What's Next For Bad Banks?

Members of President Obama's economic team appear before Congress this week. Lawmakers are likely to ask whether large, troubled banks should be allowed to fail — or whether the government should take them over. There's broad agreement on Capitol Hill that the financial bailout has fallen short. But there's less consensus about what to do next.

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STEVE INSKEEP, host:

It's MORNING EDITION from NPR News. Good morning. I'm Steve Inskeep. There wasn't much doubt that Congress ended the Bush administration dissatisfied with the bailout of financial firms. Nearly two months into a new administration, lawmakers are not much happier. There is broad agreement that the federal efforts have fallen short. And this week lawmakers will ask top members of President Obama's team what they plan to do next. One question is whether to take over troubled banks or let them fail. Here's NPR congressional correspondent David Welna.

DAVID WELNA: As President Obama flew from Ohio to Washington on Air Force One three days ago, he was asked by a New York Times reporter whether he would allow a major bank to fail. The president replied that considering the circumstances, there are, as he put it, an awful lot of banks that are in decent shape.

President BARACK OBAMA: There may be a handful of institutions that have more serious problems. And what we want to do is to cauterize the wound.

WELNA: Mr. Obama added without going into detail that more significant action will probably have to be taken with those financial institutions. Yesterday on ABC's "This Week," Richard Shelby the top Republican on the senate banking committee, told host George Stephanopoulos what he thinks should be done with those troubled banks.

Senator RICHARD SHELBY (Republican, Alabama): Close them down. Get them out of business. If they're dead they ought to be buried. We bury the small banks, we gotta bury some big ones. It would send a strong message to the market, and I believe that people will start investing in banks. People…

WELNA: Are you talking of Citigroup?

Senator SHELBY: Well, whatever. Citi has always been a problem child.

WELNA: And the federal government is expected to soon own about 40 percent of that banking institution's shares. On Fox News Sunday, Arizona Republican Senator John McCain said he too thought some banks should be allowed to fail. He was then asked whether he would nationalize such banks.

Senator JOHN MCCAIN (Republican, Arizona): I don't if it's, quote, "nationalizing," but it certainly is not continue to propping them up with tens or 40 or 50 billion dollars of taxpayers' dollars and their overall value continues to decline.

WELNA: Another Aenate Republican, South Carolina's Lindsey Graham, told NBC's "Meet the Press" he would consider outright intervention in troubled banks.

Senator LINDSEY GRAHAM (Republican, South Carolina): When are you throwing good money after bad? When would it be better to take the bank over, break it up, sell it off and better manage the bad assets versus just infusing it with capital? That to me is an option - call it what you like - that needs to be put on the table.

WELNA: Such intervention could be what New York Democratic Senator Charles Schumer called on the same show a good nationalization in which federal authorities do not actually run the intervened banks.

Senator CHARLES SCHUMER (Democrat, New York): The federal government comes in, it clears out the management, it tells the existing stockholders you're gone. It takes the bad assets and takes them off the bank's books and then recapitalizes the bank with private dollars and a new private group and management run it.

WELNA: Taking over troubled banks would by all accounts require more funds and what's left in the big financial bailout package. President Obama's has already put another $250 billion on standby in his proposed budget for replenishing those funds. Both Republicans and Democrats warn there's not much political will right now to commit more money, unless there's a new plan for spending it, a plan Congress has yet to see.

David Welna, NPR News, the Capitol.

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