Treasury to ‘Inject Capital’ into Banks

The Department of the Treasury might soon begin to inject funds into banks, according to a statement by secretary Henry Paulson Wednesday. The move by the Treasury to directly stimulate lending came after several days of attempts in coordination with the Federal Reserve to implement the Emergency Economic Stabilization Act of 2008 (EESA) and unlock frozen credit markets. “A chain of events caused by the ongoing housing correction has reverberated through U.S. banks and financial institutions, and has seriously impacted the underlying economy, reaching American households and businesses,” Paulson said in a statement on the economy. “A root cause of this situation is the housing correction and a lack of confidence in mortgage assets, as well as a lack of confidence in many of the financial institutions that hold these assets.” When banks can’t issue and finance loans – or are hesitant to do so – an American economy dependent on credit suffers. The goal of the new rescue legislation is to rekindle investor confidence, increase liquidity and move money through the system down to individual borrowers and businesses, Paulson said. “Specifically, the EESA empowers Treasury to use up to $700 billion to inject capital into financial institutions, to purchase or insure mortgage assets, and to purchase any other troubled assets that the Treasury and the Federal Reserve deem necessary to promote financial market stability,” he said. The Treasury so far has focused attention on purchasing troubled assets from financial institutions through auctions. Paulson said “it will be several weeks before our first purchase,” but that the Treasury plans to continue working quickly to provide funding to U.S. mortgage markets. “As I have long said, the housing correction is the root cause of the current financial market turmoil,” Paulson said. “We must continue to keep mortgage credit available and support the housing market, so that we can more quickly turn the corner on the housing correction.” Read Paulson’s full statement>> The Treasury also announced Wednesday the G-7 Finance Ministers and Central Bank Governors will meet Friday, a week after President George W. Bush signed the bailout legislation into law. Paulson will discuss current economic turmoil as “a global phenomena.” “We are all affected by it, and strengthened international collaboration is needed now more than ever to find collective solutions to achieve stable and efficient financial markets and restore the health of the world economy,” secretary David McCormick said Wednesday in a prepared statement. Earlier Wednesday, the Fed announced its move in global coordination with central banks around the world to cut rates and encourage lending among banks. It was the latest announcement in a week of aggressive action from both the Fed and Treasury, and one Paulson called “a welcome sign that central banks around the world are prepared to take the necessary steps to support the global economy during this difficult time.” Editor’s note: To contact the reporter on this story, email diana.golobay@housingwire.com.