Paulson Says Rescue Fund Will Inject Capital into Financial Institutions

By: • Wed, Oct 8 2008, 4:07 PM

The $700 billion rescue package passed last week by the U.S. Congress will in part be used to inject capital into financial institutions, Treasury Secretary Henry Paulson said during a press conference on Wednesday. He is also calling for a G20 meeting to discuss the current financial crisis.

Paulson explained that because of the widespread uncertainty in the marketplace, investors are hesitant to commit capital to financial institutions and that investor confidence is critical to restoring liquidity and bringing stability back to the financial system.

"The [Emergency Economic Stabilization Act] empowers Treasury to use up to $700 billion to inject capital into financial institutions, to purchase or insure mortgage assets, and to purchase any other troubled assets that the Treasury and the Federal Reserve deem necessary to promote financial market stability," Paulson said. "The new law also gives the Federal Reserve the authority to pay interest on reserves, and temporarily increases FDIC and NCUA deposit insurance from $100,000 up to $250,000."

Paulson also said he is calling for a special meeting of the G20 that will include senior finance officials, central bankers, and regulators from key emerging economies to "discuss how we might coordinate to lessen the effects of global market turmoil and the economic slowdown on all of our countries."

In his speech, Paulson outlined the challenges the U.S. is facing, saying governments should continue to provide capital injection and remove troubled assets from the markets.

Paulson said that the U.S. government will continue to focus on rebuilding credit and restoring confidence in the markets. He noted that he would like to see more recapitalization of financial firms.

Paulson added that Treasury is moving fast to come up with a program to deal with troubled assets but that the plan would not be in place for another several weeks.

In a question and answer session following his speech, Paulson said the Treasury is working to formulate a program to remove the trouble assets from the markets.

Paulson also said the current priority is to mitigate the effects of the financial crisis on the economy, adding that it is still too early to look for promising signs in the credit markets.

Paulson refused to speculate as to how long he thinks the crisis will last.