The U.S. Treasury is considering taking an ownership stake in financial institutions as the next step to stabilize the country's economy and resolve its crippling credit crunch. Secretary Henry Paulson hinted at the idea when he spoke to reporters in Washington yesterday, saying that the recently signed Emergency Economic Stabilization Act (EESA) gives him broad authority that he intends to use. Paulson said that beyond just buying up bad mortgage assets, he is weighing using the $700 billion rescue fund to infuse troubled banks with capital in exchange for ownership positions.

“It is the policy of the federal government to use all resources at its disposal to make our financial system stronger,” Paulson said. “We will use all of the tools we've been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size.”

Paulson's comments came Wednesday after coordinated interest rate cuts by central banks across the globe failed to reverse sinking market numbers. The Federal Reserve and the European Central Bank, along with central banks in England, Canada, Switzerland, Sweden, Australia, and China all lowered their key lending rates – a move that historically has proven to jump start national economies and bolster bank activity. South Korea, Hong Kong, and Taiwan followed suit with their own interest rate reductions today. Finance officials from the Group of Seven (G7) industrial nations are scheduled to convene in Washington beginning tomorrow to address the international financial meltdown.

According to Bloomberg News, banks worldwide aren't raising enough capital to offset their losses. While posting $592 billion of writedowns and losses during the crisis, they have added just $442.5 billion in new capital, according to data compiled by Bloomberg. The International Monetary Fund (IMF) said this week that it anticipates mortgage-related losses will more than double to $1.4 trillion, far above the agency's April estimate of $945 billion.

In Washington yesterday, Paulson stressed that the U.S. rescue plan will not save all institutions. “One thing we must recognize -- even with the new Treasury authorities, some financial institutions will fail,” Paulson said. He noted that regulators will take necessary actions to limit the economical impact from any single bank collapse.

Paulson reiterated the government's principal objective of addressing the “root cause of the financial system freeze --- the illiquid mortgage assets weighing on bank balance sheets.” He said the key to turning the corner on the housing correction was to keep mortgage credit available and strengthen market conditions. To provide critical additional funding to mortgage markets, Paulson explained that under the direction of the Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac have already begun to increase their purchases of agency mortgage-backed securities (MBS).

“The Treasury Department is moving rapidly to implement the EESA to help strengthen financial institutions while also protecting taxpayer interests,” Paulson said. “As I have said before, the ultimate taxpayer protection will be a stable financial system that supports normal economic activity.”

In line with that sense of urgency, the Treasury has appointed Neel Kashkari as interim assistant secretary to manage the program and named an interim CFO. Earlier this week, the Department also solicited proposals for assistance from private sector firms, who Paulson said “will bring complementary skills and expertise to the Treasury team.” And on Tuesday, the Administration held it's first meeting of the bailout program's Oversight Board.

“We will implement our new authorities with one simple goal,” Paulson said, “to restore capital flows to the consumers and businesses that form the core of our economy.”