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Paulson defends U.S. rescue of Bear Stearns

WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson on Monday defended government moves to rescue Bear Stearns Cos Inc <BSC.N> from bankruptcy, saying it was important to ensure the orderly function of financial markets.
Posted : Mon, 17 Mar 2008 20:10:15 GMT
Author : Reuters
Category : US (Business)
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WASHINGTON (Reuters) - U.S. Treasury Secretary Henry Paulson on Monday defended government moves to rescue Bear Stearns Cos Inc from bankruptcy, saying it was important to ensure the orderly function of financial markets.

Speaking to reporters following a White House meeting between President George W. Bush and his economic advisers, Paulson said those worried about the government rescue creating a "moral hazard" should keep in mind that Bear Stearns shareholders face considerable losses with the sale of the investment firm to JPMorgan Chase for $2 a share.

Moral hazard is the concept that investors might take greater risks on the belief that government policy would protect them from suffering losses.

The $236 million value of the Bear buyout deal represents less than 90 percent of the company's value as of Friday at its closing share price of $30.85.

To facilitate the deal, the U.S. Federal Reserve committed to fund up to $30 billion of Bear Stearns' less liquid assets. The problems faced by the New York investment firm underscored a loss of investor confidence in the health of the U.S. financial system.

Paulson said the orderly function of U.S. financial markets was a priority and it was better to arrange the takeover of Bear Stearns than to have the investment firm, the fifth largest in the United States, file for bankruptcy.

He also said mortgage finance giants Fannie Mae and Freddie Mac needed to raise capital, and urged Congress to enact reform measures for the Federal Housing Administration to help beef up the slumping housing market.

Paulson declined to answer a question about the weakening dollar and whether the U.S. government would intervene in currency markets to support it.

"I'm not going to speculate on hypotheticals about intervention," Paulson said. "I will just again say to you what you have heard me say before: We have a strong-dollar policy. It's very much in our nation's interest. Our economy has ups and downs."

(Reporting by Donna Smith; Editing by Leslie Adler)


(c) Reuters 2008. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.

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