Paulson calls for multi-billion dollar asset rescue

By David Lawder and Alister Bull

WASHINGTON (Reuters) - Treasury Secretary Henry Paulson on Friday called for the U.S. government to spend hundreds of billions of dollars more to rescue financial firms from lethal mortgages that threaten to collapse the financial system.

"We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses," Paulson told a news conference.

"We're talking hundreds of billions. This needs to be big enough to make a real difference and get at the heart of the problem," he said.

Paulson and Federal Reserve Chairman Ben Bernanke have already put close to $1 trillion of taxpayer money on the line to keep credit markets working. Paulson said the latest action was the best hope of ultimately protecting the public purse and avoiding a grave recession.

"I am convinced that this bold approach will cost American families far less than the alternative - a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," he said.

Treasury earlier announced it would siphon up to $50 billion from the country's Exchange Stabilization Fund for a temporary guaranty program to shore up confidence the rattled U.S. money market mutual fund industry.

It was the latest in a number of dramatic government measures to prevent credit markets from freezing up over huge losses on subprime mortgages.

These have forced U.S. investment bank Lehman Brothers LEH.N (LEHMQ.PK) into bankruptcy, Merrill Lynch into a hasty marriage with Bank of America, AIG to seek a huge government loan, and prompted the state seizure of mortgage giants Fannie Mae and Freddie Mac on September 7.

Paulson made plain that such case-by-case steps were not enough, and called on U.S. lawmakers for a broader plan.

"The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy," he said.

"This troubled asset relief program must be properly designed and sufficiently large to have maximum impact, while including features that protect the taxpayer to the maximum extent possible," he said.

He also said additional immediate steps were needed while he worked with Congress over the weekend and into next week to thrash out the broader rescue plan.

"First, to provide critical additional funding to our mortgage markets, the GSEs (government sponsored enterprises) Fannie Mae and Freddie Mac will increase their purchases of mortgage-backed securities," he said.

In addition, Treasury will expand the mortgage-backed security purchase plan it announced earlier this month to complement capital provided by Fannie Mae and Freddie Mac.

"These two steps will provide some initial support to mortgage assets, but they are not enough," he said.