Sept. 15 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson said he never considered bailing out Lehman Brothers Holdings Inc. and that a government loan to American International Group Inc. isn't currently an option.

``The situation in March and the situation and facts around Bear Stearns were very, very different with what we were looking at in September,'' Paulson said today at a White House briefing in Washington. ``I never once considered it appropriate to put taxpayer money on the line in resolving Lehman Brothers.''

The Treasury chief's decision against using government funds to save Lehman contrasts with deals he helped broker to provide Fed financing for JPMorgan Chase & Co.'s agreement in March to buy Bear Stearns Cos. and his Sept. 7 takeover of mortgage-finance companies Freddie Mac and Fannie Mae.

Paulson spent the weekend in New York with Wall Street bankers and Federal Reserve officials in an unsuccessful attempt to find a buyer for Lehman. Executives from AIG, which was given special permission to access $20 billion of capital in its subsidiaries to free up liquidity, met today with Treasury and New York Fed officials to discuss the insurer's position.

``What is going on right now in New York has got nothing to do with any bridge loan from the government,'' Paulson said. ``What's going on in New York is a private sector effort, again, focused on dealing with an important issue that's, I think, important for the financial system to work on right now.''

Stocks Tumble

His comments came as stocks tumbled, pushing the Standard & Poor's 500 Index down 4.7 percent, its steepest drop since the September 2001 terrorist attacks, as investors worried about a deepening of a yearlong credit rout that has led to $514 billion of writedowns and losses worldwide. The Dow Jones Industrial Average dropped 504.48, or 4.4 percent, to 10,917.51.

``We are working through a difficult time in our financial markets right now,'' Paulson said. ``The American people can remain confident in the soundness and resilience of our financial system. Our banking system is a safe and sound one.''

U.S. policy makers are grappling with limiting the impact of the financial market crisis on the U.S. economy. A Fed report today showed industrial production in the U.S. fell by the most in almost three years, indicating the economic slowdown will deepen amid the housing recession and rising unemployment.

Paulson said that housing is at ``the root'' of the economy's problems and that there is ``a reasonable chance'' that the bulk of those problems will be over in months.

``I am not saying two or three months, but in months as opposed to years,'' he said.

Record Bankruptcy

Lehman was forced into bankruptcy after Bank of America and Barclays Plc walked away from takeover talks yesterday. Bank of America, the biggest U.S. consumer bank, then agreed to pay about $50 billion for Merrill Lynch & Co. The collapse of Lehman dwarfs WorldCom Inc.'s insolvency in 2002 and Drexel Burnham Lambert's failure in 1990.

Paulson used the press conference to push for changes in the U.S. regulatory system. The Treasury in March released a plan calling for the biggest overhaul of financial regulation since the Great Depression, saying oversight of banks, securities firms and insurance companies is outdated.

``We have an archaic financial regulatory structure,'' Paulson said ``It really needs to be rebuilt. We're rooted in congressional charters that go back decades.''

He made his comments after meeting with President George W. Bush, who earlier today said he's been ``in close touch'' with his Treasury chief over the past several days.

Paulson tomorrow will chair a meeting of the President's Working Group on Financial Markets, a group of regulators that also includes chairmen of the Fed, Securities and Exchange Commission and the Commodity Futures Trading Commission.

To contact the reporters on this story: Rebecca Christie in Washington at rchristie4@bloomberg.net; John Brinsley in Washington at jbrinsley@bloomberg.net

Last Updated: September 15, 2008 16:40 EDT