Treasury may capitalize banks by end October: source

WASHINGTON (Reuters) - The U.S. Treasury Department plans to start directly injecting capital in U.S. banks as soon as the end of October in exchange for passive investment stakes, according to a financial policy source familiar with Treasury Secretary Henry Paulson's thinking.

Under authority granted to it by last week's $700 billion market rescue legislation, Treasury would get common or preferred shares from the banks it capitalizes, the source told Reuters on Thursday. The government does not intend to seek board seats in the voluntary capitalization program.

White House spokeswoman Dana Perino said later on Thursday that Paulson is "actively considering" capital injections into troubled U.S. banks.

"Secretary Paulson is looking at all the different tools to figure out which ones should be used at what time and how robustly and how much money to put into each," she said.

Treasury's plan to inject capital would follow action by the British government on Wednesday in which it pledged billions of dollars to shore up banks' capital in exchange for preference shares.

The source familiar with Paulson's thinking said Treasury was working "extremely fast" to put together a capital injection plan.

The injections would get at the credit crisis by giving banks more capacity to lend, complementing the bailout bill's objective of removing soured mortgage-backed assets weighing down banks' balance sheets.

The source said the injections would likely be made public, which could cause some reluctance on the part of banks to use the capital program for fear of exposing more vulnerabilities.

Paulson said on Wednesday that Treasury has wide latitude to buy or insure troubled assets, provide guarantees and inject capital. "We will use all of the tools we've been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size," he said.

(Additional reporting by Andy Sullivan; Editing by Tim Dobbyn)