HT to shadash for sending this in, from WaPo:

The rush of capital into the banking industry over the past month is allowing firms to postpone the painful process of selling devalued mortgages and other troubled assets, a step many financial experts still consider necessary to fully revive lending.

The Federal Deposit Insurance Corp. said Wednesday that it would suspend indefinitely the launch of a program to finance investor purchases of banks’ troubled loans because few companies were interested in selling. A related Treasury Department program to finance purchases of mortgage-related securities remains on the drawing board months after both were announced with fanfare.

The FDIC decision marked a victory for the banking industry, which has argued that such a program would transfer profit from banks to investors at public expense. It also showed the limits of the government’s ability to impose its will on the banks. Regulators generally cannot compel firms to sell assets, and the inflow of private capital has undermined the argument that the banks must take urgent steps to get healthy.

But FDIC Chairman Sheila C. Bair said yesterday that the best course for banks, and for the broader economy, remained a combination of raising new capital and shedding old problems. She said that the FDIC would continue to prepare to help banks sell assets.

“It is preferable to get them to sell assets in combination with raising capital in order to get the banks to be in a better position to start lending again,” Bair said in an interview. “Getting them off the books is a cleaner posture for the banks.”

Fifty financial companies raised almost $50 billion from private investors in May, more than in the previous six months combined, according to analysts at investment bank Keefe, Bruyette and Woods.

The surprising success defied widespread predictions, including by senior government officials, that investors would be scared away by the unpredictable magnitude of eventual losses on troubled assets. It has also dramatically reduced the need for additional federal investments in the largest banks. The 10 companies identified by federal stress tests as needing deeper reserves against losses must submit plans to the government next week, but it is likely that only two, Citigroup and GMAC, will require additional government aid.

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