If Plan B to save banks fails, try Plan A again

Meet the newest U.S. mega-bank: First National Toxic Loan.

The federal government appears to be turning back to Plan A in its efforts to bail out the financial system and get banks to lend again.

Plan A, as articulated by outgoing Treasury Secretary Henry M. Paulson in September, was to have the government buy bad loans from banks, ridding many institutions of much or most of their worst junk assets.

After Congress approved $700 billion for that program, however, Paulson shifted gears and decided to instead use the money to directly inject capital into banks.

"Here's a boatload of taxpayers' money. Now, lend!"

But Plan B hasn't worked. Banks still aren't lending -- even though they've sucked down $212 billion of Treasury's funds. And counting.

Investors aren't buying Plan B as a solution, either. An index of 24 major bank stocks has fallen every month since September and dived 29% just since year-end, to a 13-year low Friday. Confidence in the financial system remains fractured, at best.

So this week, Plan A was revived. Federal Reserve Chairman Ben S. Bernanke raised the issue Tuesday, saying in a speech that more aid for loss-racked financial companies was crucial. The government could reconsider the idea of buying bad assets for itself, he said, or it could set up "bad banks" that would make the purchases and give the selling banks equity stakes -- a way to potentially profit from a long-term workout of the assets.

On Friday, Federal Deposit Insurance Corp. Chairwoman Sheila C. Bair told the Wall Street Journal that the development of a revised Plan A was "beyond hypothetical. I think all of the agencies are committed to coming up with a program for troubled asset relief."

Importantly, former Fed Chairman Paul A. Volcker, now an advisor to President-elect Barack Obama, has backed the idea of creating a federal entity similar to the Resolution Trust Corp., which disposed of $520 billion worth of assets from failed savings and loans from 1989 to 1996.

The central idea is that the government would have the relative luxury of engineering long-term workouts of bad loans, including mortgages.

Why might Plan A work where Plan B has failed?

First, consider the ugly saga of Bank of America Corp.

The nation's biggest bank was considered a relatively healthy institution a year ago. Then it bought failing mortgage lender Countrywide Financial. And in September, amid the market panic that accompanied the collapse of brokerage Lehman Bros. Holdings, the bank sealed a deal to buy Merrill Lynch & Co.