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FDIC’s Bair: Bank Bailouts Were ‘Not a Good Idea’

November 13, 2009 at 12:00 AM EDT
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In an interview with Paul Solman, FDIC chairwoman Sheila Bair discusses lessons learned from the financial crisis, and looks back on the federal bailout of institutions deemed "too-big-to-fail," saying, "In retrospect, I think it was not a good idea."

JIM LEHRER: Now: the woman in charge of regulating the banks in the U.S.

Our economics correspondent, Paul Solman, spoke with her today. It’s part of his ongoing reporting on “Making Sense” of financial news.

PAUL SOLMAN: At a recent meeting of the American Bankers Association, protesters in the streets demanding that banks stop blocking financial reform and put an end to foreclosures.

Demonstrators inside received a message of support from an unlikely source, Sheila Bair, who’s in charge of insuring the nation’s 8,000-plus banks.

SHEILA BAIR, chairwoman, Federal Deposit Insurance Corporation: I don’t know how anybody can say that we have done a good job protecting consumers and financial services. I just don’t see it. So, we need this new agency… I know. No, no, it has not.

PAUL SOLMAN: An unusual forum, perhaps, for a government official to issue a dissent, but, then again, Bair is known for defying convention.

A lifelong Republican, Bair was appointed in 2006 by President George W. Bush to head the FDIC, or Federal Deposit Insurance Corporation, which guarantees bank deposits up to $250,000 per person, $500,000 per joint account.

But Bair’s views on the government’s response to the crisis put her at odds with the Bush administration. She butted heads with then-Treasury Secretary Paulson over the use of the Troubled Asset Relief Program, or TARP.

In testimony last fall, Paulson said TARP funds should be used to help Wall Street, not troubled homeowners.

HENRY PAULSON, former U.S. Treasury Secretary: I have reservations about spending TARP resources to directly subsidize foreclosure mitigation, because this is different than the original investment intent.

PAUL SOLMAN: Bair said the government had to do more to keep people in their homes.

SHEILA BAIR: We need to prevent unnecessary foreclosures, and we need to modify loans at a much faster pace.

U.S. PRESIDENT BARACK OBAMA: Families can get basic consumer loans.

PAUL SOLMAN: Bair has also clashed with the Obama administration. A disagreement with Treasury Secretary Timothy Geithner over what to do about troubled banking Citigroup led Geithner, according to some reports, to seek her removal from office. “The New York Post” parodied the dispute, Geithner as the Gotham City nemesis the Joker outfoxing FDIC Batgirl cop Sheila Bair.

SHEILA BAIR: All in favor, say aye.


SHEILA BAIR: Motion is agreed to.

PAUL SOLMAN: Instead, as bank failures have mounted, already 120 so far this year, Bair’s clout seems to have grown.

Yesterday, to cover future failures, the FDIC voted to collect the next three years of premiums from insured banks right away, a total of $45 billion. “Forbes” magazine ranks her second most powerful woman in the world, behind German Chancellor Angela Merkel.

I sat down with Sheila Bair earlier today.

Sheila Bair, welcome.

SHEILA BAIR: Thank you.

The health of the banking system

PAUL SOLMAN: It's Friday. It's the day that the FDIC announces the banks it's going to close. How many banks do you expect to close tonight?

SHEILA BAIR: Well, we never make predictions or projections about expected failures. So -- but there will be a few. I will say that.

PAUL SOLMAN: How worried are you about future bank failures in general and about the banking system at this point?

SHEILA BAIR: The banking system?


SHEILA BAIR: No, I would say, most banks are continuing to be profitable. Most are well-capitalized. Most will get through this just fine. We have about 8,100 banks in this country. We have about 413 on the troubled bank list.

That number will go up, but the -- most of the banks that go up on the troubled bank list will not fail. We also want to make sure everyone understands that, if you're an insured depositor, whether your bank fails or not -- it's a remote chance that your bank would fail -- but your deposits are absolutely safe. And it's really not anything people should be worried about.

PAUL SOLMAN: Is there a danger that the FDIC could run out of funds? You're really low at the moment, right? So, what -- and what happens if you do run out of funds?

SHEILA BAIR: So, we -- most people do not understand we are industry-funded. We assess premiums on our deposit insurance, so our reserves are provided by assessments paid by the industry.

Those reserves have been going down, obviously. It costs money. When a bank is closed, we have to make -- always make the insured depositors whole. And that costs money. So, we draw on our industry-funded reserves.

We are the government, though. We are full, faith, and credit, backed by the full faith and credit of the United States government. We can borrow if we had to up to $500 billion pretty quickly from the Treasury Department.

So, again, it's really nothing for people to worry about. But, right now, we continue to rely on our industry-funded reserves.

PAUL SOLMAN: But they're dwindling, right?

SHEILA BAIR: They are...

PAUL SOLMAN: They're way down.

SHEILA BAIR: We had about, I think -- yes, that's exactly right. So, we also reserve for losses 12 months out. I think that's -- so, our fund balance is technically negative now, because we have reserved for what we think our losses will be over the next 12 months. So...

PAUL SOLMAN: So it's a negative number...

SHEILA BAIR: It is a negative number in terms of our net worth. But our cash position is strong, about $24 billion. We will be collecting another $45 billion at the end of the year that will -- as part of a prepaid assessment.

So, we're keeping our cash reserves quite strong, relying on our industry-funded resources, not borrowing from Treasury. We're trying hard not to borrow from Treasury.

PAUL SOLMAN: Do you think too-big-to-fail banks should be broken up? And, if so, how?

SHEILA BAIR: I think, if they get in trouble again, they should absolutely get broken up.

I mean, I think the approach we have suggested is, is that, after all the support, if individual institutions can't still stand on their own two feet, then they should be put into a receivership process. We're not saying go back and shut them down and break them up now. I think what was done last year had to be done to stabilize the system. We were looking into the abyss.

But, going forward, it should not happen again. So, if any individual institution gets into trouble again, and a conventional bankruptcy process would pose collateral damage to us, the rest of us, it should be put into a special resolution process, just as we do with banks now. And it should be broken up and sold off.

"Checks and balances" in regulation

PAUL SOLMAN: Which of the current financial regulatory proposals do you like? And which don't you like? There's the administration. That gives more power to the Fed, right?

SHEILA BAIR: Right. Right.

PAUL SOLMAN: There's the new Senator Dodd bill. That gives less power to you.


I'm very big on checks and balances, whether that's my power or the Fed's power or anybody else. I think -- I think there is too much power concentrated, frankly, with institutions and within the regulatory system, in a way that is not helpful. And I think checks and balances and having a system where we can do our job efficiently, but we're all kind of looking over each other's shoulders, too, I think that's the best system, because the regulators could have done a lot of things better, too.

So, we don't want all the concentration of power in one place.

PAUL SOLMAN: Senator Dodd's proposal, that's less power for you.

SHEILA BAIR: Right. Well, it is less power for a lot of people. And it's more concentrated power with a new agency. We don't think that's a good model. No, we don't. I think...

PAUL SOLMAN: Not enough checks and balances?

SHEILA BAIR: Not enough checks and balances.

I think, well, yes, let's put the FDIC's interests aside, though I think the FDIC's interests coincide very well with the public interest. But, yes, I think any concentration of power, it's a huge pit. If that single monolithic agency makes the right decisions, then maybe you've got a really efficient regulatory system.

But if that single monolithic agency makes the wrong decisions, if it becomes captive of these big institutions that it regulates, we're in -- we're in real trouble, because there's nobody else that can raise a hand and say, you know what? You're wrong.

Mistakes during the financial panic

PAUL SOLMAN: In general, in hindsight, is there anything you would now have done differently?

SHEILA BAIR: Yes. I think we would have tried to dissuade Treasury from making these capital investments. I do. I think...

PAUL SOLMAN: Capital investments in?

SHEILA BAIR: The TARP capital investments. So, originally, that program was to be a troubled asset relief program.


SHEILA BAIR: And as part of an international coordinated effort, a decision was made to instead use the money to make capital investments into these very large institutions.

But I just see all the problems it's created now, the horrible public outcry. It's had a terrible, terrible impact on public attitudes toward the financial systems, towards the regulatory community. It's created all sorts of issues about government ownership of these institutions.

What happens if they get in trouble again? What kind of -- you know, do we contain the bonuses and the compensation, because they're taxpayer -- partially taxpayer-owned, which might make things worse, because they can't bring in new and better management, which, in some cases, might be necessary?

So, I think the complications from this -- in -- you know, in the urgency of the time, nobody should have -- you know, be held account perhaps for not thinking all of this through, but, in retrospect, I think it was not a good idea.

PAUL SOLMAN: Last question: How does it feel to be the second most powerful woman in the world, according to "Forbes" magazine, now two years running?

SHEILA BAIR: Right. Right. Two years running, right. Yes, Angela, look out.

So, I think it's more about the agency than it is about me. The banking franchise is strong now, because insured deposits stayed. When everything else was flying away, ensured deposits stayed. And I think that that proves the value of being a bank, so -- and the value of the service we perform.

So, I think it really is about the agency. But, you know, it's been -- it's been around for over 75 years, and nobody's ever lost a penny of insured deposits, and never will. So, it's easier for me to head a great agency like this and take the kudos for, but it's really about the institution.

PAUL SOLMAN: OK. Well, Sheila Bair, thank you very much.


JIM LEHRER: Tonight the FDIC announced it's closing two banks in Florida, bringing to 122 the number of banks that have failed this year.

Also, Sheila Bair answered viewers' questions online on Paul's Business Desk page. Just go to