Getting there but not there yet

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The G-7 finance ministers say they’re going to “take decisive action and use all available tools to support systemically important financial institutions and prevent their failure.” Hank Paulson says that:

As we develop plans to purchase equity … we are working to develop a standardized program that is open to a broad array of financial institutions. Such a program would be designed to encourage the raising of new private capital to complement public capital. Consistent with the legislation, any equity the government purchases through a broadly available equity program would be on a non-voting basis, except with respect to the market standard terms to protect our rights as investors.

What’s missing here–both from the G-7 and Paulson–is a delineation of which financial institutions are “systematically important” and which aren’t. Until everybody knows that, things are gonna stay weird.

Update: Actually, another thing missing is any kind of clarity as to how current shareholders of these financial institutions that get government capital injections will make out. Although I guess the shareholders really don’t matter nearly as much the creditors do.

Update 2: From Floyd Norris:

The Treasury may have to decide soon if Morgan Stanley is systemically important, and, if so, what to do about it. As speculation swirled this week, the already-depressed Morgan Stanley shares lost more than half their value, and letting it hang in the wind for long could weaken the firm irreparably.

One reason why action may be needed is that the principle allows for two interpretations, even if you assume, as I do, that Morgan Stanley is systemically important. (Mr. Paulson ducked a question about whether it and Goldman Sachs qualified.)

If the Treasury and the Fed will really “support” Morgan Stanley, then it is hard to understand why the stock should be so cheap. But if all they will do is prevent its failure, that could include a Bear Stearns-type takeover, in which shareholders come close to being wiped out. I find it hard to believe that Morgan Stanley is really in desperate straights, but this is a market and a time when almost no one is assumed to be solvent.