WASHINGTON, US - UNITED States Treasury Secretary Henry Paulson defended government moves to rescue Bear Stearns from bankruptcy, saying it was important to ensure the orderly function of financial markets.

Speaking to reporters following a White House meeting between President George W. Bush and his economic advisers on Monday, Mr Paulson said those worried about the government rescue creating a 'moral hazard' should keep in mind that Bear Stearns shareholders face considerable losses with the sale of the investment firm to JPMorgan Chase for US$2 a share.

Moral hazard is the concept that investors might take greater risks on the belief that government policy would protect them from suffering losses.

To facilitate the deal, the US Federal Reserve committed to fund up to US$30 billion of Bear Stearns' less liquid assets.

The problems faced by the New York investment firm underscored a loss of investor confidence in the health of the US financial system.

Mr Paulson said the orderly function of US financial markets was a priority and it was better to arrange the takeover of Bear Stearns than to have the investment firm, the fifth largest in the United States, file for bankruptcy.

He also said mortgage finance giants Fannie Mae and Freddie Mac needed to raise capital, and urged Congress to enact reform measures for the Federal Housing Administration to help beef up the slumping housing market.

Mr Paulson declined to answer a question about the weakening dollar and whether the US government would intervene in currency markets to support it.

'I'm not going to speculate on hypotheticals about intervention,' Mr Paulson said. 'I will just again say to you what you've heard me say before: We have a strong-dollar policy. It's very much in our nation's interest. Our economy has ups and downs.' -- REUTERS