FDIC Holds Off On Selling Toxic Loans

A major element of economic recovery is saving the American financial system. Banks need to have a strong financial foundation to feel comfortable extending credit to individuals and businesses. One of the major problems for banks during the credit crunch has been the billions of dollars worth of bad debt on their balance sheets. To help stabilize banks, the FDIC had devised a plan to sell bank assets under the name Legacy loans to clear potential bad loans off of balance sheets and allow banks to get back to the business of banking.

The FDIC was supposed to start selling these Legacy Loans this week, but they have shelved the idea for the time being thanks in part to banks showing the ability to raise capital through stock offerings. Over the past few weeks, several major banks have raised billions of dollars through the issuance of stock and investors have seemed eager to get their hands on bank stocks at bargain prices. In addition, the stress test results were better than many expected, making it a little less necessary to clear toxic assets away from bank balance sheets.

The FDIC has not abandoned the idea of selling legacy loans completely, but they have decided to give the system some time to continue recovery on its own for the time being. Bank stocks have rallied over the past several weeks as investors appear to be convinced that the institutions will survive these difficult times.

FDIC chief Sheila Bair released a refreshing statement on the issue, saying, “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. As a consequence, banks and their supervisors will take additional time to assess the magnitude and timing of troubled assets sales as part of our larger efforts to strengthen the banking sector.”

Many are relieved to see the program put on hold, feeling that the government is already too deep into the pockets of banks. Allowing the financial system to find a way to correct itself is a more desirable outcome to most people than another government-influenced solution. The Legacy Loan program, although previously approved, was still under debate in Congress when this decision was made.

Popularity: 4% [?]