U.S. Treasury Secretary Henry Paulson held a brief press conference Friday morning to report that discussions are underway between Treasury, the U.S. Federal Reserve Board, the U.S. Securities and Exchange Commission and members of Congress about a large-scale bank bailout in the United States.

Paulson offered little in the way of detail, other than to suggest that the plan will involve the U.S. government buying up illiquid mortgage-backed securities, which are currently impeding financing activity. He indicated that the plan, which is under active discussion and is expected to result in legislation next week, would require hundreds of billions of dollars.

“We have acted on a case-by-case basis in recent weeks, addressing problems at Fannie Mae and Freddie Mac, working with market participants to prepare for the failure of Lehman Brothers, and lending to AIG so it can sell some of its assets in an orderly manner. And this morning we’ve taken a number of powerful tactical steps to increase confidence in the system, including the establishment of a temporary guaranty program for the U.S. money market mutual fund industry. Despite these steps, more is needed,” Paulson said. “We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system’s stresses.” He suggested that the underlying weakness in the financial system is the illiquid mortgage assets that have lost value due to the housing correction. “These illiquid assets are choking off the flow of credit that is so vitally important to our economy,” he noted.

“To restore confidence in our markets and our financial institutions, so they can fuel continued growth and prosperity, we must address the underlying problem,” Paulson insisted. “The federal government must implement a program to remove these illiquid assets that are weighing down our financial institutions and threatening our economy. This troubled asset relief program must be properly designed and sufficiently large to have maximum impact, while including features that protect the taxpayer to the maximum extent possible.”

He admitted that such a plan will cost U.S. taxpayers a great deal, but argued that the alternative would be worse. “A continuing series of financial institution failures and frozen credit markets unable to fund economic expansion.” Paulson said that many members of Congress share his opinion, and indicated that he will spend the weekend working with them to craft a plan. “I look forward to working with Congress to pass necessary legislation to remove these troubled assets from our financial system,” he said.

And, he noted that once the current crisis is over, the U.S. regulatory system must be reformed. “This crisis demonstrates in vivid terms that our financial regulatory structure is sub-optimal, duplicative and outdated,” he said. “I have put forward my ideas for a modernized financial oversight structure that matches our modern economy, and more closely links the regulatory structure to the reasons why we regulate. That is a critical debate for another day.”

IE