From ClusterStock.com, October 8, 2008:

The Treasury finally seems to have seen the light on its crappy trash-asset bailout plan and may now actually inject capital into banks instead. This is a far better idea, one that we and others have been shouting down a rainbarrel about for weeks.

Under the original plan, unless the government vastly overpaid for the trash assets it bought, the banks still would have been undercapitalized--and, thus, unable to start lending. Having the government take an equity stake, on the other hand, not only gives taxpayers much more potential upside, it strengthens the banks' capital ratios.

The Paulson Plan should have taken this form in the first place. But better late than never.

NYT: Having tried without success to unlock frozen credit markets, the Treasury Department is considering taking ownership stakes in many United States banks to try to restore confidence in the financial system, according to government officials.

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, still preliminary, 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.

The American recapitalization plan, officials say, has emerged as one of the most favored new options being discussed in Washington and on Wall Street. The appeal is that it would directly address the worries that banks have about lending to one another and to other customers.