Busted: Bankers and The Global Economy

January 14, 2009

U.S. Politics: Banks Must do their Part

financial security trouble

financial security trouble

What the Bush administration thoroughly disregarded as a possible solution for toxic banking assets and mortgage foreclosures for the last year, Obama and the new government order in Congress have picked up as a gold card solution.

Perhaps the FDIC is no longer a lonely stepchild agency calling in the political wilderness. Calls by bankers and lawmakers to use the remaining bailout funds for the “original purpose” of buying toxic assets have resulted in new political impetus. The view of the FDIC is that the government’s financial rescue efforts have not gone far enough and that troubled asset relief is necessary to get banks lending at more normal levels and to attract private capital.

The plan places the burden on banks for explicit plans to increase lending while proving their value based on the provision of government relief that has been provided through the investment of private capital by providing asset guarantees. John Bovenzi, FDIC COO, claims that the purchase plan would give the government the power to restructure the troubled home loans as the agency buys them up.

FDIC Chairman Sheila Bair has been relentless about mortgage foreclosure prevention by introducing a plan that rewards lenders by sharing the cost of loan defaults for loans that are restructured, thus reducing losses. The plan is designed to prevented 1.5 million foreclosures in an increasingly contracted and strained housing market. Considering the large number of foreclosures combined with the number of projected foreclosures this year, the FDIC plan is a little light on substance. Barack Obama has pledged bolder action to tackle the home foreclosure crisis.

During the crisis so far, banks haven’t been required to do much beyond soak up taxpayer money. Banks have refused to adopt “systematic approaches” to loan modifications that result in “affordable loans” that the government has requested to this point. The Feds finally realize that continued uncontrolled foreclosures will result in the overcorrection of home prices. Finally, appearances are that more will be expected than inaction. Can Barack Obama corral the politics behind the scenes? Has the need to react been realized in time or is the talk just more politics?

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