Paulson Takes Page from British, May Directly Inject Capital into US Banks

On Wednesday the British government launched a plan to offer up to £50 billion ($87 billion) to major banks like Royal Bank of Scotland, Barclays, and HSBC Holdings shoring up their capital and directly strengthening their balance sheets. In exchange, the British government would get preferred equity positions in the banks.

Today, Treasury Secretary Paulson is indicating he likes the idea for US banks.

Prime Minister Gordon Brown seemed to point to the current US plan as insufficient, stating, "This is not a time for outdated thinking. We had to do more than just buy up assets."

Paulson, when pressed on his reaction to the British plan, seemed to hint affinity for the plan responding, "We will use all of the tools we've been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size."

Although a potentially extraordinary idea for a Republican administration to consider, guardians of free market economies--these are extraordinary times.

Political support certainly seems to be in place as Chairman of the House Finance Committee, Barney Frank (D-MA) advocated a similar plan. Likewise, Chairman of the Joint Economic Committee, Charles Schumer (D-NY) said the Treasury should consider a bank recapitalization plan arguing, "When the market recovers, the federal government would profit."

Prevailing logic is that taking a direct, preferred equity positions in these ailing banks will strengthen their balance sheets, bringing investors back to the market, and as the recovery begins taxpayers will take in the profits.

The Treasury taking direct positions in banks will potentially replenish Treasury (taxpayer) coiffures as banks return to profitable operations.

A plan like this seems to be gaining appeal. Taxpayers and politicians seem to be coming to like realization that injecting capital into banks may be more profitable and protecting of taxpayers than establishing expensive asset management structures, buying or insuring complex mortgage assets, attempting to restructure, and sell back to the market at a profit.

The current asset purchase bailout plan may still force ailing institutions into FDIC receivorship because of weakened capital positions, relative to deposits.

Treasury Paulson indicated that this option is current available to him in the recently passed $700 billion bailout plan.