by Calculated Risk on 10/08/2008 06:55:00 PM

There has been some more discussion today that the Emergency Economic Stabilization Act (EESA) allows for a UK type recapitalization plan (see Krugman: To do, not to do). The UK plan is more along the lines recommended by most economists, and many economists are looking for any hint that the TARP might become a recapitalization plan.

Krugman points us to Justin Fox at Time: Treasury prepares for a TARP-and-switch. And it's a good thing, too

Did anybody else notice that when Hank Paulson was describing in his press conference today what the Emergency Economic Stabilization Act enables Treasury to do, the first thing he listed was "to inject capital into financial institutions"?

Here is Paulson's prepared statement:

Specifically, the EESA 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.
emphasis added

Paulson clarified this somewhat in the Q&A (transcript from CQ Politics)

QUESTION: The EESA program, do you think it will help -- the purchasing program, troubled asset relief program, will it help much to rebuild the capital base of the financial institutions?

PAULSON: Yes. Yes, that is -- that’s what’s -- what’s critical. There is -- capital has been reluctant to come into certain financial institutions, because a lack of visibility, in terms of the uncertainty, in terms of the value of -- of some of these assets.

So the -- the -- the prime motivation is to lead to the recapitalization and the stronger capitalization of the -- of the industry.

That seems to imply that the institutions will be better able to raise capital after the TARP buys the dodgy assets - as opposed to suggesting the TARP will inject capital into the institutions.

And another question:

QUESTION: Mr. Secretary ... Is it conceivable ... that the Treasury might have to take far more far-reaching measures and, in particular, might that include the U.S. do some sort of recapitalization of its banking system?

PAULSON: Yes, I’m not going to speculate on all the things we -- we may have to do. I would simply say we have a broad range of authorities and tools in the -- in the TARP. And so we -- we’ve emphasized the purchase of the liquid assets, but we have a broad range of authorities. And I’m confident we have the authorities we need to -- to work with going forward here.

And that comment is ambiguous.

Here is a comment from Rep. Barney Frank (hat tip Brian):

In implementing the powers provided for in the Emergency Economic Stabilization Act of 2008, it is the intent of Congress that Treasury should use Troubled Asset Relief Program (TARP) resources to fund capital infusion and asset purchase approaches alone or in conjunction with each other to enable financial institutions to begin providing credit again, and to do so in ways that minimize the burden on taxpayers and have maximum economic recovery impact. Where the legislation speaks of ``assets'', that term is intended to include capital instruments of an institution such as common and preferred stock, subordinated and senior debt, and equity rights.
emphasis added

Maybe people are seeing what they want to see, but it'd be nice if the TARP was more oriented towards increasing capital.