WASHINGTON (AP) – Treasury Secretary Henry Paulson spent another day stumping for the U.S. banking system, declaring Tuesday that his top priority was ensuring “stability and confidence in our markets and financial institutions.”

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.

Paulson said in an interview Tuesday in the New York Times that he believed the results of those examinations would provide an important signal of confidence for the markets.

While all of Paulson’s talk of urgency in the Fannie and Freddie situation could unnerve already jittery investors, analysts said the administration has little choice but to press the issue.

“Never before have we seen this level of foreclosures and this sort of panic in the mortgage market,” said David Wyss, chief economist at Standard & Poor’s in New York. “Adding to those worries isn’t the biggest problem right now. The government has got to be seen effectively addressing these issues.”

The administration on July 13 unveiled a plan to provide unlimited government loans to the two mortgage giants and to purchase stock in the two companies if needed. Paulson has stressed that the proposal is a backup effort that would be in effect for 18 months as a way to calm investor fears.

While critics have charged that the open-ended offer of support exposes taxpayers to billions of dollars of potential losses, Paulson repeated his view that the support effort is critical because of the role that Fannie and Freddie play in not only U.S. but global capital markets.

Paulson said that of the $5 trillion in debt and mortgage-backed securities Fannie and Freddie have issued, more than $3 trillion is held by U.S. financial institutions and over $1.5 trillion is held by foreign institutions.

“Investors in our nation and around the world need to know that we understand how important these institutions are to our capital markets broadly and to the U.S. economy,” Paulson told his audience at the New York Public Library.

The effort to provide support to the two mortgage giants follows the government’s involvement in dealing with the near-collapse of Bear Stearns in March when the Federal Reserve provided a $30 billion loan to facilitate the sale of Bear Stearns to JPMorgan.

Paulson cautioned that the country should expect “additional bumps in the road. We have been experiencing more bumps recently and until the housing market stabilizes further we should expect some continued stresses in our financial markets.”

In an effort to reassure Americans about the safety of their bank deposits, Paulson said that even with the collapse earlier this month of savings and loan IndyMac Bank, one of the biggest failures in U.S. history, no money was lost on deposits insured by the Federal Deposit Insurance Corp., which insures accounts up to $100,000.

“No one has or will lose a penny of insured deposits,” Paulson said. “The American people have every reason to remain confident that the U.S. banking system is sound.”

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