Andrew Busch
Global Finance Strategist
BMO Financial Group

"But patience is also needed because the turmoil will not end quickly and significant challenges remain ahead." With these words, US Treasury Secretary Hank Paulson succinctly described the current state of the credit crunch.

The US Treasury and the US Federal Reserve have programs that are either just started or have yet to start and that means any positive effects from their moves have yet to be translated into an easing of the credit logjam. A good example of this is AIG getting another draw of $37.8 billion without selling one asset from its troubled securities portfolio.

As most of you have read by now, the NYT reports that the US Treasury is now contemplating a program that would directly inject capital into banks that request it. "Treasury officials say the just-passed $700 billion bailout bill gives them the authority.... and that "such a move would quickly strengthen banks' balance sheets and, officials hope, persuade them to resume lending.

In return, the law gives the Treasury the right to take ownership positions in banks, including healthy ones." Curiously, the NYT says that the appeal of this plan is that it "would directly address the worries that banks have about lending to one another and to other customers."

• Markets Get Tentative Lift, But Credit Remains Locked

However, this program has a huge signaling implication that the injection would only go to weak banks that are willing to be saddled with giving up ownership and limits on executive pay including recovery of any bonus pay that is based on stated earnings that turn out to be inaccurate. This is exactly the same problem that the TARP or EESA program is faced with getting banks to participate. The price for securities has to be set high enough to compensate banks for the negatives.

This is why I believe the US Treasury will err on the side of setting the price too high. Tsy needs to get companies to participate to help liquefy them and to remove the mortgage securities from the market. Also, Treasury needs to use the facility or Congress will ask them why Paulson/Bernanke came to them with their hair on fire to get a massive program that no one uses. Whether it's purchases of MBS or direct injections, this program will get utilities. The problem is when.

Paulson: Crisis Won't End Quickly

Central Banks Cut Rates

Like the 1930s, I think we'll continue to get a "kitchen sink" approach to the credit crisis until authorities get the gears of the capital markets to engage. Some of these programs will likely get struck down next year if they over-step the bounds of legal authority. For now, Bush/Paulson/Bernanke will do everything they can to arrest the descent. The problem remains when.

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Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. He can be reached here.

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