Chapter 3 Martellini The bailiff

Chapter 3 Martellini The bailiff - Face value The bailiff...

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Unformatted text preview: Face value } The bailiff Sheila Hair of the FDIC is at the forefront of America’s response to the financial crisis HEN she was summoned from academia in 2006 to head the Federal Deposit Insurance Corporation (FDIC), some people wondered why Sheila Bair would want to run such a sleepy backwater. The institution charged with administering America’s deposit-guarantee fund and taking over troubled banks had little on its plate. Not a single lender had failed for two years. The fund was so full that many banks no longer had to pay in premiums. Some joked that the rDIC’s main job at the time was sending out stickers forbanks to place in their windows, con- firming that they were covered by the insurance scheme. How different things look today. Shoulder-to-shoulder with Hank Paulson, the treasury secretary, and Ben Bernanke, chair- man of the Federal Reserve, Ms Bair is leading the government's response to the financial crisis and using the rule’s powers to help reshape the banking industry. And she has won plaudits for her actions so far from bankers, investors and fellow regulators. Forbes recently ranked her as the world’s second-most-powerful woman, after Germany‘s chancellor, Angela Merkel. She has been touted as a possible future treasury secretary. Ms Bair faced her biggest tests so far in September. First came the collapse of Washington Mutual (WaMu), America's largest savings-and-loan institution. Within hours, she had brokered a deal to sell its branches and deposits to JPMorgan Chase, at no cost to the taxpayer. That was quickly followed by the FDIC’s pre- emptive sale of a chunk of Wachovia, America‘s sixth-biggest bank, to Citigroup. The structure was innovative, with the FDIC agreeing to bear risk over a certain loss level in return for war- rants entitling it to a stake in Citi. The deal was thrown into disar- ray, however, when another bank, Wells Fargo, made a counter- offer. This sparked a legal battle which the Federal Reserve was still trying to resolve as The Economist went to press. Ms Bair had made her mark long before this double-wham- my. She was among the first to flag potential problems among banks, giving warning as long ago as 2002 about sloppy mort— gage-lending and lax regulation. She was an early proponent of mass-modification programmes that help borrowers avoid fore- closure by cutting the rate at which their loans reset to a more af- fordable level. Spurned at first by other policymakers, the idea has since caught on. Ms Bait rejects criticism from the right that this is a grand social experiment. Modification makes economic sense, she argues: because the costs of foreclosure are high, keep- ing those who are struggling, butnot basket-cases, in their homes should maximise loan recovery. Thousands of clients of Indy— Mac, a bank that went bust inJuly, have been offered such deals. This shows a pragmatic streak, especially for a lifelong Repub- lican. Those who have worked with Ms Bair describe her as an adept consensus-builder. She picked up political skills working forBob Dole, a former presidential candidate, and at the Iteasury. Blunt yet affable, she has won over senior Congressional Demoe crats such as Barney Frank. Unusually for a bank regulator, she is also a good communicator. Such is her passion for financial edu-. cation that she has written a Children‘s book, “Rock, Brock, And the Savings Shock”, on the dangers of indebtedness. Unlike her predecessors, Ms Bair has manoeuvred herself into a position where she can influence senior economic policy- makers. In September, for instance, she persuadedthe Treasury to modify its new blanket guarantee for money-market funds after banks complained that they would lose uninsured deposits to the funds, undermining confidence. She also won new powers as part of the government’s $700 billion financial-rescue package. The plan allows the FDIC to borrow unlimited amounts from the Treasury, increasing its capacity to assist troubled banks. Some question her judgment and accuse her of inconsistency. With IndyMac, uninsured depositors lost out, whereas WaMu’s and Wachovia’s were made whole. WaMu’s senior creditors took a hit, but Wachovia’s were spared. But Ms Bair has had to weigh the need for consistency against the effect of any decision on overall financial stability. Clobbering the creditors of a bank the size of Wachovia would have made it even harder for other banks to tap the credit markets. A more serious charge is that she acted rashly in pairing Wachovia with Citi. Wells Fargo’s much higher offer, only four days later, suggests it might have been bet- ter to wait. Prospective white knights may think twice in future before diving in, for fear of being trumped by a rival. Moreover, Ms Bair faces accusations of duplicity. An affidavit by Bob Steel, Wachovia’s boss, suggests that she was urging him to consider the bid from Wells, even as she publicly backed Citi. Insuring the insurer ‘ Protecting her reputation as the golden girl of financial regulation will require more than just fending off such criticism. Banks en~ tered this crisis with stronger capital bases than they had going into the savings-and-loan debacle of the 19805. But this down- turn will be deeper. The FDIC could still find itself swamped, and Ms Bait may struggle to keep her deposit-insurance fund, now $45 billion, from suffering ameltdown of its own.The FDIC itself predicts that bank blowups could cost the fund $4.0 billion be- tween now and 2013. Others put the numb er even higher. Ms Bait plans to double the average premium paid by banks, with the burden skewed towards the riskiest. Political and regulatory battles loom, too. Though Ms Bair failed to win authority to raise deposit insurance to whateverlev- e1 she deems appropriate, lawmakers agreed to a temporary in- crease, from $100,000 to $250,000, as part of the bailout. Once panic subsides, pressure will build to reverse this. She is also squaring up for a fight over capital-adequacy rules. She is no fan of the “advanced” rules for large banks, which allow them to set capital aside based on their own mathematical models. All this will prove testing. But so far Ms Bair has had a good crisis. I ...
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