Dec. 19 (Bloomberg) -- Treasury Secretary Henry Paulson said the government should do what it can to keep U.S. automakers from failing and make sure that any reorganization under bankruptcy laws is as orderly as possible.

“Anything that’s done has to be a step along the way to long-term viability,” Paulson said yesterday in remarks at the “Captains of Industry” lecture series in New York.

“If the right outcome is reorganization or bankruptcy, then isn’t it better to get there through an orderly process where every effort is made to avoid it, and if it can’t be avoided, everyone’s prepared for it,” Paulson said.

General Motors Corp. and Chrysler LLC are seeking about $14 billion in government funds to stay in business through the first quarter of next year.

The Bush administration last week dropped its opposition to using funds from the $700 billion Troubled Asset Relief Program initially geared toward financial firms, and officials continue to deliberate over the best way to provide assistance.

“The president’s point all the way along has been that a failure of a number of major companies in that industry would not be helpful right now,” Paulson said.

He cautioned that the Bush administration has limited horizons as it enters its last month in office.

“The best case would be to start the companies on a path to viability,” Paulson said. “The ultimate success is going to be determined by the will and the ability of the next president, the next administration and the next Congress to get there.”

Administration Plan

GM and Chrysler may get government loans to stay afloat until March, under a Bush administration plan that could be announced as soon as today, according to people familiar with discussions between the Treasury, the automakers and their finance arms. The plan, which could change before it is announced, would allow the government to take back the money if the companies don’t comply with the government’s conditions, the people said.

Earlier this week, Paulson said automakers will receive a federal aid package as soon as the government can draft a suitable plan that ensures the companies’ long-term survival.

A bailout for automakers would expand the reach of Paulson and the government into private industry. This year he has overseen interventions into financial firms, as Treasury led takeovers of Fannie Mae, Freddie Mac and American International Group Inc. and bought stakes in dozens of banks.

Bush’s Worry

President George W. Bush said yesterday he is worried about the possibility of a “disorderly bankruptcy” in the U.S. auto industry.

“I’m worried about a disorderly bankruptcy and what it would do to the psychology of the markets,” Bush said during a forum at the American Enterprise Institute, a research policy organization in Washington.

“I haven’t made up my mind” on a plan, Bush said. He said he didn’t want to “dump a major catastrophe” on his successor, President-elect Barack Obama. Still, he said, he also is “worried about putting good money after bad.”

Paulson so far has pledged $335 billion of the first half of the rescue fund to financial firms, leaving about $15 billion uncommitted. Treasury spokeswoman Jennifer Zuccarelli said yesterday no decisions had been made about whether to seek the other $350 billion.

Avoiding Foreclosures

Responding to critics who say he should have used TARP funds to provide relief to troubled homeowners, Paulson said “much more needs to be done” to avoid foreclosures.

“The number one thing that we need to do here is stem the housing correction,” he said. “As long as housing prices are declining, there is going to be no price visibility for illiquid assets.”

“Anything that can be done to get mortgage rates lower makes a huge difference,” he said.

Paulson said the Bush administration has been consulting with the Obama administration on possible new housing programs that might tap the bank rescue money.

“We didn’t think it was right or proper to implement something right now that’s going to tie the hands of the next administration until they’re enthusiastic about something, because they’re going to live with it,” Paulson said.

Paulson also repeated his call for broader changes to the U.S. regulatory system. He said he still sees a need for a “macro-stability regulator,” possibly the Federal Reserve, to look across the financial system and keep watch over banks, insurance companies, hedge funds and any other significant players.

“We think the Fed should play that role, and we think the Fed should have, again, oversight of hedge funds,” Paulson said.

To contact the reporters on this story: Rebecca Christie in Washington at Rchristie4@bloomberg.net;

Last Updated: December 18, 2008 22:20 EST