U.S. Decides ‘Sticking Capital in Banks’ Not Such a Bad Idea After All

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Way back two weeks ago, when lawmakers were facing a decision on whether to pass the $700 bailout bill, “some said we should just stick capital in the banks, take preferred stock in the banks," Treasury Secretary Hank Paulson told the Senate Banking Committee. But the U.S. wasn't going to that. Why? Because nationalizing banks is for losers. "That’s what you do when you have failure," Paulson explained patiently. "This is about success." Or, um, not.

After a long, hard week, this past weekend the Bush administration decided that "sticking capital in banks" wasn't such a bad idea after all. After meeting with finance ministers from G7 countries (otherwise known as the Coalition of the Ailing), they basically chucked over Paulson's original plan of buying troubled assets from banks in favor of taking equity stakes in banks, as the U.K. and Germany did this morning. Awkward.

Barney Frank is appreciating the irony. "We took a proposal from the secretary, and frankly, it was the Congress that explicitly added the right to buy the equity," he told ABC's This Week. "Frankly, the Treasury was not too crazy about that."

The Wall Street Journal also reminds us that "more broadly, Mr. Paulson didn't see a need for any type of government rescue plan until last month. As recently as May, Mr. Paulson was predicting that the 'worst is likely to be behind us.'" Ahem.

While markets are closed here for Columbus Day, Dow futures are up and banking stocks worldwide jumped on promise of the new capital. But is Paulson's stock plummeting?

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