NY new governor says economy headed toward a crisis

NEW YORK Mon Mar 17, 2008 7:04pm EDT

NEW YORK (Reuters) - New York's new governor, David Paterson, was sworn in on Monday and said increasingly dire problems on Wall Street imperil the economy, and the state's budget will have to be modified.

"We are looking at an economy that appears to be headed toward a crisis," said Paterson, who became governor after Eliot Spitzer was forced to resign last week in a sex scandal.

He cited the deal reached over the weekend for Bear Stearns Cos Inc. to be bought by JPMorgan Chase for just $2 a share, less than 10 percent of what it had been valued at on Friday.

He asked government and business leaders to meet with him in the coming weeks to help "adjust our budget accordingly."

He offered no details how he might close a budget gap estimated as high as $5 billion. Cutting spending, raising taxes or borrowing more money are all options.

Mayor Michael Bloomberg, who skipped New York City's St. Patrick's Day parade to attend Paterson's swearing-in, said he would try to limit job cuts at Bear's job cuts.

"We'll do everything we can to help JPMorgan absorb Bear Stearns, keep those jobs and the economic activity in our city," Bloomberg told reporters.

Wall Street is a key employer in New York, with estimates that financial employees account for about 11 percent of the city's total payroll employment.

Bloomberg saluted the Federal Reserve for helping to arrange the Bear Stearns buy-out. "We were on the brink of a major financial crisis and this seems to me to have averted it at least temporarily, and hopefully permanently."

PATERSON CAN FIND HIS WAY IN THE DARK

Paterson, the state's first black governor, is also legally blind, a matter he is comfortable enough to joke about. "We don't know the path yet. That's because we haven't a trail, and I think you all know I know a little bit about finding my way through the dark," he told legislators.

Spitzer had proposed a $124 billion budget, but the state gets much of its tax revenue from Wall Street, which is reeling from fallout from the subprime mortgage crisis.

New York City politicians and businesses fear Paterson will adopt the Democratic Assembly's plan to raise income taxes for the 70,000 people who earn more than $1 million a year.

Paterson has said he does not want to raise anyone's taxes and noted he and Spitzer had promised not to raise income taxes in their 2006 campaign.

Paterson on Monday offered his harshest criticism of Spitzer, whose difficulty getting along with legislators derailed many of his attempted reforms.

Paterson, a former state senator, speaking of leadership, said: "If that person is alone they can accomplish very little, and so we are going to do what we have always done, work together."

(Reporting by Joan Gralla and Edith Honan, Editing by Leslie Adler)