Paulson says additional bank capital needed

WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson said on Friday recapitalizing banks is the most effective use of a $700 billion financial bailout war chest but acknowledged the United States’ reputation has been tarnished as a result of the financial crisis that has spread worldwide.

Treasury Secretary Henry Paulson speaks during a news conference at the Treasury Building in Washington November 12, 2008. REUTERS/Mitch Dumke

“We have in many ways humiliated ourselves as a nation with some of the problems that have taken place here,” Paulson said in an interview with CNBC television.

Leaders of major industrial and developing economies are meeting in Washington on Friday and Saturday to discuss how to move forward from a financial crisis that began with the collapse of the U.S. housing market under a load of toxic debt and is now pushing economies around the world into recession.

Paulson won approval from Congress in early October to spend up to $700 billion to calm financial markets and revive lending, but has ruffled feathers by changing the focus to bolstering bank capital from buying mortgages.

The Treasury Secretary defended his decision to switch the focus of the rescue package, the Troubled Asset Relief Program, from buying unsellable mortgage-related assets to injecting capital into banks, saying market conditions had worsened.

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“The major purpose of the TARP was to stabilize the financial system, first and foremost, to prevent a collapse ... number two, to get lending going. I think the system has been stabilized,” Paulson said.

Government purchases of capital in healthy banks are likely to restore lending, he said.

“By the time the process with Congress was completed, it was clear we were facing a much worse situation than we had envisioned earlier on,” he said. “We have this limited pool of resources, big but limited ... it just goes farther by purchasing capital,” he added.

Paulson said he is likely to return to Congress to ask for the remainder of the $700 billion fund after he has used the first tranche of $250 billion.

“I’m not saying we’re going to need more,” he said. “Let’s get this program done. Let’s get the $250 billion out the door, let’s see how it’s working ... and it’s highly likely the right thing to do will be at some time in the not too distant future to have another capital program,” he said.

Additional reporting by Glenn Somerville and Alister Bull; Editing by James Dalgleish