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 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.