Treasury Actively Considering Bank Recapitalisation

Treasury Secretary, Henry Paulson, according to White House spokeswoman Dana Perino, is “actively considering” injecting billions of dollars of bailout money to take ownership stakes in troubled US banks.

Though a decision has yet to be made ; the terms of the bailout on how to spend $700 billion of funds authorised by Congress last week, certainly allow the Treasury to support bank recapitalisation in turn for shares.

At a press conference Perino said: “These capital injections are something that Secretary Paulson is actively considering.” [Reuters]

In a statement Oct. 8, the Treasury Secretary said he will use all the tools given by Congress for maximum effectiveness, including the capitalisation of financial institutions of every size. Mr. Paulson added that the Treasury is moving rapidly to implement all the necessary measures to help strengthen financial institutions and stabilize the financial system that supports normal economic activity.

If the Treasury does inject capital into banks, it would follow UK’s partial bank nationalisation example, which on Wednesday pledged up to $87 billion to shore up banks’ capital in exchange for preference shares.

A source familiar with Paulson’s thinking, notes Reuters – said Treasury was working “extremely fast” on a capital injection plan. It is yet unclear at this point, how this new mechanism, if implemented, will work, but chances are the Treasury will end up with ownership interests in the banks that receive the capital.

In another sign of the extreme fragility of the markets, and as the world’s financial community continues to inject billions of dollars into the clogged pipes of the capital markets — Secretary Paulson said it has convened an urgent meeting in Washington this weekend of the G20, comprised of the world’s 20 largest economies.

The meeting is scheduled for Saturday and will look at ways to urgently and effectively address issues like confidence, capital, systemic risk and liquidity.

The G20 meeting will aim at coordinating stabilisation measures in the markets.