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 Friday to make it easier for private investors to buy banks seized by the government.
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.
While the program itself can’t restore confidence in the financial system, “I think this is a significant contribution to containing the problem,” said Oliver Ireland, an associate general counsel at the Federal Reserve.
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.
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 federally-insured banks and thrifts have failed this year, compared with three for all of 2007. 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 the nation’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 8 a.m., as he was preparing to leave the White House for a morning flight to Lima, Peru, to attend the 21-nation Asia-Pacific Economic Cooperation forum.
About 1.2 million people would exhaust their unemployment insurance by the end of the year without the extension, sponsors said. The measure is estimated to cost about $5.7 billion, although economists put the positive impact at $1.64 for every dollar spent on jobless benefits because the money helps sustain other jobs and restores consumer confidence.
The legislation provides seven additional weeks of payments to people who have exhausted their benefits or will exhaust them soon. Those in states where the unemployment rate is above 6 percent will be entitled to an additional 13 weeks above the 26 weeks of regular benefits. Benefit checks average about $300 a week nationwide.
The benefits provided would be in addition to 13 weeks of federally funded extended benefits Congress approved last June.
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.