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A Two-Pronged Push To Aid Ailing Banks

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President Bush said Tuesday that the economic damage to the nation will be 'painful and lasting' if Congress fails to pass a $700 billion bailout bill. Video by AP

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By Binyamin Appelbaum and Carrie Johnson
Washington Post Staff Writers
Wednesday, October 1, 2008

Two federal agencies moved yesterday to ease the financial pressure on banks even as Congress continued to debate the wisdom of a broader intervention.

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The Federal Deposit Insurance Corporation said it would ask Congress to extend the government's guarantee of bank deposits beyond the current limit of $100,000 on each standard account, hoping to convince queasy depositors that there is no need to pull money from troubled banks.

Meanwhile, securities regulators and accounting rule-makers granted banks greater power to decide the value of their investments, even if market data suggest that prices should be lower. That could allow some banks to report smaller losses, perhaps comforting investors.

The carefully calibrated moves are trial balloons from an administration under intense pressure. Regulators, convinced that financial firms' problems are becoming economic problems, are searching for ways to help the financial industry without further provoking an angry public -- or its elected representatives in Congress.

If successful, yesterday's moves could stanch the bleeding at commercial banks in two ways: limiting their losses as the value of their mortgage investments declines and as customers withdraw deposits.

But both proposals drew quick criticism as attempts to hide rather than solve the industry's problems. An increase in the deposit guarantee also could have the effect of sheltering banks from their own mistakes by making it easier to retain depositors. And the accounting proposal has been described by critics as a way to allow banks to conceal losses.

"These veiled attempts to return to older, flawed cost-accounting methods will do more harm than good by allowing financial services companies to obscure deterioration in their balance sheets and avoid charges necessary to ensure that their income statements reflects their true economic performance," Donn Vickrey of Gradient Analytics, a market research firm, wrote in a note to clients.

The events yesterday again highlighted the increased prominence of FDIC Chairman Sheila C. Bair, who has taken a lead role in the government's response as the financial crisis spreads from Wall Street to infect retail and commercial banks.

Bair in the past week has engineered deals to sell Washington Mutual to J.P. Morgan Chase and Wachovia to Citigroup. Now she is trying to forestall any additional fire sales. Washington Mutual and Wachovia, two of the nation's largest banks, were forced into the hands of federal regulators in part because reports of ill health led depositors to withdraw money the banks needed to survive.

Bair placed a call yesterday morning to Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, to tell him that she planned to send Congress a formal request for the insurance increase because of concern about bank runs. Congress would have to vote to change the law.

The cap has not been raised since 1980, while average balances have climbed. Small businesses, in particular, often keep large account balances. As a result, only 63 percent of bank deposits now fit under the FDIC's umbrella.

"Unfortunately, there is an increasing crisis of confidence that is feeding unnecessary fear in the marketplace," Bair said in a statement. "To address this crisis of confidence, I do believe that it would be helpful for the FDIC to have the temporary ability to raise deposit insurance limits."


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