Washington: Federal regulators will guarantee as much as $1.4 trillion in U.S. banks’ debt in a bid to get the distressed financial system pumping again. They also took steps to make it easier for private investors to buy failed banks seized by the government.
Against a bleak economic backdrop, news that New York Federal Reserve President Timothy Geithner is President-elect Barack Obama’s choice for Treasury secretary gave battered Wall Street a shot in the arm Friday. The Dow Jones industrials zoomed nearly 500 points as stocks erased roughly half the losses racked up the prior two days. Investors have been seeking a clear message from Obama on who will lead his economic brain trust during the financial crisis.
Directors of the Federal Deposit Insurance Corp. voted to approve the bank-debt guarantee program, which is part of the government’s financial rescue package. The FDIC program is meant to break the crippling logjam in bank-to-bank lending by guaranteeing the new debt in the event of payment default by the borrowing bank.
Some analysts have said that freeing up bank-to-bank lending with the guarantees won’t necessarily translate into a thaw in broader lending as banks are still wary of making loans to businesses and consumers.
The FDIC also will guarantee deposits in non-interest-bearing “transaction” accounts by removing the current $250,000 insurance limit on them through the end of next year. That could add as much as $500 billion to FDIC-backed deposits.
Short-term debt issued by banks - for 30 days or less - is not covered as to avoid creating more volatility for the Federal Reserve’s primary interest rate. The Fed on 29 October slashed the rate to 1%, a level seen only once before in the last half-century. Many economists predict the Fed will lower rates again next month at its last meeting of the year.
Treasury Department spokeswoman Brookly McLaughlin on Friday called the FDIC action “an important step to strengthen the financial system by increasing confidence in the markets.”
Elsewhere, the Office of the Comptroller of the Currency, which oversees national banks, issued its first approval of a new kind of bank charter intended to increase the “pool of potential buyers” of failed banks. The Treasury Department agency said the new charter is intended for private investors interested in bidding on troubled banks that have been taken over by the FDIC.
The first preliminary approval went to Ford Group Bank, whose owners include Hilltop Holdings, Inc., an investment vehicle for Texas billionaire Gerald J. Ford.
Twenty-two federally-insured banks and thrifts have failed this year, compared with three for all of 2007. Failures continued apace on Friday, as regulators shut down two big thrifts based in Southern California - Downey Savings and Loan Association and PFF Bank & Trust - saying they fell victim to the acute distress in the housing market in that state.
Thrifts differ from banks in that, by law, they must have at least 65% of their lending in mortgages and other consumer loans - making them particularly vulnerable to the persistent housing downturn.
Also shuttered Friday was The Community Bank, a small bank in Loganville, Georgia.
It’s expected that many more banks won’t survive the next year of economic tumult.
While the FDIC threw a blanket of guarantees over U.S. banks, President George W. Bush ensured that millions of laid-off workers will keep getting their unemployment checks as the year-end holidays approach. Bush signed an extension of jobless benefits into law just before he left for Lima, Peru, to attend the 21-nation Asia-Pacific Economic Cooperation forum.
Still, a Federal Reserve official warned Friday that the economy’s weakness will stretch well into next year. “We likely are in for a protracted period of poor economic performance,” said Charles Evans, president of the Federal Reserve Bank of Chicago.
Many analysts believe the economy will continue to shrink through the rest of this year and into the next, more than meeting a classic definition of recession.
Investors were discouraged earlier this week by the inability of the White House and Congress to agree on a plan to provide relief to the battered U.S. auto industry. Hearings are expected the week after next and lawmakers could consider legislation in December.
Other federal actions to resuscitate an economy crippled by home foreclosures, a credit freeze and confusion in financial markets will probably have to wait until January.
Obama has pledged to make economic recovery the immediate focus of his new administration, and both the House and Senate will have increased Democratic majorities eager to support him.