The Nationalization Of US Banks Begins

I'm watching Hank Paulson on TV right now officially announce his plan to purchase stock in US banks to shore them up.

U.S. Treasury Secretary Henry Paulson said the U.S. will buy equity in a ``broad array'' of banks and other financial institutions to restore market stability and ensure economic growth.

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

The injection of equity is part of efforts to sustain banks and other financial institutions through the worst credit crisis in seven decades, including takeovers by Treasury of American International Group Inc. and Fannie Mae and Freddie Mac, the largest U.S. mortgage finance companies.

The Treasury, under the equity purchase program, 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.

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

``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,'' he said.

Krugman is on MSNBC saying that without a blanket guarantee for all interbank lending (which the plan completely lacks), the plan is "halfhearted". Unless the plan gets "a whole lot stronger in the next 48 hours, we're in trouble," he said. Britain's plan announced earlier today did both, resulting in what could be a 30% government stake in banks. It has largely failed so far because of the international scope of the crisis, for it's not just the US that must guarantee all interbank lending but all the G7 countries.

Krugman is right, absolutely. The G7 plan is looking more and more DOA. The Nikkei opens in 48 hours. Without a plan that includes that G7 blanket interbank lending guarantee, the markets will collapse...and the interbank backstopping is just a small part of what absolutely needs to be worked out this weekend.

The clock is ticking.

Without a massive plan, this week will not end up being "the worst week in Dow history" for much longer.