Taking an equity stake is authorized under the recently-approved $700 billion rescue package to purchase toxic mortgage assets from troubled institutions. The Treasury will likely inject funds into financial institutions in exchange for preferred shares in the hopes it will free up lending capital.

The action will mark the most direct government action into financial markets since the Great Depression. The program aims to complement private funding by restoring confidence. Paulson announced the plan as the Group of Seven finance ministers released a five-point, joint-action statement to restore market confidence on Friday.

"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," the Secretary said, adding that the government will buy equity as soon as possible.

"Trust me, we are not wasting time; people are working around the clock to deal with this," he said.

A Reuters report suggests the direct capital injections will be voluntary, and will take place as early as the end of October. The participating institutions will be made public.

"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," Paulson said.

In a Q&A session following the announcement, Paulson had no comment on what portion of the $700 billion would be dedicated to direct capital injections and what will be used on direct asset purchases.

Economists at Goldman Sachs said there are two major advantages to direct equity injections over buying mortgage assets.

"First, the investments are leveraged, so each dollar of equity can support multiple dollars of assets," economists led by Jan Hatzius wrote in a client note. "Even at the lower leverage ratios, banks are now targeting, this will multiply each dollar spent by at least five times, and probably closer to eight or nine times. Second, it should help the short-term credit markets return to a functional state by restoring trust that short-term loans will be repaid."

They said capital injections will greatly reduce the threat of bankruptcy and should make banks willing to deal with one another.

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