Paulson says financial stability is top priority

However, those soothing words had to confront the reality of more massive losses in the financial sector.

Wachovia Corp., the nation's fourth largest bank, reported that it had lost $8.86 billion in the second quarter due to soaring bad mortgage debt. It said it would slash its dividend and eliminate 10,750 positions out of a work force of roughly 120,000 employees.

And Washington Mutual, the nation's largest savings and loan, reported it lost $3.33 billion in the April-to-June quarter. WaMu, one of the institutions hardest hit by the meltdown in the mortgage market, said it had increased its loan loss reserves by $3.74 billion to a total of $8.46 billion to cover bad loans.

Paulson, speaking to business executives in New York City, acknowledged that the overall economy and the financial system were going through a "period of stress" which he said could last for a number of more months. But he insisted that the U.S. economy would emerge from the troubles "stronger and better poised for robust growth."

Paulson said it was critically important for Congress to move rapidly to approve a support package for mortgage giants Fannie Mae and Freddie Mac because of the important role the two institutions play in supporting almost half of the home mortgages in the country.

He said Congress's approval, which he predicted would come this week, would be "central to the speed with which we emerge from this housing correction" because it would guarantee the continued flow of mortgages to qualified home buyers.

The administration's support package for Fannie and Freddie could cost taxpayers as much as $25 billion, the Congressional Budget Office estimated in an analysis released Tuesday.

But CBO Director Peter Orszag said in a letter to lawmakers that there was also "a significant chance--probably better than 50 percent" that the support effort will not have to be used before it is scheduled to expire at the end of 2009.

In an effort to convince wavering lawmakers that the two giant institutions were basically sound, Treasury let it be known that bank examiners from both the Federal Reserve and the Office of the Comptroller are currently inspecting the books of the two institutions.