Paulson Considers Following Uk Lead and Buying Equity Stake in Banks

The US authorities are likely to follow Britain's example by pumping capital directly into leading banks in an urgent effort to shore up eroding confidence, as Wall Street share prices see-saw uncontrollably.

Anxious about acute fears of further banking failures, the US treasury secretary, Henry Paulson, is studying the option of taking equity stakes in banks in return for billions of dollars of American taxpayers' money.

"These capital injections are something that secretary Paulson is actively considering," said the White House's press secretary, Dana Perino, at a briefing yesterday.

Analysts and investors have grown skeptical that a $700bn emergency rescue plan passed by Congress can be effective if the US government simply purchases distressed assets from banks' balance sheets.

A week-long plunge in US share prices has alarmed treasury officials, fueling a sense that an even more radical approach is needed to persuade banks to resume lending to each other and to the public.

Paulson alluded to the possibility at a press briefing on Wednesday, saying the bail-out bill approved by Congress provided "broad, flexible authorities" for his department to "inject capital" as well as to purchase banks' troubled assets.

"We will use all of the tools we've been given to maximum effectiveness, including strengthening the capitalization of financial institutions," he said.

Finance ministers from the G7 industrialized countries will discuss a coordinated effort at a meeting at the White house tomorrow.

White House chief economic advisor Edward Lazear said injecting capital into the financial system could be quick and effective. "It's not going to take us a long time to do this. The markets will be reassured in very short order," he said.

A US ban on short-selling in financial stocks expired yesterday, prompting fresh volatility as hedge funds resumed betting on future falls in banking shares. Morgan Stanley's stock dived by 25% on doubts over a planned $9bn investment by Japan's Mitsubishi, although the bank insists the deal will be completed next week.

"It's a self-feeding frenzy - you go to sleep and hear Japan is down, you wake up and hear Europe is down, then you come in to work and markets here are down," said Thomas Russo, a partner at Gardner Russo Gardner.

Any move by the US government to recapitalizes the banking industry is likely to prove controversial in a nation which prides itself on its free-market ethos.

Even as policymakers counsel patience in waiting for the medicine already prescribed to kick in fully, they are searching hard for other approaches.

"So long as financial conditions warrant, we will continue to look for ways to reduce funding pressures in key markets," the Federal Reserve chairman, Ben Bernanke, said.

Thirteen high-street banks have collapsed in the US this year, including big names such as Washington Mutual and California's IndyMac Bancorp.

"There's a lack of confidence because we don't know which bank is going to go next," said William Isaac, a former chairman of the Federal Deposit Insurance Corporation. "Banks we never thought would go have gone."

One hedge fund manager said the next US administration should tell Wall Street that the price of the bailout would be far-reaching regulation.

Michael Masters, of Masters Capital Management LLC, called on the next administration to resist pressure from Wall Street when it moves to reorder the industry.

"I just think that someone has to take a stand and say 'wait a minute, what are we going to do here that is different from before?' Because the system we created is going to take years to unwind and it's going to require lots of regulation to make sure we never get in this situation again."

Time and tide

The US national debt is so high the clock in Time Square monitoring it has run out of digits. When developer Seymour Durst installed it in 1989 he thought 13 digits (plus one for the $) would suffice (debt was a mere $2.7 trillion in the days of Reaganomics). Now it has bust $10 trillion, a $ sign has been stuck up to free a space , and Durst is getting a clock with three more zeroes - enough for a $multi-quadrillion debt.Graeme Wearden