Treasury's Paulson: Must preserve bailout funds

WASHINGTON (Reuters) - Treasury Secretary Henry Paulson on Tuesday said the unpredictable nature of the current financial crisis meant it was necessary to ensure that financial bailout money was not diverted to other uses.

In testimony prepared for delivery to the U.S. House Financial Services Committee, Paulson said the $700-billion Troubled Asset Relief Program, or TARP, was intended to shore up the financial system and said there were other efforts under way to help homeowners avoid preventable foreclosures.

"While I understand the interest in spending TARP resources on other approaches, the efforts already under way will do more to prevent foreclosures than might have been achieved through very large purchases of mortgage-related securities through the TARP," he said.

Paulson faces a grilling over a decision to use TARP funds for recapitalizing financial institutions instead of buying bad or so-called toxic assets as was originally proposed.

He said that by the time Congress had approved the funds, the financial crisis had gone global and become so severe that "an asset purchase program would not be effective enough, quickly enough."

Paulson said the financial bailout was not intended as a stimulus package. "It was intended to shore up the foundation of our economy by stabilizing the financial system, and it is unrealistic to expect it to reverse the damage that had already been inflicted by the severity of the crisis."

(Reporting by Glenn Somerville; Editing by James Dalgleish)