Treasury says has power to inject bank capital
Friday, 10 October 2008

REUTERS, WASHINGTON- US Treasury Secretary Henry Paulson said on Wednesday a recently approved financial bailout bill gives him wide authority to inject capital into the banking system and would not rule out having Treasury take an ownership position in banks if necessary.

"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 told a news conference ahead of a Friday meeting of Group of Seven finance ministers.
 
The British government on Wednesday pledged hundreds of billions of pounds to rescue its banking system and Paulson ducked a direct answer when asked whether the next step for the United States might be some similar form of recapitalization.
 
"I'm not going to speculate on all the things we may have to do," he said. "I would simply say we have a broad range of authorities and tools...to work with going forward here."
 
The New York Times, quoting unnamed government officials, said Treasury was considering taking ownership stakes in many U.S. banks. A Treasury spokesperson could not be reached for comment on the story.
 
Congress last week approved a $700-billion financial rescue package that gives Treasury power to buy unwanted and illiquid assets from banks that have grown reluctant to lend but also gives it leeway to attempt means of unlocking frozen credit markets as well.
 
Paulson said the package grants "broad, flexible authorities for Treasury to buy or insure troubled assets, provide guarantees, and inject capital" but didn't spell out whether that meant it might seek ownership stakes in some banks.
 
POLITICAL SUPPORT
 
If it chose to take such a step, Treasury likely would find significant support from politicians searching for ways to potentially recover some of the huge investments now being made in freeing up capital markets and putting a tighter regulatory rein on banking practices.
 
Democratic Sen. Charles Schumer of New York, who chairs the Joint Economic Committee, said on Wednesday that Treasury should consider directly recapitalizing banks and said that might provide a way for taxpayers to benefit later.
 
"When the market recovers, the federal government would profit," Schumer said.
 
A similar idea was floated earlier in the week by the chairman of the House Financial Services Committee, Rep Barney Frank of Massachusetts, who suggested Treasury should consider buying preferred shares of ailing banks and financial firms to provide them capital.
 
"We can buy these preferred shares and if a company becomes more profitable, you (taxpayers) will get a share of that as well," Frank told an audience in Providence, Rhode Island.
 
Treasury and the Federal Reserve have tried repeatedly to jump-start lending by injecting huge does of liquidity into the banking system, taking over some failed institutions and, on Wednesday, engineering an unprecedented cut in global interest rates among central banks in North America and Europe.
 
So far, financial markets remain in turmoil with stock prices plunging and consumers and businesses having difficulty in getting credit from banks that are wary of lending.
 
That may make taking direct stakes in banks -- a relatively radical idea in normal times for a Republican administration committed to private enterprise -- more palatable.
 
"It is the policy of our federal government to use all resources at its disposal to make our financial system stronger," Paulson said, by restoring capital flows that have choked up.
 
The British plan announced on Wednesday provides for the government to offer banks up to $87 billion to shore up their capital in exchange for preference shares.

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