http://www.bloomberg.com/…

Treasury Secretary Henry Paulson urged banks receiving $250 billion in capital injections from the government to use the funds to spur economic growth.

“We must restore confidence in our financial system,” Paulson said at a press conference in Washington. “The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it.”

With the equity purchases, Paulson is using more than a third of the $700 billion in government support Congress gave him the authority to use on Oct. 3. He didn’t identify any of the lenders. People familiar with the plan said nine companies will get $125 billion: Citigroup Inc., Goldman Sachs Group Inc., Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., Merrill Lynch & Co., Morgan Stanley, State Street Corp. and Bank of New York Mellon Corp.

Mussolini would be tickled.

Paulson said the Treasury will dedicate $250 billion for boosting bank capital through preferred stock purchases. The regulators said in a statement that “thousands” of financial companies would participate.

Participating banks will need to accept limits on executive pay and so-called golden parachute payments. They also will need to give the Treasury warrants for an amount equal to 15 percent of the senior preferred investment, with a strike price determined by the bank’s share price at the time of issuance.

The senior preferred shares will pay a dividend of 5 percent for the first five years and 9 percent after that, the Treasury said. The purchase price of the stock will be the market price of the banks’ common shares at the time of the transaction. Companies will be able to buy back the equity at par after three years.

The possibility for this to turn out bad is pretty high. Even should the companies buy back their shares and the government get out completely from this setup… the precedent alone is incredibly dangerous. What will this mean for these corporations? How involved will the government get? Now that they are partial owners all previous barriers are gone.

It just gets worse by the day.

http://online.wsj.com/…

American International Group Inc. was facing a severe cash crunch as ratings agencies cut the firm’s credit ratings, forcing the giant insurer to raise $14.5 billion to cover its obligations.

With AIG now tottering, a crisis that began with falling home prices and went on to engulf Wall Street has reached one of the world’s largest insurance companies, threatening to intensify the financial storm and greatly complicate the government’s efforts to contain it. The company is such a big player in insuring risk for institutions around the world that its failure could shake the global financial system.

Shares of AIG fell 42% to $2.70 in recent premarket activity Tuesday after earlier in the premarket session rising 5% to $5. The stock tumbled 61% on Monday amid the U.S. stock market’s worst daily point plunge since the first day of trading after the Sept. 11, 2001, terrorist attacks. In addition to AIG’s woes, the financial markets were rattled by the rushed sale Sunday of Merrill Lynch & Co. to Bank of America Corp. and the bankruptcy-court filing of Lehman Brothers Holdings Inc.

AIG has been scrambling to raise as much as $75 billion to weather the crisis, and people close to the situation said that if the insurer doesn’t secure fresh funding by Wednesday, it may have no choice but to opt for a bankruptcy-court filing.

“The situation is dire,” a person close to AIG said.

With strong encouragement from the Fed, Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. are seeking to raise $70 billion to $75 billion in loans to help prop up AIG, according to people familiar with the situation. Word of AIG’s efforts to borrow that much sent the stock market tumbling in the last hour of trading.

Korean markets were down 6% today. Many of the banks are down in premarket. Looks like it’s going to be another interesting day.