FDIC's toxic asset plan may be dead

The FDIC's plan to help banks rid their balance sheets of toxic mortgage assets was put on life support -- and may now be dead. Many banks have refused to accept their losses and sell their loans, even though the government was prepared to prop up prices by offering cheap financing to investors. The banks refused the bargain and kept their prices higher than investors wanted to pay.

In acknowledging failure of the Legacy Loan Program, Sheila Bair, chairwoman of the FDIC, told The New York Times, "Banks have been able to raise capital without having to sell bad assets through the LLP, which reflects renewed investor confidence in our banking system."

Was that statement just made to put a happy face on the problem that continues to fester? Some analysts think so and believe the banks are just delaying their day of reckoning. In fact, some think the government's policies have made it easier for the banks to do just that. Estimates are that banks hold unrecognized losses of more than $1 trillion. Banks are not required to book mortgage loses unless they sell them or the loans fall delinquent. So what about all the loans on the books where mortgages are underwater? Is it just a matter time before they fall delinquent? And how soon will that time come?

Banks continue to refuse to make deals, even when it comes to short sales to avoid foreclosures. I continually hear from real estate sales people that it can take months to get a bank to agree to a short sale (if they can get agreement at all), even if the appraisal won't come close to the mortgage value. Living among the toxic assets of Florida, I know many neighbors who expect losses of $50,000 to $100,000 on their homes. Banks just aren't ready to face that reality.

"What's happened is that the government's programs have addressed the symptoms of the financial crisis, but not the cause. The patient feels better, but the underlying cause of the problem is still unaddressed," Frederick Cannon, chief equity strategist at Keefe, Bruyette & Woods told the Times.

Banks are using the excuse that they fear the administration or the Congress will impose restrictions on executive pay or other corporate decision making so they refuse to participate in the program, according to Diane Casey-Landry, chief operating officer for the American Bankers Association. It's the same stalling tactic that was used until they could get the terms they wanted under TALF.

But I'm not so sure it will be that simple a fix. The loans now being sold under TALF involve a lot less money than the $1 trillion dollars in potential unrecognized losses some analysts think banks hold. But, now that TALF has worked out the kinks, maybe FDIC's program still has a chance. The longer banks put off the day of reckoning on their losses, the longer it will take for this country to begin a healing process.

Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies.

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