Paulson: Uncle Sam wants stock

Treasury Secretary Henry Paulson, emerging from a meeting with central bankers from across the world, said that the U.S. government will buy stock in troubled banks rather than simply buying up toxic mortgage-backed assets.

The rescue/bailout package passed by Congress recently gives the Treasury the authority to buy shares of banks. By purchasing shares, Paulson hopes to increase capital available to banks. Because banks lend out a multiple of the amount of capital they hold, by increasing a bank's capital, the Treasury can broadly increase what it lends. Purchasing $7 billion worth of stock, for example, could mean $70 billion worth of lending. And taxpayers would then own shares of the bank, purchased at a deep discount relative to a year ago. (Or even two weeks ago.) When the banks recover, the Treasury could see a hefty profit, in a best-case scenario.

The bankers "finalized an aggressive action plan" to deal with the global crisis, said Paulson. "Never has it been more important to find collective solutions."

Paulson read from a lengthy statement before answering questions. (The G7 joint statement here.)

The American economy is “severely strained,” Paulson said, noting that the "root cause [is] the housing correction" and a lack of confidence in U.S. financial institutions. "The market turmoil is a global event," he said, calling for "individual and collective actions to provide much needed liquidity."

Paulson said that he was communicating and coordinating with nine central banks. "We're in close coordination with Japan and China and other investors around the world," he said. 

UPDATE: Obama's willing to give it a shot — and notes that the bill he backed gives Paulson this authority. His statement argues that the "test of any idea must not be whether it is liberal or conservative." The sentiment exposes just what strange ideological terrain we've entered. The proposal, of course, comes from a conservative administration but is rooted in left-wing ideas of state control of the economy. In the midst of this crisis, though, those distinctions seem worth very little.

Obama's statement ...

“There are many causes of this economic crisis, and it’s critical that we respond using all the tools that we currently have. That’s why I support Secretary Paulson’s latest initiative to use the authority we gave him in the financial rescue plan to provide more capital to our financial institutions so that they have money to lend to families and businesses. He should implement this plan quickly, aggressively, and ensure that it protects taxpayers, does not reward CEOs, and is limited in duration. As financial conditions evolve, the government should be prepared to take all additional action necessary to maintain market confidence, including extending broader guarantees in the financial system. And the United States must step up its efforts to work with the G-7 and our other allies to ensure a globally coordinated solution.

“This is not a time for ideology, but a time for common sense and pragmatism. The test of any idea must not be whether it is liberal or conservative, but whether it works for the American people. That’s what we should all be focused on in the days ahead to restore strength and prosperity to our economy.”