Paulson warns of more bank failures amid more cash for AIG (Roundup)

Oct 9, 2008, 1:46 GMT

Washington - Treasury Secretary Henry Paulson on Wednesday warned that more banks would fail as the US financial system goes through a tough period of restructuring, and promised to use all powers at his disposal to ease the economic fallout.

Meanwhile, the US Federal Reserve late Wednesday announced it will add another 38 billion dollars in financing to American International Group, which was already presumed rescued last month, when the government issued the insurance giant an 85-billion-dollar loan.

Paulson asked for 'patience' from the public and said it would take 'several weeks' before the US Treasury began buying up troubled mortgage assets at the heart of the credit crisis.

Legislation passed by Congress last week allows the Treasury to buy up to 700 billion dollars in mortgage-backed securities and boost the capital positions of struggling financial institutions, in an effort to keep credit flowing through the US economy.

Congress passed the measure after a wave of bankruptcies, bail- outs and takeovers of banks and mortgage lenders through September in the United States. Paulson warned that there were more collapses to come.

'One thing we must recognize: even with the new Treasury authorities, some financial institutions will fail,' he told reporters in Washington.

The rescue package 'doesn't exist to save every financial institution for its own sake,' Paulson said.

The Federal Reserve, the rate-setting central bank, gave AIG the additional infusion of cash to 'replenish liquidity' in the insurance company and protect the government's loan, which was secured by an 80-per-cent stake in the firm.

The company has been trying to sell off profitable subsidiaries to raise money to repay the original government loan.

Paulson suggested that more measures to ease the credit crunch were still in the pipeline. He warned that the ongoing financial turmoil 'will not end quickly' but said he was confident in the resilience of the US economy.

'We are a strong and wealthy nation, with the resources to address the needs we face,' Paulson said.

Later this week in Washington, he will host finance ministers and central bank heads from the Group of Seven (G7) industrial nations to discuss the international response to the credit crisis.

Paulson announced a 'special meeting' of the Group of 20, which includes emerging economies, on the sidelines of annual gathering of the International Monetary Fund and World Bank over the weekend.

Members of the G20 'will discuss how we might coordinate to lessen the effects of global market turmoil and the economic slowdown on all of our countries,' he said.