Treasury's Paulson says future bailouts aren't off the table

WASHINGTON -- U.S. Treasury Secretary Henry Paulson Monday said he "never once considered" using taxpayer dollars to bail out investment bank Lehman Bros. leh but emphasized he will act as needed to protect the economy.

Paulson commented at a White House press briefing after Lehman filed for protection from creditors in bankruptcy court. That action followed a series of weekend meetings in which no taxpayer-backed plan emerged for saving Lehman.

"Don't read (this weekend) as no more (support from the government). Read it as that it's important … for us to maintain the stability and orderliness of our financial system," Paulson said.

The move over the weekend to let Lehman fail was a sharp break from recent, dramatic market interventions, including the federal takeover of mortgage giants Fannie Mae and Freddie Mac and a $30 billion Federal Reserve loan for the March sale of troubled investment bank Bear Stearns.

Federal Reserve Chairman Ben Bernanke has been among those worrying that the efforts, though justified, encourage firms to take undue risks. "Lehman seemed the appropriate place to draw the line," says Vincent Reinhart, former director of the division of monetary affairs at the Fed.

Unlike Bear Stearns, Lehman had been rumored to be struggling for months, meaning its fall was less likely to spark a financial panic. And Lehman has had access to funds from the Fed under a lending program set up after the sale of Bear.

The Fed and Treasury will likely be tested again, given the line of companies in financial straits, from insurer American International Group to savings-and-loan Washington Mutual.

Jon Faust, a former Fed economist at Johns Hopkins University, says what happened this weekend doesn't mean the Fed won't step in again. "They don't want to bail out somebody if they don't have to." But "If something came up today that they thought threatened the stability of the financial system as much as Bear Stearns did, I would think they would make a similar decision."