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Frank mulls public-backed rescue plan

Associated Press / September 17, 2008
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WASHINGTON - The turmoil on Wall Street is prompting a key congressional Democrat to consider a broad federal market rescue that could include creating a new government entity to take over collapsed financial institutions and sell off their assets, as lawmakers did during the 1980s savings and loan crisis.

Representative Barney Frank, a Massachusetts Democrat and the House Financial Services Committee chairman, said a body like the Resolution Trust Corp. - the largely taxpayer-financed company that seized and liquidated the savings and loans - might be needed in the coming months to stabilize markets and prevent more implosions at major financial institutions.

His panel plans a hearing Tuesday to hear from economists and others "to begin the process of thinking about" the idea.

"There have been a series of ad hoc interventions that have not worked," Frank said. "Has the private market made so many mistakes and burdened itself with so much bad paper that there needs to be some public intervention?"

In a more immediate step designed to help regulators deal with the credit crisis, Democrats said they have agreed to give the Federal Reserve authority to pay interest on commercial bank reserves, a move that could give the central bank better control over interest rates. The measure, which Frank said would cost $300 million over the next two years, is likely to become part of the final spending package Congress passes this month before adjourning.

Senate Banking Committee chairman Christopher Dodd, Democrat from Connecticut, said he backs the idea, but it should come with new requirements that banks help more homeowners avoid foreclosure.

A broader debate about whether government intervention is needed to help dispose of mortgages and other distressed debt will begin this month and unfold next year.

Frank said many banks' assets are so undervalued - in large part because of the psychological impact of the lingering housing, credit, and financial crises - that "the private market won't even go to a fire sale."

The RTC was created in 1989 to deal with the aftermath of the savings and loan crisis, when hundreds of the institutions failed and led to a massive taxpayer bailout. The corporation disposed of the associations' assets and then went out of business.

Former Fed chairman Alan Greenspan advocates creating a similar entity in a new epilogue to the paperback edition of his memoir, "The Age of Turbulence: Adventures in a New World," which came out last week. It would be an alternative to turning the Fed into an uber-cop responsible for policing financial market stability.

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