As the financial crisis threatens to spiral out of control, U.S. Treasury Secretary Henry Paulson is taking 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 now plans to make big capital injections into large financial institutions and get equity in return.

In a news conference Friday evening, following the Group of Seven meeting in Washington, Paulson said the plan is to offer a term sheet for needy banks. The government will not get voting rights status for its injection in most cases. Paulson said the government’s efforts were focusing on “liquidity” needs and “systemic risk.”

Paulson said recapitalization was now “necessary” and would let “taxpayer dollars go further,” because it is a “more efficient” use of capital than the auction process, which is meant to deal with illiquid assets.

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• A d v e r t i s e m e n t

“This a plan I am quite confident will work,” Paulson said.

Still, not all economists heard all the details they wanted from Paulson’s statement Friday night.

“There are few specifics,” said economist Robert Brusca of FAO Economics. “Too many key words are vague and not well-specified.”

Details of the plan were first reported by CNBC earlier Friday.

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.

“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 [MS 9.68 -2.77 (-22.25%) ] and Goldman Sachs [GS 88.80 -12.55 (-12.38%) ],” 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 add.

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 wind up being made to non-depository institutuons like investment banks, insurers and hedge funds. That issue was not addressed in Paulson’s news conference Friday in either his remarks or the question-and-answer period, but at this point it is understood that the plan is meant for banks, savings and loans and credit unions.

“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.

Like the auction process, however, that board has yet to be set up, and with developments in the financial markets moving much faster than the Washington bureaucracy it might not be long before Paulson takes action.

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