FDIC to guarantee $1.4 trillion in bank debt

updated 8:03 p.m. ET Nov. 21, 2008

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.

Against that bleak economic backdrop, news that New York Federal Reserve President Timothy Geithner is President-elect Barack Obama's choice for Treasury secretary gave battered Wall Street a shot in the arm. The Dow Jones industrials zoomed nearly 500 points as stocks erased roughly half the losses racked up the prior two days. Investors have been seeking a clear message from Obama on who will lead his economic brain trust during the financial crisis.

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.

"This step by the FDIC is a significant step in the right direction," said Oliver Ireland, an attorney specializing in banking law at Morrison & Foerster who was an associate general counsel at the Federal Reserve. While the program itself can't restore confidence in the financial system, "I think this is a significant contribution to containing the problem," Ireland said.

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.

The FDIC also will guarantee deposits in non-interest-bearing "transaction" accounts by removing the current $250,000 insurance limit on them through the end of next year. That could add as much as $500 billion to FDIC-backed deposits.

Short-term debt issued by banks — for 30 days or less — is not covered as to avoid creating more volatility for the Federal Reserve's primary interest rate. The Fed on Oct. 29 slashed the rate to 1 percent, a level seen only once before in the last half-century. Many economists predict the Fed will lower rates again next month at its last meeting of the year.

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Treasury Department spokeswoman Brookly McLaughlin on Friday called the FDIC action "an important step to strengthen the financial system by increasing confidence in the markets."

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.

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