EDITORIAL: Bailouts and Fannie, Freddie

By | Tuesday, July 22, 2008

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Revelations that the Federal Deposit Insurance Corporation (FDIC) authored faulty and improper sub-prime loans to consumers after it took over operations of Hinsdale, Illinois-based Superior Bank FSB could not be more troubling and should signal Congress that rushing to pass reactionary bailout provisions and new regulatory legislation will likely be inadequate.

More than 6,700 mortgages worth in excess of $550 million were doled out to consumers under FDIC authority, and hundreds of those borrowers who couldn't afford the loans have been foreclosed on, according to the Wall Street Journal. The FDIC is being sued by Texas-based Beal Bank that bought 5,315 of the loans from Superior alleging that half of them originated while the bank was under FDIC control. The FDIC, in an initial report, estimated it could be liable for about $70 million. An agency official said the case could be settled for about $23 million.

IndyMac Bancorp Inc. was taken over by the insurance agency earlier this month, and there are several other banks on the FDIC's list of troubled institutions. That coupled with these new troubling revelations about the FDIC's handling of Superior raises some serious questions for the federal insurer. Taxpayers should pay close attention.

The current balance of the FDIC insurance fund stands at an estimated $53 billion. If IndyMac folds, and it is highly likely that it will, the FDIC could be on the hook for about $6 billion to $7 billion - roughly 12 percent of the fund - to repay customers of one bank. At that funding level, the FDIC can currently insure about 10 bank failures. Then what?

What is the government going to do if the number of home foreclosures that have risen every month this year, 53 percent in June, continue to rise at a record pace launching even more banks toward the brink? The Bush administration opened the treasury coffers more than a week ago to allow Fannie Mae and Freddie Mac to borrow at reduced rates to save themselves from collapse, even as the two mortgage giants proclaim strength, as their liquid capital outpaces their obligations.

The Democrat-controlled Congress wants bailouts across the board and wants to hire more regulators to fix this mess. In this case, the 53 elected representatives and senators are going to have to sit down and think long and hard about reforming the entire structure and duties of the regulatory agencies.

Proclamations that everything will work out coming from Senate Banking Committee Chairman Chris Dodd, who wants bailouts and more regulation, won't cut it. Neither will Republican proclamations that the Democratic Congress is responsible, because Richard Shelby was the chairman of the committee for the majority of the time that these sub-prime lenders were doling out bad loans. Pennsylvania Avenue is flush with finger pointing. Taxpayers and conservatives want solutions, not buck passing.

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