FDIC Chairman Sheila Bair Forecasts the Future of Financials
Friday, July 25, 2008PAUL KANGAS: While the Senate will likely pass a massive housing rescue bill this weekend, the troubles in the housing market continue to strain financial markets. From the Federal backstop for mortgage giants Fannie Mae and Freddie Mac, to the recent failure of IndyMac Bank, consumers are nervous. Stephanie Dhue spoke with FDIC Chairman Sheila Bair this afternoon and began by asking her if the nation's banks are in crisis situation.
SHEILA BAIR, CHAIRMAN, FDIC: Well, crisis is a strong word. We're certainly in a very challenging environment. And I do think the foreclosure crisis is a crisis. We've been expressing concerns for a long time about all these un-affordable loans that were made in recent years and the impact that would have on foreclosure activity, driving home prices down. And we're seeing that. So I think really stabilizing the housing market is the key. And once we get that stabilized I think other things will fall into place and we will see the light at the end of the tunnel.
STEPHANIE DHUE, NIGHTLY BUSINESS REPORT CORRESPONDENT: To what extent are the banks and thrifts at risk for the troubles at Fannie Mae and Freddie Mac?
BAIR: I think with this bill that has been passed, I think it somewhat makes explicit what was implicit before which is the Federal government will come in if need be. I think Secretary Paulson and the regulator have indicated they think it is a low probability that the government will need to come in. But if they do that should stabilize the situation. So I think any direct credit exposure that banks have to Fannie and Freddie have been addressed by that. I think from a more broader economic perspective, Fannie and Freddie as well as the FHA are obviously providing a lot of support (INAUDIBLE). The secondary market is not there any more so in terms of providing funding for mortgage lending, it is also very important to the banking sector.
DHUE: When Indymac bank failed, that really scared a lot of people.
BAIR: It really did, yes, it did.
DHUE: So how strong is the FDI insurance fund? Can it withstand the stress of a major bank failure?
BAIR: Yes, we really can and I was very concerned that people reacted as they did with the long lines, even insured depositors really unnecessarily inconveniencing themselves. And that saddened me greatly. And we really doubled our public education efforts about deposit insurance so people understand that their money is safe and the FDIC is there for them. We have never lost a penny of insured deposits and that will continue. We have an industry fund reserve at the end of the first quarter was about $53 billion. That will go down somewhat because of the Indymac failure, but we are also in the process of -- continuing the process of collecting premiums from the industry. And we will in the fall be instituting a new plan to make sure that the reserves stay adequate. And so I really based on the information I have now, I can't foresee really any scenario where those reserves would be insufficient to handle even worse case scenarios. Assuming we did have an Armageddon situation which I think is not going to happen, we are backed by the full faith and credit of the United States government. So if the resources were there, through our industry funded reserves or through our backup guarantee, for insured depositors to be covered so they really, really do not have anything to worry about.
DHUE: What makes you so confident there won't be Armageddon and there won't be a major bank failure? House prices continue to plummet.
BAIR: Well, there are some big challenges out there. But the U.S. economy has proven itself to be resilient. Banks went into this with very strong capital, very strong earnings. They were in a good position to weather it and we have cycles. We've been through cycles before and we've weathered them and they are difficult but we have weathered them and get through them. And certainly if you look historically from what kind of challenges the FDIC has looked at, has dealt with before, the S&L days, this is nothing like the S&L days. The level of the bank failure activity is very low. The (INAUDIBLE) is very low.
DHUE: Do you think that the FHA bill will be effective given that it's voluntary, the banks have to take big losses, it doesn't address the second liens?
BAIR: It will help. There are some limitations that are generally acknowledged. But I think it will help. I think for a certain set of mortgages, especially those which are deeply underwater, I think FHA refinancing will make some sense. We had also suggested that Congress adopt a borrower loan program that would be run by Treasury too, which we think would have been a little more saleable to pay down principle, up to 20 percent to make the loans affordable. And those owns with have to be repaid. So it was not a bailout. In fact the repayment costs would have been shared by borrowers as well as the mortgage investors. That's still out there. We think if things deteriorate more, that perhaps Congress will take another look at doing a program like that.
DHUE: We've been speaking with Sheila Bair, chairman of the FDIC. Thanks for joining us.
