Bailout officials feared banks would collapse

NEW YORK: The Bush Administration and Congress discussed the possibility of a breakdown in law and order and the logistics of feeding US citizens if commerce and banking collapsed as a result of last year's financial panic, it was revealed.

Making his first appearance on Capitol Hill since leaving office, former Treasury Secretary Hank Paulson said it was important at the time not to reveal the extent of officials' concerns, for fear it would "terrify the American people and lead to an even bigger problem".

Paulson testified to the House Oversight Committee on the Bush Administration's unpopular US$700 billion bailout of Wall St, which was triggered by the failure of Lehman Brothers last September.

In the days that followed, a run on some of the safest investment vehicles in the financial markets threatened to make it impossible for people to access their savings.

Pennsylvania Democrat Paul Kanjorski asked Paulson to reveal details of officials' concerns, which were relayed to Congress in hasty conference calls last year.

The calls included discussion of law and order and whether it would be possible to feed the American people, and for how long, according to Kanjorski.

"In a world where information can flow, money can move with the speed of light electronically, I looked at the ripple effect, and looked at when a financial system fails, a whole country's economic system can fail," Paulson said.

"I believe we could have gone back to the sorts of situations we saw in the Depression."

The Oversight Committee is investigating the takeover of Merrill Lynch by Bank of America.

Paulson defended putting pressure on Bank of America when it had last-minute doubts about the deal in December. Not to have done so could have rekindled the "financial havoc" the bailout had calmed.

- INDEPENDENT