Treasury prepares to invest in banks

WASHINGTON — The Treasury Department confirmed Friday night that it will buy stakes in major U.S. banks and financial institutions, announcing the bold move as leaders of the world's leading industrialized democracies agreed to guidelines for joint action but stopped short of taking coordinated steps sought by investors worldwide.

The revelation that Treasury will take nonvoting stakes in U.S. banks adds to a growing list of unprecedented government interventions into private financial institutions not seen since the Great Depression.

The list includes the seizure of mortgage-finance companies Fannie Mae and Freddie Mac, the rescue of global insurer American International Group (AIG) with an $85 billion loan, emergency lending to several financial firms, and the direct purchase of short-term promissory notes from U.S. corporations to bypass clogged credit markets.

The announcements came after another turbulent day in world financial markets and after Treasury Secretary Henry Paulson held an emergency meeting in Washington, D.C., with the finance ministers and central-bank presidents from the Group of Seven (G-7), which includes the United States, Canada, the United Kingdom, Germany, France, Italy and Japan.

In a news conference, Paulson said he told the visiting financial leaders how he'll carry out the recently enacted $700 billion U.S. financial-rescue package. He revealed that he plans to go beyond purchasing distressed bank assets to take nonvoting stakes in U.S. financial institutions to help recapitalize them.

"We are developing strategies to use the authority to purchase and insure mortgage assets and to purchase equity in financial institutions, as deemed necessary to promote financial-market stability," Paulson said. He added that Treasury is working to develop a standardized approach for a wide array of companies to help them attract private capital as well.

Treasury's equity-purchase program was widely favored by economists, who said it would be preferable to the approach of buying bad mortgage securities from banks, the centerpiece of the financial bailout bill.

"Buying mortgage assets is plagued with problems," said R. Glenn Hubbard, dean of the Columbia Business School and former chairman of President Bush's council of economic advisers.

Hubbard made his comment after it became clear the secretary was leaning toward the new approach.

"It's very helpful that Treasury is pivoting in this direction," he said. "This is a crisis that policy can fix; it's not beyond our ability."

Paulson offered few details about the equity program, declining to say how much of the $700 billion would go to such purchases. He said officials were "working around the clock" to develop the program.

In a joint communiqué, G-7 finance ministers and central bankers said "that the current situation calls for urgent and exceptional action. We commit to continue working together to stabilize financial markets and restore the flow of credit, to support global economic growth."

Their five-point guideline plan includes preventing bank failures, ensuring that credit and money markets return to normal functioning, enabling banks to raise capital from public and private sources, ensuring sufficient insurance of bank deposits, and restarting the secondary markets where mortgages and other loans are pooled into bondlike instruments.

"This is a period like none of us have seen before. ... There were not [questions] on what we needed to do," Paulson insisted, dismissing concerns that global investors wanted to see more immediate G-7 steps taken in unison.

Action would be coordinated where possible, he said, but "individual countries are going to have different needs and are going to approach the problems differently."

Perhaps the statement's most important point, however, was its message to the world that the G-7 powers are committed to coordinated and united action. Market analysts had stressed that such a stand was necessary to improve global confidence.

This weekend, Paulson will continue to meet with leaders of 20 most important economies — including big emerging markets such as Brazil, Russia, India and China — to seek additional ways of restoring confidence. They're in Washington, D.C., for meetings of the International Monetary Fund.

The G-7 meeting came at the end of a turbulent week in global financial markets.

In the United States on Friday, the Dow Jones industrial average swung more than 1,000 points in a wild day of trading, the biggest point swing in the blue-chip stock index's 112-year history.

The Dow closed down 128 points to 8,451.19, the best daily finish in a dismal week that had the index down more than 18 percent, the worst week of its storied history. Before reaching that final number, however, the Dow fell almost 700 points after the opening bell Friday and briefly crossed below 8,000 for the first time in five years.

In a rare bit of good news, some battered bank stocks, including Citigroup and J.P. Morgan Chase, rebounded, preventing even steeper losses in the Dow. The tech-heavy Nasdaq actually closed up 4.39 points, or 0.27 percent, to 1,649.51. The S&P 500 posted modest losses of 10.70 points, or 1.18 percent, to 899.22.

Information from the Los Angeles Times is included in this report.