Testifying before the House Committee on Financial Services, Treasury Secretary Henry Paulson said financial firms must be allowed to fail.

"It is clear that some institutions, if they fail, can have a systemic impact. Looking beyond immediate market challenges, last week I laid out my proposals for creating a resolution process that ensures the financial system can withstand the failure of a large complex financial firm. To do this, we will need to give our regulators additional emergency authority to limit temporary disruptions," Paulson said.



Paulson called for regulators to have emergency powers to manage the financial system. Paulson went on to say that Freddie Mac and Fannie Mae are working through a challenging period.

"Our model proposes three primary regulators: one focused on market stability across the entire financial sector, another focused on safety and soundness of institutions supported by a federal guarantee, and a third focused on protecting consumers and investors," he said.

By Steve Stecyk and edited by Nancy Girgis