FDIC Backs Fed's Bank Bailout Plan

Chairman Pushes Lawmakers To Include Mortgage Restructuring In $700B Package

(AP)  As Congress moves on the financial bailout plan, restructuring of troubled mortgages should be part of the final package, the head of the Federal Deposit Insurance Corp. said Tuesday.

FDIC Chairman Sheila Bair said she hoped that changes on home loans "will be a feature of that."

Under the $700 billion proposed bailout plan, the government could acquire troubled mortgage assets or provide a guaranty for delinquent loans, buying them and removing them from the overall pool of mortgages, Bair suggested.

Mortgage finance giants Fannie Mae and Freddie Mac, taken over earlier this month by the government which is operating them under a conservatorship, bought mortgages from banks and other lenders and guaranteed them in exchange for fees.

"We're highly supportive of Treasury's initiative," Bair said. "I think it will help a lot" to stabilize the housing and financial markets, she said.

Bair stressed the need for a restructuring of distressed home loans in a comprehensive, streamlined manner along with a resolution for securities tied to mortgages. She spoke at a Brookings Institution conference on housing.

Bair also reaffirmed that she believes it unlikely the FDIC would have to use its "wide flexibility" to borrow from the Treasury if needed.

The failure in July of Pasadena, Calif.-based IndyMac Bank tipped the federal deposit insurance fund - now at around $45.2 billion - below the target minimum level set by Congress, but Bair has said the agency's plan to raise the premiums charged U.S. banks and thrifts to replenish the fund likely will be sufficient.

So far this year, 12 federally insured banks and thrifts have failed, compared with three last year. The largest U.S. thrift, Washington Mutual Inc., is faltering.

"I think actually the banking sector is holding up pretty well," Bair said. The recent collapse of major investment banks and the cataclysm on Wall Street has shown that "there is some virtue to regulation. There is some virtue to leverage constraints," she said.

But Lawrence Summers, a Harvard University economist who was Treasury secretary during the Clinton administration, said he was "less serene" than Bair about the condition of the banking industry.

Banks may appear to be in better shape than they are because they haven't fully recognized problems in their accounting, he said.

Investment banks have had more lenient guidelines in how highly leveraged they could become, with a much higher ratio of debt to their capital than commercial banks regulated by the FDIC that have access to the deposit safety net.

Referring to Treasury Secretary Henry Paulson and the current tumultuous events, Bair said, "Hank's got a whole lot of other people knocking on his door. I don't want to add to people knocking on his door."

Meanwhile, Paulson and other regulators were on Capitol Hill to explain, and often defend, the bailout package.

Federal Reserve Chairman Ben Bernanke warned of higher unemployment and increased home foreclosures, if lawmakers fail to pass the Bush administration plan. He told the Senate Banking Committee that inaction could leave ordinary businesses unable to borrow the money they need to expand and hire additional employees, while consumers could find themselves unable to finance big-ticket purchases such as cars and homes.

Stocks held steady in early afternoon trading on Wall Street as Paulson told the committee that quick passage of the administration's plan is "the single most effective thing we can do to help homeowners, the American people and stimulate our economy."

But many lawmakers criticized the plan and some conservative Republicans are against it.

"I have long opposed government bailouts for individuals and corporate America alike," said Sen. Richard C. Shelby of Alabama, the panel's senior Republican. "We have been given no credible assurances that this plan will work. We could very well send $700 billion, or a trillion, and not resolve the crisis."