WASHINGTON - Former Treasury Secretary Henry Paulson says the causes of the financial crisis still threaten the U.S. financial system. But he warns that Congress could stifle the economic recovery if it overreaches and tightens regulation too much.

Paulson says in prepared testimony that mortgage giants Fannie Mae and Freddie Mac must be restructured and regulators need stronger tools to prevent future crises.

But he cautions against legislative proposals that he says would hamper innovation and award even greater power to Wall Street banks.

Paulson is preparing to discuss the lightly regulated "shadow banking system" of financial firms before a panel investigating the roots of the crisis. He says the system needs better oversight but is necessary for economic prosperity.

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