U.S. bank regulator urges mortgage loan guarantees

Federal Deposit Insurance Corp Chairman Sheila Bair told the Senate Banking Committee that regulators were working with the Bush administration to create a loan guarantee program under which the government would bear some of the risk of future losses.

Bair was one of several officials testifying before the committee on the regulatory response to the financial crisis sweeping global markets. In the House of Representatives, the oversight committee was also holding a similar hearing.

A $700-billion financial bailout package that Congress approved early this month gives the Treasury Department the power to offer loan guarantees as an inducement for lenders to modify loans, Bair said.

“Specifically, the government could establish standards for loan modifications and provide guarantees for loans meeting those standards,” Bair said. “By doing so, unaffordable loans could be converted into loans that are sustainable over the long term.”

Bair did not mention any dollar figure for such a program but the Wall Street Journal reported on Thursday that officials were considering something on the order of $40 billion.

SUPPORT GROWING

Senate Banking Committee Chairman Christopher Dodd effectively endorsed the idea, noting widespread discontent that authorities’ emphasis so far appeared to be on helping the banking industry.

“Doing more for homeowners is the one policy solution that a majority of ... Americans said they support,” Dodd said. “If there were ever a time that demanded that we think anew, this is it.”

Under the financial rescue package, the Treasury plans to directly inject $250 billion of capital into U.S. banks in exchange for preferred shares. Nine of the largest U.S. banks were essentially arm-twisted into signing on for the first $125 billion in capital infusions.

Treasury interim assistant secretary for financial stability Neel Kashkari said the move has given the market more confidence but conceded conditions remain shaky.

“Since the announcement of our capital purchase program, we have seen numerous signs of improvement in our markets and in the confidence in our financial institutions,” he said. “While there have been recent positive developments, the markets remain fragile.”

U.S. stock markets were chalking up sizable gains on Thursday after another day of big losses on Wednesday. Credit markets, in which banks and companies make loans and obtain operating funds, were still tight but not frozen as they have been in some recent weeks.

Testifying before the House panel, former Federal Reserve Chairman Alan Greenspan claimed to be shocked by the breakdown in U.S. credit markets. [ID:nN23440238]

“SHOCKED DISBELIEF”

“Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity ... are in a state of shocked disbelief,” said the former Fed chief, who retired in January 2006 after 18-1/2 years in the job.

Greenspan has been criticized for not foreseeing the bubble developing in housing and for keeping interest rates low for an extended period while lending practices slackened.

He said he was concerned in 2005 that investors were underestimating risks, adding “this crisis, however, has turned out to be much broader than anything I could have imagined.”

Another regulator now facing stiff scrutiny, Securities and Exchange Commission Chairman Christopher Cox, told the same committee the crisis demonstrated that regulatory gaps needed to be closed and rules that allowed investment banks to operate loosely must be tightened.

“The lessons of the credit crisis all point to the need for strong and effective regulation, but without major holes and gaps,” he said.

U.S. investment banks no longer exist, since all have either gone bankrupt, been acquired or converted into bank holding companies as the credit crisis raged.