Bush: Economy can handle turmoil

WASHINGTON Treasury Secretary Henry Paulson declared that the current turmoil in markets and financial institutions ultimately will "make things better."

Both President Bush and Paulson worked to calm jitters about the latest developments - the venerable Lehman Brothers Holdings Inc.

filing for bankruptcy, Merrill Lynch & Co. being forced to sell itself to Bank of America, and American International Group Inc., the world's largest insurance company, seeking emergency funding to shore up its balance sheet.

"Adjustments in the financial markets can be painful, both for people concerned about their investments and for the employees of the affected firms," the president said, diverting from planned text for an appearance with visiting Ghanian President John Kufuor to address the economic situation. "But in the long run I am confident that our capital markets are flexible and resilient and can deal with these adjustments."

Paulson, making a rare appearance before reporters in the White House briefing room, also sounded notes of optimism.

"What we are going through in the short term doesn't make anything easier," he said. "But in the longer term, it's going to make things better, because we've got excesses we need to work through."

Paulson said he is taking Monday's stock tumble as a good sign - because the fall was less-severe than expected and occurred in a relatively orderly way. "I think we're making progress," he said.

Less than three hours later when the markets closed for the day, however, it turned out that the Dow Jones industrials slid 500 points in their worst point drop since the September 2001 terrorist attacks.

Bush said that federal policymakers are "focused on the health of the financial system as a whole" and Paulson added later that "we do not take - and I don't take - lightly ever putting the taxpayer on the line to support an institution." While Paulson didn't categorically rule out future Washington bailouts, his and Bush's comments, taken together, strongly suggested none will be forthcoming.

The federal government seized mortgage lenders Fannie Mae and Freddie Mac last week, and engineered the sale of faltering Bear Stearns Cos. to J.P. Morgan & Co. in March by providing a government loan to complete the deal. But Paulson said the previous situations were "very, very different" than Lehman's circumstances.

"Moral hazard is something I don't take lightly," Paulson said, referring to the belief that when the government steps in to rescue a private company it encourages other companies to engage in risky behavior.

He said he "never once" considered having the federal government step in and supply any money to resolve the crisis at Lehman Brothers, the nation's fourth largest investment bank which faced huge losses on its mortgage holdings. Starting Friday, Paulson participated in three tense days of negotiations at the New York Federal Reserve Bank in which he held firm to this position, and other financial companies then lost interest in trying to buy Lehman. That forced Lehman to file for bankruptcy protection on Monday.

With the current financial crisis rooted in the problems in the housing market, Paulson sounded positive there, too.

"There is a reasonable chance that the biggest part of the housing correction can be behind us in a number of months - I'm not saying two or three months but in months as opposed to years," he said.

Bush said that he, his advisers at the White House and officials "throughout my administration" were focused intently on the problems and how to "reduce disruptions and minimize the impact."

The president was being briefed on the situation Tuesday afternoon, following a trip to Texas to view damage from Hurricane Ike, by a group including Paulson, Federal Reserve Chairman Ben Bernanke and the heads of the Securities and Exchange and Commodities Futures Trading commissions.

A senior administration official said the meeting was planned as an update for Bush, not as a session to make or announce new federal action. The official spoke on condition of anonymity because he wasn't authorized to speak about an event that hadn't happened yet.

Paulson said the government will need additional "major authorities to wind down financial institutions that aren't banks" over the longer-term to deal with the fallout and prevent similar problems in the future. But he did not detail what those are and said they would take time to wind through Congress.

With candidates pointing at the Bush administration for some share of the blame for the economic turmoil, Paulson said he's not focused on politics and will "leave history to the historians."

But he said that Bush's economic policies have been sound and that some of the regulatory and legal structures that have been in place for years - if not decades - are part of the problem.

"I'm playing the hand that was dealt me," Paulson said.

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