Paulson Says Will Buy Bank Equity `Soon as We Can'

By John Brinsley and Rebecca Christie

Oct. 10 (Bloomberg) -- U.S. Treasury Secretary Henry Paulson said the U.S. will buy equity ``as soon as we can'' in banks and other financial institutions to restore market stability and revive economic growth.

The Treasury is ``working to develop a standardized program that is open to a broad array of financial institutions,'' Paulson said at a press conference after a meeting in Washington of finance ministers and central bankers from Group of Seven countries.

The injection of equity would be aimed at sustaining banks and other financial institutions through the worst credit crisis in seven decades. Paulson declined to give a timetable or details about the purchases, and signaled that markets may be in for turmoil ahead.

``We're going to do it as soon as we can do it and do it properly and do it effectively and right,'' Paulson said. ``Trust me, we are not wasting time; people are working around the clock to deal with this.''

A drop in home prices and illiquid securities tied to mortgages led to the collapse of some of the country's biggest financial firms and to takeovers by the Treasury of American International Group Inc. and Fannie Mae and Freddie Mac, the largest U.S. mortgage finance companies.

Under the equity purchase program, the Treasury would not be involved in bank management, Paulson said. Equity purchases would take place alongside Treasury's coming program of ``broad'' mortgage asset purchases, he said.

More Capital

``Such a program would be designed to encourage the raising of new private capital to complement public capital,'' Paulson said.

The U.S. Congress a week ago passed legislation allowing the Treasury secretary to spend as much as $700 billion to buy troubled mortgage-related assets and purchase equity in banks.

The International Monetary Fund earlier this week said banks around the world would need $675 billion in fresh capital in the next several years to recover from the credit crisis. The IMF also raised its estimate of losses tied to U.S. loans and securitized assets to $1.4 trillion -- roughly half of which have already been written down or recognized as losses.

Asked about how newly approved funds would be divided between the mortgage-asset and bank equity purchases, Paulson declined to offer specifics.

Market Liquidity

``Any equity the government purchases through a broadly available equity program would be on a non-voting basis, except with respect to the market-standard terms to protect our rights as investors,'' Paulson said.

The G-7 nations are committed to ``an aggressive action plan'' to expand liquidity and stem a credit crisis threatening global economic growth, he said in the statement.

The G-7 will ``provide liquidity to markets, strengthen financial institutions, protect savers and enforce investor protections'' under a ``coherent framework,'' Paulson said. Policy makers will pursue ``robust international partnership and cooperation.''

The Dow Jones Industrial Average posted its biggest weekly drop in the history of the 30-stock average as officials from the U.S., Japan, Germany, U.K., France, Canada and Italy met for the first time since the financial crisis spread last month. Stocks in Europe and Japan had the biggest weekly drop in at least 21 years.

Responding to a question, Paulson said markets may ``have some volatility for a while'' and ``this is about confidence.''

To contact the reporters on this story: John Brinsley in Washington at jbrinsley@bloomberg.net Rebecca Christie in Washington at Rchristie4@bloomberg.net.