Government May Take Ownership In Banks, Quicker Solution Than Buying Illiquid MBS

Last week after the bailout bill was passed, Treasury began hiring money managers to help handpick illiquid securities to buy out of bank’s portfolios. This week, Treasury may instead use the money to inject directly into banks:

Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. Such a move would quickly strengthen banks’ balance sheets and, officials hope, persuade them to resume lending. In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones.

The Treasury plan was still preliminary and it was unclear how the process would work, but it appeared that it would be voluntary for banks.

The proposal resembles one announced on Wednesday in Britain. Under that plan, the British government would offer banks like the Royal Bank of Scotland, Barclays and HSBC Holdings up to $87 billion to shore up their capital in exchange for preference shares. It also would provide a guarantee of about $430 billion to help banks refinance debt.

With the situation is rapidly evolving and markets still in free-fall, this might be the best, quickest solution.