WASHINGTON The United States is developing plans to buy equity stakes in financial institutions, providing another weapon in its war against financial market turmoil, U.S. Treasury Secretary Henry Paulson said on Friday.
Providing the first confirmation of the plan after a meeting of Group of Seven finance chiefs, Paulson said the equity purchases would be made alongside purchases of distressed assets as a way to recapitalize U.S. banks and other institutions reeling from soured mortgages and illiquid securities.
The Treasury will use authority granted by Congress in last week's $700 billion financial rescue legislation to buy largely nonvoting common or preferred shares. Paulson said the two-pronged approach would more effectively recapitalize banks.
"We can use the taxpayers' money more effectively and more efficiently, have it go farther and get more for their dollars and more protection if we develop a standardized program for making and encouraging equity participation," he said.
The proposal drew quick support from Democratic presidential nominee Barack Obama, who said it would provide "more money to lend to families and businesses."
Disclosure of the plan comes as the Treasury is considering a number of other major steps to deal with a worsening crisis of confidence that has frozen credit markets and halted interbank lending.
The Treasury may also push for a global backstop of interbank lending and possibly an unlimited guarantee on bank deposits, according to sources familiar with the discussions. A Treasury spokeswoman said the Bush administration is reviewing a British proposal to guarantee interbank lending.
The direct capital injections would help banks overcome the bad debts weighing down their balance sheets and boost their capacity to lend, complementing the bailout bill's objective of removing illiquid assets.
Some critics of the proposals for buying soured mortgage-related products have said the process would take so long that it would reduce its efficiency, whereas a capital injection through share purchases would immediately put more cash for lending into the banking system.
The question may be whether banks are willing to accept the government as a stakeholder in return for the new capital.
Paulson said the program would be designed to promote the raising of new private capital for financial institutions alongside the public capital. Many financial firms have been unable to raise private capital in recent weeks as market panic has savaged their share prices.
He said the program would be standardized and open to "a broad array of financial institutions." He was less clear about the timing, but said details of the plan were being developed quickly.
"We're going to do it as we can do it in a proper way that will be effective. Trust me, we're not wasting time, we're working around the clock," he said.
A source familiar with Paulson's thinking said earlier on Friday that the government does not intend to seek seats on companies' board of directors in the voluntary capitalization program.
The Treasury's equity plan follows the lead of Britain, which said on Wednesday it was prepared to inject 50 billion pounds ($87 billion) of taxpayer money into its banks and guarantee bank lending.
Paulson declined to discuss the size of the U.S. bank equity purchases relative to the amount of asset purchases it plans.
Paulson also said the G7 central bank governors and finance ministers "finalized an aggressive action plan" to address financial market turmoil by coordinating individual and joint policy moves to provide liquidity to markets, strengthen financial institutions, protect savers and enforce investor protections.
Paulson said it was critical for governments to continue to take both individual and collective actions to stabilize markets and restore confidence in the financial system.
Paulson said that to make sure the actions of one country do not come at the expense of others or the system as a whole, the G7 finance leaders will stay in close contact as they move forward with their responses to the crisis.
He said the U.S. economy was "facing a prolonged period of uncertainty and our financial markets are experiencing unprecedented and extraordinary challenges."
(Additional reporting by Mark Felsenthal, Glenn Somerville and Karey Wutkowski Reporting by David Lawder and Mark Felsenthal, Editing by Chizu Nomiyama, Gary Hill)