By Rebecca Christie and Simon Kennedy Oct. 9 (Bloomberg) -- Treasury Secretary Henry Paulson signaled the government may invest in banks as the next step in trying to resolve the deepening credit crisis. Paulson told reporters in Washington yesterday that legislation Congress passed last week to rescue financial institutions gave him broad authority that he intends to use, beyond just buying mortgage-related assets on banks' balance sheets. He indicated that an option available may be boosting companies' capital with cash infusions. ``It is the policy of the federal government to use all resources at its disposal to make our financial system stronger,'' Paulson said. ``We will use all of the tools we've been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size.'' Banks worldwide aren't raising enough capital to offset losses: while posting $592 billion of writedowns and losses during the crisis, they have added just $442.5 billion of new capital, according to data compiled by Bloomberg. The International Monetary Fund anticipates losses will more than double to $1.4 trillion. In a sign that potential costs to taxpayers from any government aid to financial companies could be higher than at first foreseen, the Federal Reserve yesterday increased its lending to American International Group Inc. AIG Aid The Fed set up a new program to extend up to $37.8 billion to AIG by borrowing securities from units of the insurer. The fresh aid comes just three weeks after the central bank took control of AIG with an $85 billion loan. Paulson spoke two days before officials from the Group of Seven industrial nations gather in Washington for their first meeting since the financial meltdown accelerated last month. Hours earlier, the Federal Reserve, European Central Bank and four other central banks lowered interest rates in an unprecedented coordinated effort to ease the economic effects of the credit freeze. Paulson didn't rule out new programs following the meeting, while noting that it might ``not make sense to have identical policies'' because each countries' circumstances are different. U.K. Prime Minister Gordon Brown has suggested authorities act to guarantee lending in the interbank market. Brown also opted yesterday to spend 50 billion pounds ($87 billion) to partly nationalize at least eight British banks. Paulson stressed the U.S. rescue plan won't save all firms. Firms to Fail ``One thing we must recognize -- even with the new Treasury authorities, some financial institutions will fail,'' Paulson said. Instead, regulators will take measures to limit the systemic risk from any single bank failure, he said. President George W. Bush's working group on financial markets, which is headed by Paulson and includes the Fed, Securities and Exchange Commission and Commodity Futures Trading Commission, said Oct. 6 the Treasury will move quickly to implement the financial bailout. The plan also allows for guarantees. The law, approved by Congress Oct. 3, gives the government power to buy assets, provide guarantees and ``address capital raising,'' the working group said. Beyond the G-7 talks, Treasury Undersecretary David McCormick said this weekend would feature a ``special meeting'' of finance officials from the Group of 20, which combines developed and emerging economies. ``We're reflecting a reality of the global economy,'' he said of the talks. Rescue Plan President Bush signed into law on Oct. 3 a measure that gives Paulson the authority to purchase as much as $700 billion in mortgage-related assets and other securities from financial institutions saddled with illiquid debt. Since then, the Standard & Poor's 500 Index has dropped about 10 percent and credit markets have tightened further. ``Patience is also needed because the turmoil will not end quickly and significant challenges remain ahead,'' Paulson said. ``Neither passage of this new law nor the implementation of these initiatives will bring an immediate end to current difficulties.'' The Treasury this week is recruiting asset managers and other staff to carry out the rescue plan, which will be administered by a newly formed Office of Financial Stability in the Treasury's headquarters in Washington. Pacific Investment Management Co. and BlackRock Inc. submitted bids to manage troubled mortgage-backed assets as part of the program, people familiar with the matter said. `Major Downturn' The global economy is headed for a ``major downturn,'' the IMF said in its World Economic Outlook released yesterday. Global growth is projected at 3 percent next year, down from 3.9 percent this year, the IMF said. In April, the IMF predicted a 25 percent chance of worldwide growth at or below 3 percent, which it said was ``equivalent to a global recession.'' ``The turmoil is a global phenomenon,'' McCormick said in a statement. ``We are all affected by it, and strengthened international collaboration is needed now more than ever to find collective solutions to achieve stable and efficient financial markets and restore health to the world economy.'' To contact the reporters on this story: Simon Kennedy in Washington at skennedy4@bloomberg.net; Rebecca Christie in Washington at Rchristie4@bloomberg.net.

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