As financial markets continue their free-fall despite action by the U.S. government in terms of a $700 billion bailout, the U.S. Treasury department is reportedly ready to inject capital directly into the embattled banking system. Several media outlets are reporting that Treasury Secretary Henry Paulson is looking at the end of October to begin the nationalization process.
The White House lent credence to the rumor early Thursday when White House spokeswoman Dana Perino said that Paulson is "actively considering" direct capital injections into the shaky U.S. banks.
"Secretary Paulson is looking at all the different tools to figure out which ones should be used at what time and how robustly and how much money to put into each," she said in a press conference.
The banking crisis has outweighed every other economic worry in recent weeks, sending the credit markets into crisis and the global markets into turmoil. The desperation of the situation was evidenced Wednesday, when, despite a series of coordinated rate cuts around the world, most markets still posted losses.
Rumors that nationalization could take place were swirling before the New York Times broke the story early Thursday morning, citing unnamed Treasury officials who claimed that the recently passed $700 billion financial rescue package allows the department to put cash directly into the banking system.
The direct injections would strengthen banks' balance sheets and persuade them to continue lending while giving the Treasury the right to take ownership positions in the banks. The report added that the Treasury's plan is preliminary and it is unclear how the process would work. It is expected to be voluntary for banks.
The Treasury's reported move follows the unprecedented coordinated rate cut action Wednesday, in which the Federal Reserve and five other central banks jointly reduced benchmark interest rates by one-half of a percentage point in a bid to support the beleaguered global economy. In the United States, the federal funds rate now stands at 1.5 percent, its lowest level since 2004.
The Fed has also spent hundreds of billions of dollars to keep credit flowing. Tuesday, the central bank said it would buy commercial paper that corporations issue to obtain short-term loans to cover regular expenses, such as payroll. However, the efforts have not been enough to stem the bleeding in the global markets, opening the door to the Treasury's bank plan.
Wednesday, Paulson warned that markets are "severely strained" and "significant challenges remain ahead."
"Uncertainty and a lack of confidence have clogged our basic financial plumbing," the Treasury Secretary noted. "While our actions have been aimed at restoring financial markets and institutions, our purpose is to prevent financial market difficulties from further impacting businesses and families across the country."
Overseas, the United Kingdom is working to shore up its shaky banking system. As per the plan announced by the British Treasury Wednesday, the U.K. government will make 200 billion pounds available to banks under a Special Liquidity Scheme. The government has also pledged to invest about 50 billion pounds, or $87 billion, in direct support for eight major banks including Barclays (BARC.L) and Royal Bank of Scotland (RBS, RBS.L).
Further, the British government is ready to provide an incremental minimum of 25 billion pounds in the form of preference shares, or PIBS, at the request of an eligible institution, as assistance to an ordinary equity fund-raising. In addition, the government will provide eligible institutions a guarantee of about 250 billion pounds to help the refinancing of debt.
Alastair Darling, the Chancellor of the Exchequer, said the government would continue to do whatever is necessary to combat the financial crisis.
"The reason we are doing this now is because it is necessary to stabilize the banking system," Darling noted.
Meanwhile, as part of fighting back the crisis, which is pushing the global economy towards a recession, finance ministers of various European countries have met in Luxembourg on Tuesday and agreed to temporarily relax accounting rules to help banks. In the U.S., the Securities and Exchange Commission made similar changes in September. Spain has announced a 30 billion euro fund to buy assets from the nation's banks. The fund could be raised to 50 billion euros.
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