Paulson says markets emerging from crunch: report

NEW YORK (Reuters) - U.S. Treasury Secretary Henry Paulson said U.S. financial markets are emerging from the credit crunch that many economists believe has pushed the country to the brink of recession, according to The Wall Street Journal.

"I do believe that the worst is likely to be behind us," Paulson told the newspaper in an interview.

The Journal said Paulson's comments appear to be the Bush administration's most optimistic assessment yet about the financial turmoil that began last year with defaults on subprime home loans and spread through financial institutions that owned tens of billions of dollars in mortgage-backed securities.

In the interview, however, the Treasury Secretary predicted there would be further "bumps along the road," and that it would take "some months longer" for the market distress to fully dissipate. Some financial markets, he said, still aren't fully functioning.

The Journal said Paulson pointed to the Federal Reserve's decision to help prevent the collapse of Bear Stearns BSC.N and to provide liquidity to other investment banks as "an inflection point" in the crisis.

The newspaper said Paulson also believes Congress will soon pass two measures he considers critical: one to improve the regulation of Fannie Mae (FNM.N) and Freddie Mac (FRE.N), the government-chartered mortgage companies, and another to overhaul the Federal Housing Administration.

(Reporting by Mark McSherry; Editing by Braden Reddall)