It is a remarkable shift for the Administration, which as recently as mid September had rejected the option of nationalization or even partial nationalization of a bank. More to the point, the new development also throws into question the fate of the debt repurchase plan that was--and technically still is--the crux of the $700-billion Emergency Economic Stabilization Act of 2008 passed at the beginning of October.

It is unclear whether the plan to buy toxic debt will no longer be a centerpiece of the rescue plan now that Treasury has also decided it will buy shares of these banks, Peter Cohan, a principal of Peter Cohan & Assoc., tells GlobeSt.com. "Frankly I couldn't be happier if that plan [to buy toxic debt] becomes DOA. There are so many reasons why it will not work: it will be hard to set an appropriate price, especially for securities that have tranches rated at different risks. If Treasury sets a price that is higher than the value on the bank's book then the bank realizes a profit, which isn't right. If the price is set under the book value, the bank would have to take a write-off, which would then have to offset a capital loss--which of course the banks couldn't do. So they would turn into zombie banks for all intents."

Cohan doesn't think the Administration will publicly jettison the plan to buy debt. "I think it will just focus on the capital injection plan and if that works they will quietly forget about the other."

The problem is that the plan to buy up toxic debt will take a while to implement--at least until the end of the year, Steve Pumper, executive managing director in Transwestern's Investment Services Group, tells GlobeSt.com. "In my estimation I think Treasury is going to take partial ownership of the banks as a temporary solution until the debt plan can get off of the ground." The two approaches can easily co-exist with each other, he concludes.

Whichever approach the Administration chooses to emphasize--debt purchases or direct purchases of banking stock shares--the cooperation of the world's Central Banks will be essential. Fortunately, after a brief spell of Schadenfreude among some of these institutions, all have concluded that the entire global system is at risk, not just the US.

On late Friday, a meeting of the Group of Seven Finance Ministers and Central Bank Governors--which includes Canada, France, Germany, Italy, Japan, the United Kingdom and the US--ended with the release of a broadly worded plan of coordinated action. Generally noted to be lacking in specifics--for instance, step one of the plan calls for the use of all available tools to support systemically important financial institutions and prevent their failure-–the assumption is that details are being worked on behind the scenes. "Of course it isn't going to end with these broad promises," Pumper says. "Governments are working feverishly to put a tangible solution in place." The coordinated cut in interest rates last week is an example of that." On that subject, Pumper feels that another 50 basis point could stand to be trimmed from the federal funds rate--if only to make hoarding cash as unattractive as possible.

Indeed, once the Washington, DC-based G7 meeting was over, at a summit chaired by French President Nicolas Sarkozy representatives from 15 European countries pledged to guarantee interbanks with maturities up to five years until the end of next year. This is a key measure, many say, as the heart of the credit crisis is banks' reluctance to trust one another. Other measures include a decision to allow governments to buy bank stakes and a commitment to recapitalize banks in distress. Britain, of course, had announced last week it would guarantee interbank lending as well as take stakes in the country's biggest banks in a program of partial nationalization. All that remains--at least on this particular facet--is whether the US will also agree to guarantee interbank loans.

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Rescue Plan Changes Directions, Increases Complexity

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