No Easy Answers As Obama Team Faces Banking Crisis

No Easy Answers As Obama Team Faces Banking Crisis - 1/21/2009

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No Easy Answers As Obama Team Faces Banking Crisis
Edmund L. Andrews

International Herald Tribune . January 21, 2009
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EXCERPT: Even before they have settled into their new jobs, President Barack Obama's economic advisers face an acute crisis in the U.S. banking system that has no easy answers and that they are not yet prepared to address. The president's advisers watched most U.S. banking shares fall sharply Tuesday, on inauguration day, reinforcing what Obama officials have known for weeks: Their most urgent financial problem is an immense new wave of losses at banks and other lending institutions that threatens to cripple further the institutions' ability to resume normal lending. […] Obama administration officials are almost certain to intertwine help to the banks with the president's goal of providing as much as $100 billion for reducing home foreclosures. The two goals are not necessarily in conflict. Subsidizing loan modifications so that people can keep their homes could relieve banks of the steep losses associated with foreclosures and prevent further erosions in bank asset values by putting a floor under home prices. "Mortgages are still the underlying problem, and I really think we need to address that problem head-on," said Christopher Mayer, senior vice dean at the Columbia University School of Business. "The foreclosure stuff is just trying not to have even bigger losses in mortgages than we have so far." Administration officials said they were determined not to repeat the mistakes of Henry Paulson Jr., Treasury secretary in the Bush administration. Paulson sold Congress on an elaborate strategy for shoring up banks and then shifted to an entirely different approach before he even got started. Analysts said the Obama administration's challenge would be to help banks get rid of severely devalued mortgage assets on their balance sheets - from nonperforming subprime mortgages to pools of mortgages and derivatives - without wasting taxpayers' money or rewarding banks for bad practices.

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