January 31, 2008

Paulson expects US banking sector will recover

WASHINGTON (AFP) - Treasury Secretary Henry Paulson predicted Wednesday that banking sector and financial markets would recover from a wide-ranging credit crunch that has reverberated through world markets.

Paulson, a former chief executive of the Goldman Sachs investment bank, said US financial markets had weathered downturns in the past and subsequently returned to good health.

"I have great confidence in our markets. They have recovered from similar stressful periods in the past, and they will again," the Treasury chief said.

Paulson said the economy will continue growing, but "not as rapidly" as it had in recent years.

The Treasury secretary spoke at a real-estate forum in Washington as the Federal Reserve announced it had opted to cut its main interest rate by half-a-percentage point to 3.00 percent amid a worsening housing market slump.

Fears are mounting that the world's largest economy could be on the cusp of a recession. A government report earlier Wednesday showed that US economic growth slowed dramatically to a 0.6 percent annual crawl in the fourth quarter of 2007, after a 4.9 percent pace in the third quarter.

Paulson said the two-year-long housing downturn had affected the country's financial markets, partly as major banks have announced tens of billions of dollar in losses tied to mortgage investments.

"Since August, financial institutions have written off over 153 billion dollars of assets," Paulson said, but he said that US financial institutions had raised over 95 billion dollars in new capital in recent weeks to shore up their balance sheets.

Merrill Lynch, one of America's biggest investment banks, announced earlier this month that it had won fresh financial backing totaling 6.6 billion dollars from the Kuwait Investment Authority, the Korean Investment Corporation and other investors.

The bank, like rivals including Citigroup and Morgan Stanley, has suffered hefty losses on its mortgage holdings, particularly subprime home loans granted to people with poor credit.

While voicing confidence that the economy and financial markets would recover their footing, Paulson also called on Congress to quickly pass an economic stimulus plan endorsed by President George W. Bush.

"I am optimistic that Congress will pass a growth package quickly enough to have a real impact on our economy," Paulson added.

Congress is debating the package which includes tax rebates and business incentives and is valued around 150 billion dollars.

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