Government bank plan isn’t working

We lost count of how many times we argued that the government’s bank plan is far from the best. In fact, it’s worse, it isn’t working at all..

Plan to Help Banks Clear Their Books Is Halted

WASHINGTON — The Federal Deposit Insurance Corporation indefinitely postponed a central element of the Obama administration’s bank rescue plan on Wednesday, acknowledging that it could not persuade enough banks to sell off their bad assets.

In a move that confirmed the suspicions of many analysts, the agency called off plans to start a $1 billion pilot program this month that was intended to help banks clean up their balance sheets and eventually sell off hundreds of billions of dollars worth of troubled mortgages and other loans.

Many banks have refused to sell their loans, in part because doing so would force them to mark down the value of those loans and book big losses. Even though the government was prepared to prop up prices by offering cheap financing to investors, the prices that banks were demanding have remained far higher than the prices that investors were willing to pay.

In a statement, the F.D.I.C. acknowledged that it had not been able to get banks interested in its so-called Legacy Loans Program. Scheduled to start later this month, the pilot program was aimed at selling off $1 billion in troubled home mortgages.

F.D.I.C. officials portrayed the change as a sign that banks were returning to health on their own.

“Banks have been able to raise capital without having to sell bad assets through the L.L.P., which reflects renewed investor confidence in our banking system,” said Sheila C. Bair, chairwoman of the F.D.I.C.

But some analysts said the banks’ reluctance to clean up their balance sheets meant they were merely postponing their day of reckoning. Indeed, some analysts said government policies had made it easier for banks to gloss over their bad loans.

What’s happened is that the government’s programs have addressed the symptoms of the financial crisis, but not the cause,” said Frederick Cannon, chief equity strategist at Keefe, Bruyette & Woods, which analyzes the industry. “The patient feels better, but the underlying cause of the problem is still unaddressed.”

The program was one part of the Treasury Department’s broader Public Private Investment Program to get bad assets off the books of major banks.

The other big component, which Treasury officials say is still being prepared, is aimed at having the government team up with private investors to buy mortgage-backed securities.

No one knows exactly how many losses are buried in the troubled mortgages on banks’ books, but some analysts estimate that the unrecognized losses total more than $1 trillion. Under accounting rules, banks do not have to write down the value of most mortgages unless they sell them or they fall delinquent.

Recent government policies have further reduced the pressure on banks to sell. The Federal Reserve’s “stress tests” on the 19 biggest bank holding companies concluded that only one — GMAC, the former financing arm of General Motors — needed so much additional capital that it would have to turn to the government for a new cash bailout.

In addition, financial regulators relaxed the so-called mark-to-market rules, making it easier for bank holding companies to refrain from writing down the value of assets for which there is no market. That change allowed many big banks to report higher profits, and thus higher capital, for the first quarter of this year.

The Federal Reserve also is pumping hundreds of billions of dollars into mortgage-backed securities, and into other kinds of consumer and business lending. Starting next month, the Fed plans to offer cheap financing for investors who want to buy “legacy” securities backed by mortgages on commercial real estate.

Diane Casey-Landry, chief operating officer for the American Bankers Association, said the lack of interest in selling the assets stemmed from fears that Congress would impose restrictions on executive pay and other issues for banks and investors in the program. “There’s a lot of uncertainty out there in terms of how the program would operate,” she said. “What we would rather see is the market working.”