With the $700 billion rescue plan still weeks away from implementation, and with the functionality of the U.S. investment banking model persistently facing serious doubts and considerable stress – Secretary Paulson, reports CNBC, has decided to expedite plans to inject capital into banks.
According to senior government officials, notes CNBC – the plan is to offer a term sheet, offering capital injections to ‘all banks’.
At the moment, the bailout fund, which is controlled by the Treasury, is not expected to buy in an auction system its first toxic asset until after the presidential election on November 4. Fears that the rescue package will not be implemented quickly enough to have any effect, unless it is launched in some form in the next couple of weeks, continues to grow as concerns about the health of big institutions and the need for direct government support at this point has reached paramount need for expeditious implementation.
Hugh Hendry, Partner and CIO at Eclectica, told CNBC early Friday:
He didn’t wish to spread alarm….but the big issue confronting the market, is I’m afraid the health and sustainability of Morgan Stanley (MS). It is unimaginable that they can be allowed to go. I suspect that they will be nationalized at some point today or over the weekend.
The Emergency Economic Stabilization Act of 2008, has broadened substantially Mr. Paulson’s authority for intervention. The Treasury Dept. has now available two new mechanisms in place for engaging private-sector firms: the financial agent authority, and procurement under the Federal Acquisition Regulation.
The Treasury, working now under these new mechanisms, as the expediting of plans to inject capital into banks suggests, will apply a range of other forms of financial assistance, which include the Treasury using taxpayer funds to buy stakes in Wall Street banks. Under such a measure, the cash received in return for the shareholding would provide much-needed capital for the banks.
Secretary Paulson, who believes that it is the Treasury’s job to address the root problems of the banking crisis – publicly acknowledged Thursday that the Treasury is “seriously considering” bank capital injections.
Update: Treasury Secretary Paulson said at a press conference after a G7 meeting in Washington the U.S. will buy equity “as soon as we can” in banks and other financial institutions. [Bloomberg]