By Jason Simpkins
Managing Editor
Money Morning
The Federal Deposit Insurance Corp. (FDIC) could soon establish a "bad bank" to absorb financial institutions' toxic assets. The bad bank initiative could lead to the seizure of many U.S. banks, but would stop short of nationalizing the banking sector.
FDIC Chairman Sheila Bair is pushing for control of the operation, arguing that the FDIC could help finance the bad bank by issuing bonds, Bloomberg News reported early today (Wednesday). The FDIC could also tap funds from the Troubled Asset Relief Program (TARP), or offer stock in the new institution.
Analysts say the FDIC is the obvious choice to run the bad bank, as it already has the necessary expertise. The FDIC has been modifying mortgages held by IndyMac Federal Bank FSB since that bank collapsed last year.
"It doesn't make sense to give the authority to anybody else but the FDIC," said John Douglas, a former general counsel at the agency, told Bloomberg. "That's what the FDIC does, it takes bad assets out of banks and manages and sells them."
Purchasing banks' toxic assets could pave the way to renewed lending by removing securities of questionable value from the balance sheets of financial institutions. It would also give the government the opportunity to rewrite the terms of some of the mortgages that are at the root of the current financial crisis.
However, absorbing banks' assets could, in some cases, also mean that the government is actually taking control of the institutions. So far, the government has taken stakes in the financial institutions it has provided financial assistance to, but has stopped short of actually taking complete ownership of the banks. It is likely that any institutions seeking assistance from the bad bank, would have to make similar concessions, and that has raised the question of whether or not the United States will nationalize the banking sector.
"If we are strengthening [banks], then the American people should get some of the upside of that strengthening," House Speaker Nancy Pelosi, D-CA, said earlier this week. "Some people call that nationalization."
Bank seizures are "going to happen," Sen. Corker, R-Tenn., told Bloomberg after meeting with new U.S. President Barack Obama yesterday (Tuesday). "I know it. They know it. The banks know it."
Still, policymakers insist that nationalization - particularly of the larger banking system - is not on the table.
House Financial Services Chairman Barney Frank said yesterday that "the government should not take over all the banks," and FDIC Chairman Bair said earlier this month she would be "very surprised if that happened."
News and Related Story Links:
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Federal Deposit Insurance Corporation:
Loan Modification Program for Distressed Indymac Mortgage Loans.