By Greg Robb, MarketWatch
Last update: 8:28 p.m. EDT Oct. 10, 2008
WASHINGTON (MarketWatch) -- Treasury Secretary Henry Paulson laid out more details of his radical plans to buy equity in banks Friday, while the Group of Seven finance ministers and central bank governors urged its members to take whatever steps are necessary to restore market confidence.
After their closed-door meeting Friday, the G7 set out a broad "plan of action" to stabilize global financial markets, in a one-page plan that was sweeping in scope but short on specifics.
Credit crisis: Global responses
G7 nations vow action
Finance ministers outline sweeping commitment to "urgent and exceptional" actions to stabilize financial markets.
The plan calls for banks to be recapitalized with public and private funds, but makes no specific mention of another common suggestion: Guaranteeing all interbank debt worldwide.
The G7 meeting came as global stock markets endured another volatile day. Investors around the world scrambled to move their funds into the safest and most liquid investments, such as cash and government bonds, fearing that the seizing up of credit markets could lead to a major recession and the failure of large corporations.
In a press conference, Paulson gave some new details of the emerging plans by the U.S. federal government to inject capital directly into a "broad array" of financial firms.
Paulson said that officials are working on a "standardized program that is open to a broad array of financial institutions."
Paulson said the Treasury is working as quickly as possible to nail down the details and get the recapitalization plan running. He said the government wants to "do it right."
The plan is to attract private capital to complement the government's funds, he said.
Paulson went out of his way to say existing shareholders would be protected, and that the government would only make the purchases through a "broadly available equity program" without any voting power, "except with the market standard terms to protect our rights as investors."
The G7 said that "urgent and exceptional action" is needed to stabilize financial markets.
We will continue to act in line with this solid anchoring of inflation expectations and the necessity, again, to deliver price stability."
The financial and monetary leaders vowed to use all available tools to support systemically important financial institutions and prevent them from failing.
Also on the G7 to-do list were unfreezing credit and money markets, ensuring banks can raise capital from the private sector, ensuring that deposit insurance regimes were robust, and repairing secondary mortgage markets where appropriate.
The actions should be taken in ways that would protect taxpayers and avoid damaging other countries.
Interest rate policy should be used "as necessary and appropriate," the G7 plan said.
It is unclear whether the plan will go far enough to satisfy financial markets, which are suffering from a profound loss of confidence.
Jean-Claude Trichet, the president of the European Central Bank, said that markets needed time to digest the G7 stance.
"My experience of markets is that it takes always a little time for markets to capture all the elements that are associated with the decisions that we are taking, and also with the principles that we are displaying," Trichet said.
"It's normal that there is a maturing process."
At first blush, some analysts were not too impressed.
Robert Brusca, chief economist at FAO Economics, called the statement "fluff - good fluff but fluff."
Vincent Reinhart, a former top staffer at the Federal Reserve Board, said markets had no interest in pledges but wanted to know exactly what the G7 would do before trading resumes Monday.
Reinhart said the financial markets are moving quickly, which makes the gears of international economic policymakers seem to move more slowly.
"I think the finance ministers just failed a test, or at best got a C minus," said Paul Krugman, a Princeton University economics professor and New York Times columnist.
But Sherry Cooper, chief economist at BMO Capital Markets, said she thought the principles expressed by the G7 would reassure markets.
Economists have said they wanted the G7 to agree on measures including sweeping guarantees of bank deposits and interbank lending, as well as direct injections of taxpayer money to recapitalize ailing banks.
"They have to deliver the goods because the markets are just not going to stabilize unless they do," said Brian Hilliard, head of economic research at Societe Generale. "And the goods are government guarantees of deposits."
Ahead of the meeting, Ken Rogoff, a Harvard University professor and former chief economist at the International Monetary Fund, said there needed to be an "overwhelming" G7 statement.
"I think the worst thing to do would be to come out with a very tepid response," he said. "It would be the end of the G7."
"This is really the mother of all financial crises since World War II, and if the G7 leaders can't ... get it together and come out with a very effective statement, it is going to be a sad day indeed," Rogoff said.
With global equity markets plunging, the odds of coordinated action "are increasing by the hour," Hilliard said. "The gravity of the situation is just obvious to everybody."
Greg Robb is a senior reporter for MarketWatch in Washington.
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