The administration of US President George W. Bush is considering taking ownership stakes in certain US banks as an option for dealing with the global credit crisis.
An administration official, who spoke on condition of anonymity because no decision has been made, said the US$700 billion rescue package passed by Congress last week allows the Treasury Department to inject fresh capital into financial institutions and get ownership shares in return.
This official said that all the new powers granted in the legislation were being considered as the administration seeks to deal with a serious credit crisis that has caused the biggest upheavals on Wall Street in seven decades and continues to roil global markets.
Supporters of this approach, such as Democratic Senator Charles Schumer, argue that injecting fresh capital into US banks who want to participate in the program would be an effective way to bolster banks’ balance sheets and get them to resume lending. Taxpayers would benefit because the government would receive an equity stake in the bank in return for providing the capital.
“This idea would, at a minimum, complement the administration’s planned approach of buying up troubled assets and may prove to be the most promising tool of all in Secretary Paulson’s kit,” Schumer said in a statement.
A decision to inject capital directly into financial institutions in return for ownership stakes would be similar to a plan announced on Wednesday by Britain.
Treasury Secretary Henry Paulson told reporters that the Treasury was moving quickly to implement the US$700 billion rescue effort and he specifically mentioned reviewing ways to bolster the capital of banks.
“We will use all the tools we’ve been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size,” Paulson said at a Wednesday news conference.
Asked whether he would try something like the British plan, Paulson said: “We have a broad range of authorities and tools ... We’ve emphasized the purchase of liquid assets, but we have a broad range of authorities. And I’m confident we have the authorities we need to work with going forward.”
The administration so far has stressed its major goal is to purchase bad loans from financial institutions.
Paulson said that while the financial market turmoil has hurt the economy, the administration is moving quickly to begin the largest financial system rescue effort in history.
Even with the program to buy bad assets from financial institutions, he said, some banks will fail.
He also called for patience, saying “the turmoil will not end quickly and significant challenges remain ahead.”
Paulson on Monday selected Neel Kashkari, 35, an assistant Treasury secretary, to be the interim head of the new program. In his remarks on Wednesday, Paulson said the administration would move quickly to nominate someone to fill the job permanently.
Paulson said he was consulting with US President George W. Bush, congressional leaders and presidential candidates senators Barack Obama and John McCain before choosing someone to fill the job permanently. The post requires Senate confirmation, something Paulson predicted could occur next month.
The administration has been rushing to implement the program, which cleared Congress last Friday. Paulson said it would be several weeks before the program makes its first purchases of assets.
“US and global financial markets continue to be severely strained,” Paulson said at the briefing called to preview the upcoming weekend meetings of finance officials of the G7 major industrial countries, the 185-nation IMF and the World Bank.
The global credit crisis was expected to be the major agenda item at those talks.
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