FDIC's Bair Sees Bailout Money for Loan Modifications

The head of the Federal Deposit Insurance Corp said Thursday she is optimistic the agency will be able to obtain money from the $700 billion bailout fund to launch its proposed home-loan modification program quickly.

Chairman Sheila Bair said she is still talking with U.S. Treasury Secretary Henry Paulson about the anti-foreclosure plan and is "hoping for a great result." "I'm still talking with him and on the merits he's not opposed," Bair told Reuters after speaking at a Johns Hopkins University event.

Bair has proposed preventing about 1.5 million foreclosures under a plan that would reward participating lenders by sharing the cost of defaults on restructured loans.

The FDIC estimated the plan could cost the federal government $24.4 billion out of the $700 billion Troubled Asset Relief Program (TARP).

The FDIC proposal has been met with resistance from the Treasury and the White House, which have said the TARP is supposed to be used for investing, not spending programs.

"I think we might be able to get some TARP money to launch this program very quickly," Bair said during the event.

Bair said she is also speaking with lawmakers and that Congress could give Treasury a directive to release the funds needed for the loan modification program.

House Financial Services Committee Chairman Barney Frank said on Tuesday that the Bush administration is likely to back off its opposition to using TARP funds for the FDIC plan and that a foreclosure reduction program could start "fairly soon." Bair said that House Speaker Nancy Pelosi also supports releasing TARP fut home prices.

More Work Needed

She also said she expects U.S. bank failures to continue at a higher rate but that the "vast majority" of U.S. banks remain well-capitalized and safe and sound.

Nineteen U.S. banks have failed so far this year, compared with three banks in 2007.

Bair raised concerns about banks' continued reluctance to lend to each other and to consumers.

The FDIC plans to finalize a rule on Friday that provides a guarantee to banks' new senior unsecured debt, which Bair said should help calm markets and increase interbank lending.

"There was a lot of overreaction in the markets yesterday," Bair said.

Shares of the top U.S. banks plummeted on Thursday, with Citigroup shares dropping more than 20 percent to just above $5 a share.

The cost of insuring Citigroup debt also surged.

Regulators will also be closely watching to make sure that banks are increasing lending, especially banks that are receiving federal funds through the TARP, Bair said.

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Rep. Frank, a Massachusetts Democrat, has said lawmakers may object to authorizing the release of the second half of the $700 billion bailout fund if banks do not sufficiently show an increase in lending.

But Bair warned against putting any specific numbers, such as a 5 percent increase, on lending level requirements.

Regarding regulatory reform, Bair said Congress next year will need to pass new rules for financial services firms that have largely operated outside the strictly regulated banking industry.

She said regulatory holes allowed financial firms to created risky structured products with little transparency.

"We've got a lot of regulatory arbitrage," Bair said. "We've got to stop this, we've got to have rules that apply across the board."

Bair said fundamentally she is an optimist, but there will be more pain in the near term for the banking industry with more troubled assets and more problem banks. "Clearly it's too early to declare the end of the financial crisis," she said.

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