Some of the chief critics of the $700 billion bailout plan said Treasury Secretary Henry Paulson had the wrong idea about how to use the money. Instead of buying up troubled assets, the U.S. government should inject capital directly into banks, they said.

The feds have come around. Paulson acknowledged Thursday that the Treasury Department is open to the idea of the U.S. government becoming a significant owner of America's troubled banks.

The idea is nearly unthinkable to some. In a story in Thursday morning's edition of the trade newspaper American Banker, Scott Talbott of the Financial Services Roundtable said the government investing directly in financial institutions "would cross the Rubicon . . . At that point you are moving into socialization."

That was before Treasury's new intentions were publicized. Later Thursday, the president of that financial-industry group said the Treasury has "to proceed on all fronts." Buying into the banks would be "a major piece of the puzzle," he said.

"Injecting capital is a better solution," said Jon Lorenz, CEO of Colorado Business Bank. "Banks do not need cash, they need more capital to absorb losses and ensure their financial stability. Using the same amount of money to bolster capital vs. buying assets will do far more to restore confidence in our financial system."

The U.S. action follows similar plans in other countries with a greater history of nationalization. In the U.K., Prime Minister Gordon Brown is engineering an $87 billion plan to partly nationalize at least eight British banks. Japanese lawmakers are considering reviving a law that would allow the government to inject public money into regional financial companies. And Spain's government this week said it will establish a fund of as much as $68.5 billion to buy up bank assets.

Don Childears, CEO of the Colorado Bankers Association, said it wasn't clear if the Treasury Department was talking about commercial banks or other nonbank financial institutions.

"Real banks aren't where the core problems exist, and I'm not aware of any interest by banks in such a move." In Colorado, he said, "the need hasn't been demonstrated."

Barbara Walker, executive director of the Independent Bankers of Colorado, said both asset purchases and capital infusions are required to stabilize markets.

"These are necessary temporary measures that will work themselves out when the economy settles back into normalcy. It's better than selling off chunks of major U.S. financial institutions to foreign countries."

Paulson and Federal Reserve Chairman Ben Bernanke, when lobbying Congress for the bailout legislation last month, played down calls by some lawmakers for the government to take equity stakes in individual companies. Still, Treasury officials say that such a move was always an option under the broad power the law gives Paulson to help banks and other financial institutions.

While the bank stock purchase plan being considered at the Treasury would be voluntary, it is assumed that many companies would jump at the chance of getting government funds.

The Treasury's financing is likely to come with restrictions and it could trigger limits on executive pay that were mandated by Congress, potentially reducing the appetite of some banks to participate. Government stock purchases could also dilute existing shareholders, or confer a stigma of a bank in trouble.

John Carmichael, CEO of Broomfield-based Summit Bank & Trust, said he would be concerned about stigma. The bank has an exceptionally healthy risk- based capital ratio of nearly 26 percent, more than twice the Colorado average.

"The message is there's a possibility the bank is undercapitalized and needs the injection. We wouldn't need it, but if it started happening, I'd be concerned about the message it sent."

Wire services contributed to this report. Finance Editor David Milstead can be reached at milstead@RockyMountainNews.com or 303-954-2648.