The National

There were hints of this today, and the New York Times breaks it open:

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 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.

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.

The socialist jokes write themselves, especially since is happening on the watch of MBA President and free market fundamentalist George W. Bush, but this is a good thing. Nationalizing the banks is the best way to both shore up the system and get the best deal for taxpayers. Obviously it's not what you'd want to do in a sustainable economy, but it's the hand we've been dealt. The Wall Street Journal is arguing in favor of this right now. It's simply what must be done. No bank is willing to lend each other money because they have no expectation that they'll be paid back. Their balance sheets are crap, and they simply need capitalization.

The fact that the Treasury Department came to this realization now is helpful for a potential Obama Administration. He's still going to inherit one heck of a mess, but at least the plan is in action and may be in motion. And ultimately this will put the federal budget in less of a hole. The pain is going to be sustained, but I think we have a path to turn the corner.

The only thing that could derail such a plan is this:

One concern about the Treasury’s bailout plan is that it calls for limits on executive pay when capital is directly injected into a bank. The law directs Treasury officials to write compensation standards that would discourage executives from taking “unnecessary and excessive risks” and that would allow the government to recover any bonus pay that is based on stated earnings that turn out to be inaccurate. In addition, any bank in which the Treasury holds a stake would be barred from paying its chief executive a “golden parachute” package.

The only thing that will stop Paulson is the greed of his buddies. And the only thing that will stop the banks from taking the deal is the loss of their precious parachutes. Of course, there's a way for a President to play hardball on this, but I don't see that coming until January.

(By the way, Democrats forced this option for equity stakes into the bill. Just so you know.)

...I should also note that the US is taking the lead of Britain on this. I'm not fully informed on Gordon Brown's problems, but it appears that he's done quite a bit of good in the past year and is being blamed for the sins of his predecessor.