Paulson says U.S. lacked tools to tackle crisis

SINGAPORE (Reuters) - Outgoing U.S. Treasury Secretary Hank Paulson said the U.S. government had to battle the financial crisis without the tools needed to do the job effectively, the Financial Times newspaper reported on Wednesday. Paulson also said any future regulatory overhaul needed to ensure that financial system infrastructure could allow for the failure of large institutions.

In one of his last interviews before leaving office, Paulson said, "We've done all this without all of the authorities that a major nation like the U.S. needs."

He said even after Congress in October approved the $700 billion (484 billion pound) troubled asset relief program, the U.S. still lacked tools such as an adequate special bankruptcy regime for non-bank financial firms.

"We're dealing with something that is really historic and we haven't had a playbook," he said.

"The reason it has been difficult is first of all, these excesses have been building up for many, many years. Secondly, we had a hopelessly outdated global architecture and regulatory authorities...in the U.S.," the newspaper quoted him as saying.

Paulson said any regulatory overhaul should emphasise "better and more effective" regulation and needed to make sure that infrastructures and powers were robust enough to allow large institutions to fail.

"The organisations (financial firms) cannot be too big or too interconnected to fail," he said.

Paulson said he was surprised by the ferocity of the crisis but believed he grasped from August how severe it was as problems at home funding companies Fannie Mae and Freddie Mac threatened to coalesce with a dangerous September results season for financial institutions.

"If you asked me six months ago... if I was surprised by the magnitude of the challenge, the answer is 'yes'," he said.