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Small, mid-sized banks still in danger

Marketplace Staff Aug 11, 2009
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Small, mid-sized banks still in danger

Marketplace Staff Aug 11, 2009
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TEXT OF INTERVIEW

Bill Radke: Almost a year since the financial crisis hit, the banking system seems to have stabilized. But stable does not mean healthy. And despite taxpayers bailing out the big banks, thousands of small and medium-sized banks are still threatened by bad loans. That’s the conclusion of a new report out this morning from a Congressional watchdog agency. On the line with us is the head of that panel, Harvard law professor Elizabeth Warren — good morning.

Elizabeth Warren: Good morning.

Radke: We’ve been seeing so many signs of the recession maybe coming toward a close, prices coming back up — Why are small and mid-sized banks still in danger?

Warren: Well the problem with small and mid-sized banks is that they tend to hold whole mortgages, meaning that they’ve got the whole thing rather than just a fractionalized share of it in a security. But the program designed to help get those bad assets off the banks’ books don’t apply to small mortgages. Worst, small mortgages hold a lot of commercial real estate loans, which pose a real threat of high defaults in the near future. So since small banks have more trouble raising capital, we raise a particular alarm in the position they may be in.

Radke: So we might still worry about commercial real estate and unemployment might still go up, but what about these banks — if many of these did collapse, how widely would that pain spread?

Warren: Well, it spreads two ways. One, of course, is that we have to pick up on deposit insurance and make sure that the depositors are safe, and that puts more strain on the system. But it’s also that the banks themselves are a sign of what else is wrong. Remember that the problem that started this whole crisis is that all of these mortgages that were out there that people couldn’t pay. And so long as those mortgages are still carried as assets on the banks’ books, and so long as foreclosures continue to rise, we have a serious economic problem.

Radke: One of your panel members, Republican Congressman Jeb Hensarling of Texas, has dissented from this report. He says you seem to be advocating another taxpayer bailout. How true is that?

Warren: Well I’m not sure what report Congressman Hensarling was reading because the report makes very clear deep skepticism about the approach that Treasury is using to deal with the troubled assets. Now having said that, it also says that we have to be realistic. So long as those bad assets stay on the banks’ books, they put us all at threat.

Radke: Harvard law professor Elizabeth Warren heads the Congressional Oversight Panel looking over the bank rescue program. Thank you.

Warren: Thank you.

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