Interview with FDIC Chairman Sheila Bair

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AL HUNT: On the same day that Congress passed the financial rescue plan, Wells Fargo announced that it, not Citibank, would be buying Wachovia – another dramatic development in the banking landscape. It’s been that kind of a week for our guest, FDIC Chairman Sheila Bair. Madam Chairwoman, thank you so much for being with us.

SHEILA BAIR: Happy to be here.

MR. HUNT: I suspect you haven’t gotten a lot of sleep this week. (Laughter.) You jump through a lot of hoops to help engineer a deal for Citi to acquire most of the assets of Wachovia, which turn around and cut – what they felt was the better deal with Wells Fargo. It would look at first at the marketplace working, less federal dollars involved – (inaudible) – but you put out a statement saying you’re standing by the Citi agreement. Do you think they double-crossed you?

MS. BAIR: Well, no, no, not at all. I think that the Wells deal – offer is new. Everybody’s evaluating it. What we were trying – we also said in that statement that we were reviewing – so we’d be talking with the other regulators and all the parties to determine what’s in the public interest.

What we wanted to make clear was until things are settled with what’s going on with the Wells bid, that the Citi deal was still there. We just wanted to make sure that it was clear to people the Citi deal was still there – we made that agreement.

MR. HUNT: So it may not necessarily – we should not assume that you have problems with the Wells deal –

MS. BAIR: It’s – no, you shouldn’t assume – we’re reviewing it. We’re absolutely reviewing it. We’re hoping we can – again, working with the other regulators, we’ve got to regulate –

MR. HUNT: Can that be done in a matter of days?

MS. BAIR: I would think so. I would hope so, yeah.

MR. HUNT: Let’s move to the big bill, the big financial rescue bill that was passed. It raised the – it raised the insurance ceiling to $250,000. First, I want to ask you – do you feel that’s sufficient? And I know you’ve said it’s only temporary but really, at the end of next year, realistically, we’re not going to go back to $100,000.

MS. BAIR: Well, that’s true. I think that’s the smart money in Washington saying that and so and I think you would certainly need to carefully think if you’re going to make it to remove the sunset that you know, what happens with deposits, you don’t want a lot of destabilization and that extra bump-up.

MR. HUNT: Right.

MS. BAIR: The flip-side is, though, if they make it permanent, obviously, right now, because it’s temporary, Congress said we don’t have to determine in our calculation of what the premiums are – what – required reserve ratio. So that would be the trade-off. We would have to bump up premiums to take in effect that additional –

MR. HUNT: But it is likely to stay at 250,000 dollars?

MS. BAIR: You know, it’s Congress’ call. They set our deposit insurance limits so I guess I wouldn’t want to prejudge Congress but I would certainly say that there’s some strong arguments, probably, for keeping it when it expires.

MR. HUNT: You have to all – I think – bolster the deposit insurance fund, which is now, I think at $45.2 billion.

MS. BAIR: That’s right.

MR. HUNT: You need to what, double that?

MS. BAIR: Well, that’s a good question. You know, we think – we’ve done a lot of stress test analysis of projected bank figures internal and what our losses would be given various protections, high loss and low, and we think we do need to raise premiums to make sure the reserves stay sound. But we’re going to do it in a measured way, spread it over a period of time. And we actually think our industry reserves will be sufficient. I think it’s important for the public to understand we are with the government – we’re backed by the full faith and credit of the United States government.

MR. HUNT: Right.

MS. BAIR: We already have a lot of authority to borrow Treasury. Now, we have even more with this bill. So that the money’s there to be able to borrow if we need it but we think our industry-funded reserves are going to be sufficient. I would also hasten to add that if we do have to borrow from Treasury, we pay that money back. That’s in our statute through industry assessments – it is paid back.

MR. HUNT: Right.

MS. BAIR: We borrowed once in the early 1990s, we paid it back within two years with interest so there’s no taxpayer cost, even if we do borrow it, we will pay it back through industry assessment.

MR. HUNT: So no necessity to raise that $45 billion by any appreciable amount?

MS. BAIR: Well, I think it’s a static – it’s not a static number. We’re bringing in, you know, billions of dollars in premium income now and we’re going to be bumping that up. Again, we’re going to be proposing some major premium increases next week. We’re required by statutes to do that. We’re supposed to maintain our ratio – our reserves within a 1.15 to 1.50 ratio. So to get it back to where it needs to be, we are required by Congress to implement what’s called the restoration plan, which will include some premium increases. But again, we’re trying to do measured increases, to build a fund, maintain public confidence without shocking industry too much.

MR. HUNT: You have had, I think, 13 bank failures this year, including a couple really big ones, WaMu. First, I think, the largest, any bank – do you expect any more big bank failures this year?

MS. BAIR: You know, I really try not to make predictions. I think we are in uncertain times –

MR. HUNT: You said there are going to be bank failures.

MS. BAIR: There will be bank failures and certainly, a number of smaller bank failures, which is what we’ve seen, which is more typical.

MR. HUNT: But how about big ones?

MS. BAIR: Well, you know, I think overall, banks are very well capitalized. They have – yes, they have some stresses in their outset quality, some a lot. But they also have very strong reserves; they’ve been very aggressive about getting reserves. So I really think the balance sheets are strong, they’re in a good position to what it is. What I’m really looking at now is liquidity issues. I think that’s really where the public confidence factor comes in. The policers need to maintain confidence in their banks and their deposit insurance.

Commercial users of banks and banks who lend to each other need to maintain confidence in the banks they do business with. Commercial customers in other banks should have the sophistication to be able to analyze a bank balance sheet and be able to make a judgment about its health. And so do that – just don’t irrationally pull back, which I am seeing a little bit now and it concerns me.

MR. HUNT: Madam Chair, now that this financial rescue plan has been adopted, there’s some talk to move the – shift the focus more from buying bad assets of institutions to perhaps government investing or in some cases –

MS. BAIR: Right, right.

MR. HUNT: It that a move that you would like to see? Would you like to move more in that direction?

MS. BAIR: Well, I think it’s – from the TARP, I think that’s Secretary Paulson’s call. He has multiple tools that he can use and I believe Congress gave him the ability to buy assets as well as credit guarantees and some direct capital infusion. We also, as part of our bank resolution process, when a bank becomes troubled, we have multiple tools we can use and that cost possibility could – in our own resolution process, that would be one technique we might be able to use.

With the Citigroup deal that you mentioned earlier, we used a combination – we provided some loss protection above a fairly large first-loss position but we also took an equity position through security as well as ones to make sure that, you know, as the value of the corporation, the value of the institution increase, that we would have some benefit too. So that’s the nice thing about taking the equity position, that you can recapture some of that value that you’re risking initially to stabilize the bank.

MR. HUNT: Let me – let me ask you two quick political questions.

MS. BAIR: Sure.

MR. HUNT: You know a little bit about politics. You have been praised by so many Democrats this week.

MS. BAIR: (Chuckles.)

MR. HUNT: You are a lifelong Republican. Barney Franks says you’re the best regulator he’s ever seen. If a Democrat should win the White House and asks you to keep serving, would you keep serving as FDIC chair?

MS. BAIR: Well, I would. I’ve said that. You know, I think the next president needs to be able to have an economic team that he wants to work with and yes, I’m happy to stay although I think it’s – it’s important to have stability now and I think it’s important for me as the chairman of the FDIC to signal that – my willingness to see this out. But that said, you know, I was in academia before I took this job. I was asked to take the job – I’m happy to go back to academia too. So I want to be flexible for the next president.

MR. HUNT: Sheila Bair, at the end an extraordinary week, thank you so much for being with us. And when we come back, the financial rescue plan’s now law. The economic outlook, though, is still dicey. We’ll talk with our reporters after the break.

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