On Second Thought, We'll Keep Those Toxic Loans

The New York Times is reporting that the FDIC has put a halt to their program to help banks sell off some of the loans that are on their books. These are the so-called legacy loans that were once referred to as toxic. FDIC guaranteed loans were being offered in order to entice buyers to purchase the legacy loans from banks. This was part of the Geithner plan rolled out earlier this year.

The problem appears to be that no banks want to sell the loans for the prices that are being offered:

Many banks have refused to sell their loans, in part because doing so would force them to mark down the value of those loans and book big losses. Even though the government was prepared to prop up prices by offering cheap financing to investors, the prices that banks were demanding have remained far higher than the prices that investors were willing to pay.

The Baseline Scenario is one of the blogs that has been warning that such an outcome was very possible, and it appears they were correct in their forecasting.

The FDIC and other government outlets may attempt to spin this refusal to participate as evidence of a return to health on the part of the banks, but this is unlikely. More likely is that other steps taken over the last eight months have allowed the banks to survive despite the bad decisions they made in entering into these loans.

This would appear to be a realization of the zombie bank scenario many have been warning of.

The toxic, I mean legacy securities program is still going forward, at least as of now.

The story of this program's failure is not particularly spectacular, but the quote that ends the NY Times story is rather provocative [E.A.]:

Diane Casey-Landry, chief operating officer for the American Bankers Association, said the lack of interest in selling the assets stemmed from fears that Congress would impose restrictions on executive pay and other issues for banks and investors in the program. “There’s a lot of uncertainty out there in terms of how the program would operate,” she said. “What we would rather see is the market working.”

Someone ought to tell Ms. Casey-Landry that if the market was working, she would be collecting dramatically fewer dues. Without the extraordinary intervention by the government over the last few months, the American Bankers Association would have undoubtedly seen a dramatic decrease in membership.