AGA Today

U.S. Treasury Considers Buying Stakes in Banks
New Tack Comes Amid World-Wide Emergency Rate Cuts
By Deborah Solomon
Wall Street Journal

WASHINGTON—The Treasury Department is considering ways to inject capital directly into banks, possibly by taking equity stakes, as the financial crisis continues to worsen.

Treasury Secretary Henry Paulson, in a marked shift in rhetoric, played up Treasury's newfound authority to "to inject capital into financial institutions" in remarks Wednesday. Mr. Paulson, who won approval from Congress to buy $700 billion worth of distressed assets, had previously focused on Treasury's plan to buy mortgage-related securities from financial institutions that are having trouble getting the assets off their books.

As the financial crisis continues to escalate, Treasury has begun fleshing out ways to use its authority to make direct injections into financial institutions, according to a person familiar with the matter. Treasury is figuring out how to structure such infusions so that banks can recapitalize and begin lending.

No such moves are imminent, but the fact that the department is engaging in such discussions is an indication of how the crisis is constantly morphing. Such a move was not under consideration just a few days ago but has become more of a possibility in recent days as the stock market has plunged and the credit crunch shows no signs of easing.

Treasury wants to design something voluntary that encourages healthy institutions to participate. Treasury is discussing whether to buy preferred stock or find some other way to inject capital into the firms.

In remarks to reporters on Wednesday, Mr. Paulson said its new authority extends beyond just mortgage-related assets to "any other troubled assets that the Treasury and the Federal Reserve deem necessary to promote financial market stability."

The U.K. government this week announced a plan to take stakes in a range of domestic banks.

Coordinated Rate Cuts
On Wednesday morning, the world's central banks launched a large coordinated attack against the widening global financial crisis, lowering short-term interest rates in unison.

The emergency interest-rate action, which involved the Fed, the European Central Bank, the Bank of England and others, is a sign that fears that the financial crisis could cripple the global economy are spreading rapidly.

But the rate move failed to soothe jittery investors. The Dow Jones Industrial Average closed Wednesday at 9258.10, down 189 points, or 2%. The index has fallen 14.6% so far this month. Oil fell $1.11 to $88.95 a barrel, on signs of weakening global demand. Investors continued to flock to safe-haven U.S. Treasury bills, and away from riskier debt such as junk bonds.

One of the chief threats to the global economy is that banks and other financial institutions are hoarding cash, which makes it harder for businesses and households to finance their day-to-day affairs. Lower interest rates reduce the cost of borrowing for banks, businesses and households, and potentially boost confidence. But it's far from clear whether the lower rates will make banks and other lenders, which are gripped by fears of defaults by borrowers, any more willing to lend.

The U.K. government this week announced a plan to take stakes in a range of domestic banks. As recently as a few days ago, the U.S. Treasury was not considering any capital injections. But it has become more of a possibility as the stock market has plunged and the credit crunch shows no signs of easing.

Treasury wants to design something voluntary that encourages healthy institutions to participate. It is discussing whether to buy preferred stock or find some other way to inject capital into the firms.

In remarks to reporters on Wednesday, Mr. Paulson said its new authority extends beyond just mortgage-related assets to "any other troubled assets that the Treasury and the Federal Reserve deem necessary to promote financial market stability."

On Wednesday, central banks in the U.S., the euro zone, the U.K., Canada, Sweden and Switzerland each cut short-term interest rates by a half percentage point, noting that "the recent intensification of the financial crisis has augmented the downside risks to growth." Acting on its own, the People's Bank of China also cut rates, as did Australia's central bank, a day earlier. Later, central banks in South Korean and Taiwan cut interest rates, too, and Brazil's central bank cut reserve requirements on cash and term deposits.

The global scope of the move was unprecedented, and the cuts marked the first time central banks across the Atlantic have moved in tandem on interest-rate policy since just after the Sept. 11, 2001, terrorist attacks in the U.S. The Fed has not moved rates since April, when it lowered them to 2%.

The moves likely mark just the beginning of broadened government efforts to keep the world-wide credit freeze from strangling the global economy. "For all central banks, this is not the end of the story," says Laurence Meyer, vice chairman of Macroeconomic Advisers, a forecasting firm, and a former Federal Reserve governor. "We're facing a potentially severe recession." —Jon Hilsenrath, Joellen Perry and Sudeep Reddy contributed to this article.