In banking crisis, U.S. steps up
Moves by federal regulators signal that the financial sector can't solve its problems on its own.
Actions this week by federal regulators open a new phase in America's banking crisis – with the government stepping toward its most interventionist financial-market role in nearly 15 years.
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The latest moves are intended to restore confidence in Fannie Mae and Freddie Mac, enterprises that play a central role in the home-loan market. Also, the faltering bank IndyMac reopened Monday with a new owner, the Federal Deposit Insurance Corp.
Since the subprime lending problem emerged in earnest a year ago, financial institutions and regulators have scrambled to contain the damage. They have made some progress, but this new phase signals that the private sector probably is not capable of resolving the crisis on its own.
Among the reasons: Some banks are having trouble raising new capital from investors, a key step to maintaining solvency when loan losses are rising. Also, a weak economy is adding to loan defaults that were already high because of imprudent mortgage lending during the housing boom.
"There's no question in my mind that this crisis will be much worse than the S&L [savings and loan] crisis" of the late 1980s in its cost to government, says Kenneth Thomas, a finance expert at the University of Pennsylvania's Wharton School in Philadelphia. Government "will have to play a bigger role."
America and other nations have been down this road before. Banking crises have emerged periodically, often after an era of good times when financial firms lent too freely and inflows of foreign money were large.
In the early 1990s, the government spent about $150 billion to dispose of failed savings-and-loan institutions.
The latest government moves include:
•Treasury Secretary Henry Paulson said Sunday he is seeking congressional approval for the US Treasury to temporarily buy and hold stock in Fannie and Freddie, which operate in the private sector but with government-chartered missions.
•Also on Sunday, the Federal Reserve said it will lend to Fannie Mae and Freddie Mac, should that prove necessary. Separately, Secretary Paulson is seeking approval to expand a Treasury line of credit to the two firms.
•IndyMac, a large mortgage lender, reopened Monday under the control of the Federal Deposit Insurance Corp. The FDIC seized the bank Friday after a run by depositors threatened its survival. The agency plans to operate the bank until it can be sold.
•The FDIC, in a statement related to the IndyMac takeover, sought to clarify the insurance coverage it provides, which covers bank accounts up to $100,000.
In recent months, the Federal Reserve has taken many actions designed to help banks avoid collapse. It has been extending credit through various lending operations – including the unusual step of lending to securities firms as well as traditional banks. It has also reduced short-term interest rates, which reduces banks' borrowing costs.
In March, it provided a $30 billion loan that enabled JPMorgan Chase to buy Bear Stearns when that investment bank was on the verge of bankruptcy.
