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DIC chief is facing exceptional challenges

Posted by smeddum on September 1, 2008

DIC chief is facing exceptional challenges
By Eric Dash
and Geraldine Fabrikant
The New York Times Salt Lake City Tribune
Article Last Updated: 08/31/2008 12:25:23 AM MDT

WASHINGTON – Sheila Bair anticipated the mortgage crisis long before most other regulators. But she never dreamed it would wreak so much havoc on so many banks.
More than a year after the credit crisis first flared, Bair, the chairwoman of the Federal Deposit Insurance Corp., warned last week that the outlook for the ailing banking industry was bad – and getting worse.
The swelling tide of toxic home loans is proving to be even more worrisome than initially feared, Bair said. She is struggling to clean up the mess and forestall home foreclosures with a plan to ease loan terms for hard-pressed homeowners.
”It is going to be a slog to work though this, but there is no easy way to do it,” Bair said about her plan during an interview in her office here. ”We haven’t seen the trough of the credit cycle yet.”
Her downbeat outlook was underscored Tuesday by the FDIC’s latest quarterly assessment of the industry. The agency said the number of bad loans at banks ballooned to its highest level in 15 years during the second quarter.
Industrywide, bank earnings plunged 86 percent from April to June, to $4.96 billion, from $36.8 billion a year earlier, the agency said.
The FDIC, which guarantees savings and checking deposits, also raised the number of banks on its list of problem lenders to 117, the most since mid-2003.


That is up from 90 at the end of the first quarter. The agency does not disclose which banks are on the list, but it said the troubled lenders had combined assets of about $78 billion.
For all the bad news, American banks are in far better shape than they were in the late 1980s and early ’90s, when the savings and loan crisis claimed hundreds of lenders across the nation.
But some worry that the agency has fewer people – and less money – than it needs to cope with the industry’s latest travails, particularly if several large institutions were to collapse.
Integrity Bank of Alpharetta, Ga., on Friday became the 10th U.S. bank to fail so far this year, done in by the very business it was built on – real estate lending. Analysts expect dozens more lenders to run into trouble.
Bair’s agency is stretched. Dozens of staff members who had been through the banking crises of the early 1990s retired in recent years. Despite her efforts to bring some seasoned examiners back, her small army of examiners is largely untested.
Meanwhile, there are growing questions about the adequacy of FDIC’s insurance fund, which guarantees repayment on deposit accounts of up to $100,000 when banks collapse. The fund dwindled to $45.2 billion during the second quarter, from $53 billion in the first quarter.
To replenish its fund, the agency will probably have to raise the fees it charges banks by at least 14 cents for every $100 of deposits, according to estimates by analysts. Bair declined to comment on the likely size of any increase but said the agency was proposing to revamp its fees so that institutions engaging in high-risk practices would pay higher rates.
”It only seems fair,” Bair, 54, said. Such a move is expected to draw criticism from banks.
How Bair navigates the financial and political landmines ahead will help determine the course of the banking industry and, by extension, the broader economy. It also will determine her legacy.
”If the agency gets through the credit mess, having handled the bank failures that are to come, she is going to be widely seen as the person who prepared the agency for this,” said Jaret Seiberg, a financial policy analyst for the Stanford Group, in Washington. ”If the cycle is worse than expected – and if the agency insurance fund isn’t big enough or they didn’t have enough examiners – she will become the fall guy.”
The centerpiece of Bair’s plan is to modify loans so that people can stay in their houses. ”It is something we should put a priority on,” said Bair clip.
From her perch at the FDIC, Bair has become one of the industry’s most influential policymakers and outspoken critics. She issued some of the earliest warnings on the housing market and prodded the Treasury Department to back a comprehensive approach toward freezing low teaser rates on certain adjustable mortgages, a stance that many investors have opposed. She also has walked a fine line between pressuring banks to raise capital and urging depositors to remain calm.
Bair’s blunt remarks also have drawn criticism, since the FDIC’s record is not pristine. The agency approved dozens of new bank charters in coastal hot spots, even as those housing markets were overheating. IndyMac Bank, the California lender that collapsed in July, was not even on the agency’s troubled bank list.
”It was more accelerated than we anticipated,” Bair said of IndyMac. ”I wouldn’t say it was a surprise.”
Bair brings one of the most varied backgrounds of anyone to lead the agency, cultivating fans in financial circles from Wall Street to Washington and on both sides of the aisle. She is probably the only FDIC chairperson to write risk-capital policy briefs for bankers and short stories for Highlights for Children magazine.
A native of Independence, Kan., Bair got a taste of policymaking and pragmatic politics while working for former Sen. Robert Dole, the Kansas Republican. After losing a close race for Congress in Kansas in 1990, she worked as a commissioner at the Commodities Trading Commission and later joined the New York Stock Exchange as its top government relations officer.
In 2001, President Bush appointed her assistant secretary for financial institutions at the Treasury. She soon left for the University of Massachusetts at Amherst, where, as a professor of public policy, she became known for her work on consumer protection issues.
Then the White House called again. The president asked her to lead the FDIC just as the housing market was peaking in mid-2006.
Bair said that she became aware of the breakdown in lending standards after hearing several consumer complaints during her tenure at the Treasury. But when she arrived at the FDIC the staff began raising broader concerns, and the agency bought a database to study the industry’s loan performance.
”By the fall and winter 2006, we were looking at this market pretty hard,” she said. There were very low down payments, loans that never verified the borrower’s income, poor disclosure and huge payment shocks. ”It was pretty eye-popping, some of the stuff we were seeing. We couldn’t believe it.”
As the housing market worsened, she warned that millions of borrowers might lose their homes as adjustable mortgages reset to higher interest rates. She called for a comprehensive approach to the problem, a concept that was woven into the recent housing legislation but has gotten little traction from the industry.
At the time, Treasury officials believed the housing crisis could be solved on a case-by-case basis. Secretary Henry Paulson Jr. said that the subprime problem was largely contained. But behind the scenes, Bair was pressing her case.
”We eventually came to the perspective that a more systematic approach made sense,” said Robert Steel, the former undersecretary of the Treasury for domestic affairs who is now chief executive of the Wachovia Corp. ”She was there first and should get credit for that.”
At the FDIC, Bair has embarked on an ambitious policy agenda. She was an early advocate of using special bonds to jump-start Wall Street’s business of repackaging loans into securities. And she has continued championing the idea that a sweeping program to modify loans is the best alternative for the industry.
Not everyone agrees with her. One financial industry consultant said this will turn into a very expensive failure, and the banking industry will pay a price for it.

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