Friday, October 10, 2008
As the financial crisis threatens to spiral out of control, Treasury Secretary Henry Paulson is prepared to take extraordinary steps through the extensive authority granted to him under emergency rescue legislation.
With the legislation’s main mechanism—an auction system to purchase bad mortgage-based securities—still weeks away from implementation, Paulson is now expediting plans to inject capital into banks, CNBC has learned.
According to senior government officials, the plan is to offer a term sheet, offering capital injections to all banks. An announcement won’t happen for several days.
“I don’t wish to spread alarm on the line people but the big issue confronting the market is I’m afraid the health and sustainability of Morgan Stanley and Goldman Sachs,” Hugh Hendry, Partner and CIO at Eclectica, told CNBC early Friday. “It is unimaginable that they can be allowed to go, I suspect that they will be nationalized at some point today or over the weekend,” he added.
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Even before details of the latest measures began to trickle out, there was heightened concern about the health of big institutions and the need for direct government support.
The Emergency Economic Stabilization Act of 2008’s vague language gives Paulson almost unlimited power to intervene and leaves much up to interpretation.
In that context, some say cash injections could apply to non-depository institutuons like investment banks, insurers and hedge funds.
“He’s free to just strike deals, to do special deals,” says Lawrence White, a former White House economist and savings and loan regulator, who adds Congress was aware of the powers being given to Paulson and thus pressed hard for an oversight board.
This article was posted: Friday, October 10, 2008 at 12:47 pm