Paulson Says Markets to Remain Stressed for `Months'

By John Brinsley and Rich Miller

Nov. 17 (Bloomberg) -- Treasury Secretary Henry Paulson said markets may be under stress for ``months'' and two of President-elect Barack Obama's top economic advisers agreed that further steps are needed to shore up the economy.

``There will be stress in the capital markets for a number of months,'' Paulson said at a panel discussion in Washington. He was joined at the conference by Clinton administration Treasury chiefs Robert Rubin and Lawrence Summers.

``Restoring the financial system will go a long way toward helping the economy recover,'' Paulson said. ``There's still a good bit to be done, because the economy has turned down, housing prices are still declining.''

Rubin, now a senior counselor to Citigroup Inc., predicted the crisis of confidence will abate ``within a reasonable period.'' Summers, now at Harvard University, called for a ``speedy, substantial and sustained'' fiscal stimulus that seeks to boost the economy for the next two to three years.

Paulson and Federal Reserve Chairman Ben S. Bernanke met earlier with House Speaker Nancy Pelosi and other Democratic leaders to discuss how the funds are being used and a proposal to rescue the auto industry.

Pelosi said she urged Paulson today to use ``all authorities granted to him'' under the $700 billion financial rescue program to stem foreclosures on residential mortgages.

TARP Funds

At the conference, Paulson reiterated his defense of the Treasury's decision this month to abandon its plan to buy toxic assets from banks. The divergence from the original intent of the Troubled Asset Relief Program came with two months left in the Bush administration.

Paulson said last week the TARP would be used to shore up the market for securitized auto, student and credit-card loans.

The Treasury has completed about $159 billion in preferred equity purchases of large and medium-sized banks. A total of $250 billion of the $700 billion has been set aside for capital injections into financial institutions.

The Bush administration has told congressional aides it won't ask lawmakers to release the remaining $350 billion, people familiar with the matter said.

Paulson said strains on the country's budget will require his department to sell $1.5 trillion in Treasury debt this fiscal year, which began Oct. 1. The Treasury announced on Nov. 3 plans to borrow $550 billion in the current quarter and $368 billion in the January-March period.

Auto Bailout

Earlier today, Senate Democrats announced legislation that would give automakers as much as $25 billion in TARP funds to help prevent the collapse of the three main U.S. firms. The measure would impose limits on executive pay and require stock warrants to help taxpayers recoup the investment.

Paulson, who has opposed the use of TARP for the auto industry, reiterated that any rescue for the companies must take into account their ability to recover.

``I feel very strongly that anything we do has got to have a path to sustainability,'' he said. ``It would be a huge mistake to just say, `well, how do we know what viability is, so let's just give them some money.'''

Rubin said that ``we need to avoid a failure of the auto companies, but we need to marry that with a plan to getting the auto companies into an economic model that will succeed.''

General Motors Corp., Ford Motor Co. and Chrysler LLC are seeking aid as industrywide sales have plummeted to a 17-year low. GM this month said it lost $4.2 billion in the third quarter and almost $73 billion since the end of 2004.

Ford's Losses

The largest U.S. carmaker said it may not have enough cash to get through the year. Ford lost $2.98 billion in the third quarter as sales fell 22 percent.

The Treasury has committed $290 of the first half of the rescue plan to buy stakes in banks and insurer American International Group Inc.

Treasury and the Fed are working on a new plan to ease strains in the markets for car and student loans, as well as credit-card debt that ``would take relatively modest amounts of TARP assets,'' Paulson said. ``When you look at what this economy may need, it's pretty hard to believe we're going to get the kind of recovery we need with the credit markets in a number of areas still as clogged as they are.''

To contact the reporter on this story: John Brinsley in Washington at jbrinsley@bloomberg.netRich Miller in Washington rmiller28@bloomberg.net