FDIC Chief Sheila Bair spoke at the Town Hall Los Angeles this morning, sharing her thoughts on financial markets and some of the policy issues she faces as one of the nation’s top banking authorities. Formerly a professor of regulatory affairs at the University of Massachusetts, Bair speaks in a rapid fire style. So I’ll put her comments in bullet points.
On the economy as a whole
Bair said the Administration was winding down some of the emergency programs introduced in the wake of the crisis such as the TARP funding. “Things are getting better,” she said. “It’s time for government to get out and let the markets work.”
They’ll be more bad news though.
“Banking is a lagging indicator. They’ll go through the process of cleaning up their balance sheets for at least two quarters past the end of the recession.” There are now 416 trouble banks, 106 that have failed this year. Bair said banks will see $100 billion in losses over the five year period beginning in 2008. About $60 billion has been recognized already.
And more changes are coming.
“There’s a difference between free markets and a free-for-all,” she said. Bair supports legislation proposed by Rep. Barney Frank that would create a government-run recovery fund, financed by private industry, that would take over investment banks and insurance companies deemed “too-big-to-fail.” The process would work in much the same way the FDIC takes over failed banks. In such cases, shareholders and lenders would take more of a hit than they did in the cases of bailouts such as AIG. “I want the market to understand there will be losses,” she said.
On the unpopular decision to bail out big banks.
“Everybody did what we had to do, a lot of us didn’t like it,” she said. Bair said she wants to see the quasi-governmental agencies Fannie Mae and Freddie Mac redesigned. “We either nationalize them or privatize them, but this hybrid approach didn’t work.”
IndyMac, no mas
She told a vocal group of folks who had invested more than the insured limit in IndyMac CDs that they wouldn’t be getting any more money—“there are virtually no assets left.” She said that if folks wanted to increase their recoveries in bank failures they’ll have to get Congress to change the laws.
Why loan officers don’t return calls
I asked the Chairwoman after her talk if the PPIP program would be expanded to purchase bad assets from good banks. She said yes. I also asked her take on why there have been so many complaints about banks taking so long to approve loan modifications. “They didn’t staff up,” she said. “There is still to too much of an inclination to just not do it. Investors are still unwilling to do modifications. We tried to streamline it, to make it about pay stubs and tax returns. That’s what you need.”
The future of banking
When asked if the FDIC was slow in allowing new banks to be insured, she conceded it was. “The old model of brokered deposits funding commercial real estate, we have a lot of problems with that.” She also said she hoped federally insured institutions will have learned something from the crisis and avoid exotic financial instruments and focus instead on the basics. “We’re going to get away from models and math and make loans based on getting to the know the borrower. It’s not who comes up with the best financial engineered product or who made the most fees anymore.”
Wishful thinking, but let’s hope she’s right.
BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.