By Damian Paletta, WSJ | 16 October 2008
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FDIC Chairman Sheila Bair after Treasury Secretary Henry Paulson announced Tuesday a plan to take stakes in banks.
WASHINGTON— Federal Deposit Insurance Corp. Chairman Sheila Bair on Wednesday criticized the federal government for failing to take more aggressive steps to prevent Americans from losing their homes, highlighting a rift between her and other senior U.S. officials over terms of the $700 billion rescue package. The government plan will help stabilize financial markets but it doesn't do enough to address home foreclosures, the root of the crisis, she said in an interview with The Wall Street Journal. "Why there's been such a political focus on making sure we're not unduly helping borrowers but then we're providing all this massive assistance at the institutional level [[with few or NO strings attached: normxxx]], I don't understand it," she said. "It's been a frustration for me."
Ms. Bair didn't single out government officials or leaders, but her criticisms brushed on decisions made by both the Bush administration and Congress. For example, she described painstaking efforts made by lawmakers in crafting the federal Hope for Homeowners program to make sure it limited resale profits for borrowers who received affordable home loans. Ms. Bair, who was nominated by the White House and confirmed by the Senate in 2006, has frequently said government and industry efforts to prevent foreclosures aren't effective enough. She has long defended her focus on consumer protection as an important role for the FDIC, which is charged with protecting bank deposits.
Her comments Wednesday came amid growing tensions with key figures in resolving the financial crisis, notably Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, according to people familiar with the matter. Defenders of the Bush administration's rescue plan say tackling problems at the heart of the banking industry, in particular the loss of public confidence in financial institutions, is the government's primary responsibility. Officials say the freezing up of many financial markets threatens consumers and businesses by choking off the credit that is the lifeblood of the economy.
"We just did a massive bill that does a lot for homeowners," said White House spokesman Tony Fratto. "You are always going to have different views on some specifics on policy. But I think we're all trying to pull in the same direction." Ms. Bair's comments are expected to provide new fodder for critics of the government's response to the financial crisis, especially among those who say it has done too little to help families falling behind in their mortgage payments. "I support all the measures; I've been a part of all the measures that have been taken," she said. "But we're attacking it at the institution level as opposed to the borrower level, and it's the borrowers defaulting. That is what's causing the distress at the institution level. So why not tackle the borrower problem?"
Increasing Power
The FDIC has accumulated increasing power as it has become a central player in the government's rescue plan. In recent weeks, it has handled some of the largest bank failures in U.S. history, and now is charged with guaranteeing not only consumer bank deposits but new debt issued by companies. That move, announced Tuesday, was part of a broader series of efforts to get credit flowing again. Ms. Bair has argued the plan should have a bigger focus on homeowners, whose travails are at the heart of the current crisis. Until home prices stop falling, financial markets and the economy are unlikely to stabilize. "This agency, probably as much as anybody, given our genesis in the Depression, has a sense of purpose now perhaps more than any other agency," Ms. Bair said.
Former FDIC Chairman William Isaac said he agreed. "One of the things we need to do is slow down foreclosures," he said. "The chairman of the FDIC, who has to pick up a lot of the pieces when banks fail, is certainly entitled to make such a statement." Ms. Bair and the FDIC are central to the government's plan to stabilize the banking sector. The agency is temporarily offering unlimited deposit insurance for non-interest bearing accounts and guaranteeing roughly $1.4 trillion in new unsecured bank debt.
Negotiations over details of the deal proved tense, with U.S. officials rushing to catch up with their foreign counterparts and the U.S. stock markets reeling. Last week, Ms. Bair met Messrs. Paulson and Bernanke and the two men tried to convince her to offer the debt guarantees to a broad range of institutions and a wide range of debt, according to people familiar with the matter.
Ms. Bair, who declined to comment on the meeting, was initially resistant and eventually sought a formal legal opinion over whether such measures would be valid, according to people familiar with the matter. A day after the discussions, she sent a memo to the Treasury secretary and Fed chairman proposing a compromise. Rather than guarantee bank debts up to 100% of their value, she proposed guaranteeing them up to 90% of their value. The debt guarantees were eventually limited to 100% of unsecured debt issued by June 30 with three years or less of maturities.
Multiple Efforts
The federal government has launched multiple efforts since last year to help homeowners rework distressed mortgages. The programs, which have been largely voluntary for the mortgage industry, have done little to reverse the trend of rising foreclosures. Falling home prices in some areas have continued putting pressure on banks and homeowners. A giant program created by Congress this summer to help homeowners started just two weeks ago. The agency's growing role has given her views a more prominent platform after spending much of this year arguing her point from the sidelines.
Ms. Bair, a one-time Republican congressional candidate and children's book author, had suggested direct action to modify mortgages en masse before many other regulators in Washington. In April, she pitched a plan that would authorize the Treasury Department to make loans to as many as one million homeowners to minimize foreclosures. In July, after failed thrift IndyMac Bancorp Inc. reopened its doors under FDIC control, the agency said it would halt foreclosures on the mortgages it owned and would try to modify loans for struggling homeowners.
Her stance has led to tangles with government officials, including a disagreement with White House Chief of Staff Joshua Bolten, a longtime colleague. She wrote a newspaper article about using government money to help homeowners avoid foreclosure, without running it by the White House. Ms. Bair declined to comment on the exchange. "We are an independent agency, and we've been talking about this a long time," she said. Speaking on behalf of Mr. Bolten, the White House spokesman, Mr. Fratto, said: "Josh thinks very highly of Sheila, and thinks she's doing a terrific job at FDIC."
The public role of the FDIC, which was created during the Great Depression, comes and goes in waves. It had a huge presence during the savings-and-loan crisis of the 1980s and 1990s, and has re-emerged as a crucial player. Ms. Bair was one of the regulators who sat across the table from top bank executives Monday at the Treasury Department when the final details were unveiled.
"The decisions we're making are historic," she said. "How many times can you be in public service when you know that the decisions you make will go into history books? How will future generations judge what we're doing? I think about that a lot." Her term as chairman of the FDIC lasts until mid-2011 and her term on the FDIC board lasts until 2013. Ms. Bair said she would stay in her role if the new president wanted her to remain. If she leaves, she said, she would likely return to academia.
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