Paulson says U.S. planning to buy financial equity

By David Lawder

WASHINGTON (Reuters) - 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.  Continued...