By Emily Kaiser and Claudia Parsons
WASHINGTON (Reuters) - The U.S. government pushed on Saturday to finish a plan to buy direct stakes in American banks as finance ministers from around the world struggled to find ways to stop the deepening financial crisis and shore up markets.
Treasury Secretary Henry Paulson said the U.S. government would buy shares of financial institutions if necessary to halt market turmoil that has wiped out trillions of dollars of wealth and threatens to throw the global economy into major recession.
"We're going to do it as we can do it in a proper way that will be effective. Trust me, we're not wasting time, we're working around the clock," Paulson said late on Friday after a meeting of finance ministers from the Group of Seven rich countries in Washington.
The G7 vowed to take all necessary steps to unfreeze credit markets and ensure banks can raise money, but offered no collective course of action to solve the 14-month-old debt crisis, which has worsened dramatically in recent weeks.
The finance leaders agreed to use all available tools to support "systemically important" financial institutions and prevent their failure, and ensure banks can raise capital "in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses."
Financial markets needed time to fully digest all the steps various countries have taken so far in response to the crisis, European Central Bank President Jean-Claude Trichet said.
But analysts said the G7 statement was unlikely to allay the panic that has swept through global markets in recent weeks after U.S. investment bank Lehman Brothers tumbled into bankruptcy and triggered a wave of risk aversion that left banks hoarding cash.
"Right now, everybody's scared, they're panicking," said Mark Waggoner, president of Excel Futures Inc in California. "Unless they see action, they're still going to panic.
"Part of the problem is no matter what they (G7) do it's not going to be an instantaneous fix and everybody wants a fix that's immediate," he added. "It's just not going to happen."
A meltdown in the risky U.S. subprime mortgage market last year has crippled parts of the global financial system, leaving many banks with massive amounts of distressed debt, facing huge losses and making them reluctant to extend credit to other banks and even some big customers in case they go bust.
Companies are facing problems selling bonds and other debt instruments to raise money for operations and expansions. Nearly one in five small U.S. businesses say they risk going out of business because of the worsening crisis, a survey by American Express Open showed on Friday.
Without credit, world economic growth will collapse and unemployment will soar. Some investors had been looking to the G7 for a comprehensive plan to get money flowing smoothly again.
Borrowing costs spiked this week even after central banks poured hundreds of billions of dollars into markets and cut interest rates in their broadest coordinated action in history in an attempt to restore confidence.
Global stocks sank to five-year lows on Friday as panicky investors pulled out their cash, with the U.S. S&P index and European stocks suffering their worst week ever, losing around a fifth of their value.
Morgan Stanley ,the No. 2 independent investment bank, plunged 22 percent on Friday on doubts a planned $9 billion cash injection from Japan's Mitsubishi UFJ Financial Group Inc would be enough to enable it to ride out the crisis.
U.S. PLAN
Under the U.S. plan, the Treasury will use authority granted by Congress in last week's $700 billion financial rescue legislation to buy shares in financial firms in addition to buying some of their distressed assets such as soured mortgages and illiquid securities.
The move would clear some bad assets off the banks' balance sheets, theoretically freeing them up to lend again. Paulson said a two-pronged approach would be more effective.
"We can use the taxpayers' money more effectively and more efficiently, have it go farther and get more for their dollars and more protection if we develop a standardized program for making and encouraging equity participation," he said.
The proposal drew quick support from Democratic presidential nominee Barack Obama, who said it would provide "more money to lend to families and businesses."
Paulson declined to discuss the size of the U.S. bank equity purchases. He did not give a timeframe but said details of the plan were being developed quickly.
Buying direct stakes in struggling banks to recapitalize them could pump huge amounts of money into the system more quickly than the proposal to buy soured mortgage-related products, which could be highly complicated and time consuming.
The question may be whether banks are willing to accept the U.S. government as a stakeholder in return for fresh capital.
Japan's finance minister also said his country was considering injecting capital into banks. Such moves would be similar to measures Britain has announced to put money into struggling lenders.
Italy, the next president of the Group of Seven powers, has drafted a reform of the world's financial institutions which it will present on Saturday, Economy Minister Giulio Tremonti said.
Tremonti said Italy's presidency of the rich nations club, which begins in January, will see a radical shake up of financial institutions to avoid a repetition of recent market turmoil.
Leaders of euro zone countries will meet in Paris on Sunday in a new European attempt to coordinate action. The Group of 20, which also includes reserve-rich emerging economies such as China and Russia, will meet on Saturday.
Scrambling for safety, investors have pulled a net $43.3 billion so far in October from U.S. mutual funds investing in equities, while pouring nearly $60 billion into money-market mutual funds.
Russia on Friday said it would stump up cash to support battered stock prices, launching an aid package worth around 5 percent of the value of Russia's traded shares.
Iceland, among the most dramatic casualties of the crisis, sought to reassure international investors, saying it would honor its obligations.
Many investors have been looking for global leadership, but U.S. President George W. Bush is a lame duck ahead of the November 4 election.
(Additional reporting by Reuters bureaus around the world; Editing by Brian Moss, Steve Orlofsky, Toni Reinhold, Leslie Adler, Kim Coghill, Jerry Norton)
