Within the next few days, President Barack Obama will face a decision likely to be among the most important he will face as president - how to rescue the banks and financial institutions vital to the functioning of the nation's economy. Last fall, Congress appropriated $700 billion to do just that. But with half that money spent to little effect, the health of the banking industry continues to deteriorate.
Now, the president and Treasury officials must quickly decide how to fix the troubled banks without rewarding the current managers or shareholders. At the same time, Mr. Obama must keep a promise he made to Congress to spend between $50 billion and $100 billion to help rescue millions of homeowners still facing foreclosures.
The answer, we believe, is to invite troubled banks to agree to a limited period of close government supervision during which they would agree to accept what the Treasury decides is a fair value for the toxic debt they hold. The government would loan them enough additional capital to make them healthy, and the accumulated bad loans would be managed by a government bank set up for that purpose, with the goal of eventually selling them at a higher value.
The banks boards and senior managers would be vetted by regulators. There would be no stock dividends or management bonuses until the government loans were repaid. Troubled banks that choose not to participate would either fail and face similar reorganizations led by the Federal Deposit Insurance Corp. or attempt to recover on their own. And no banks would be considered "too big to fail," a shift from previous practice.
Treasury officials have been less than aggressive in their dealings with the largest troubled banks since the failure of Lehman Brothers, the investment giant, caused a virtual shutdown of the nation's financial system last fall. The results have been far from satisfying. Hundreds of billions of dollars in federal aid to troubled banks have failed to produce significant lending.
Now, with the deepening spiral of the current recession, banks large and small are carrying an ever-increasing burden of troubled loans, and there is little time left for equivocation. Banks need to come clean and get help with tough conditions or fail.