Word: fdic
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...lender might easily only recoup half of what it's owed. In August, the Federal Deposit Insurance Corporation instituted an aggressive loan-modification effort at the failed IndyMac Bank, and that program is now a template for what the government might encourage at a national level. Basically, the FDIC wants to set up a series of incentives, like $1,000 for each modification, as well as loss sharing, should rewritten loans run into trouble...
Nationally, the idea is similar - pushing back principal payments, not forgiving them entirely, is the solution trumpeted by the FDIC. That seems fairer: telling people that they can get a break now, but will eventually have to pay may alleviate qualms about handing out free rides. Or it may just be dooming us to have this conversation all over again. Unfortunately, without good data on what has worked so far, it's remarkably difficult to determine what to do going forward. Of course, ignoring the issue hasn't worked too well either...
Nonetheless, the idea of new loan guarantees as the solution to fix the banking crisis appears to be gaining momentum in Washington and abroad. Earlier in the week, Treasury Secretary Timothy Geithner seemed to have struck a deal between the FDIC and the Federal Reserve to roll out a new phase of the bank bailout plan that would include both guarantees and direct asset purchases. The latter plan is favored by the FDIC and is often called the "bad bank" approach, because the government would set up an institution to buy up all the loans or bonds that are backed...
...only are the Citigroup shareholders likely to be out of luck, especially if the Fed, Treasury, and FDIC have to step in again, but most of the preferred shareholders and debt holders will be wiped out in the flood as well...
...just the FDIC's fault," says Bert Ely, CEO of Ely & Co. "But it and other regulators are not moving fast enough to close problem banks and limit losses...