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Sheila Bair Trumps Tim Geithner

Posted by Larry Doyle on October 29, 2009 9:52 AM |

FDIC Head Sheila Bair

“Too big to fail.”

Do you think the American public is sufficiently sickened by that phrase? No doubt.

How will our ‘wizards in Washington’ handle this monstrous issue going forward? Is there any doubt that the industry itself should be held accountable to provide the necessary capital to unwind firms deemed ‘too big to fail?’ Of course not. However, the execution of that policy is where the rubber meets the road and where we learn who in Washington is truly working for the American public and who is working for the financial industry. How so? Let’s navigate.

What type of leverage does Uncle Sam have to assess capital charges for purposes of unwinding firms when the industry and firms are in distress? None. Then why would Secretary Geithner and other economic wizards in the Obama administration maintain that banks should incur those capital charges after the catastrophe hits? Why? The Wall Street lobby has obviously gained Mr. Geithner’s ear. What are the banks saying? “Don’t do it, Tim!!” The banks want to maximize their returns on capital and being forced to set aside capital for systemic risk will crimp those returns.

Who is the voice of reason on this critically important topic? FDIC head Sheila Bair once again displays the courage and character to voice her dissent with the administration. Bloomberg highlights Ms. Bair’s courage in writing, Bair Breaks With Obama, Urges Prepaying Costs to Unwind Firms:

Federal Deposit Insurance Corp. Chairman Sheila Bair, breaking with the Obama administration, said U.S. financial companies should prepay into a fund the government would use to unwind large failed firms.

Congress should set up a Financial Company Resolution Fund and force institutions with more than $10 billion of assets to pay before a firm collapses, Bair said in testimony prepared for a House Financial Services Committee hearing today. Investors in failed companies also should take losses, she said.

“A prefunded FCRF has significant advantages over an ex- post funded system,” Bair said. “It allows all large firms to pay risk-based assessments into the FCRF, not just the survivors after any resolution, and it avoids the pro-cyclical nature of requiring repayment after a systemic crisis.”

Ms. Bair provides more wisdom on this topic. Who should bear the risks?

“Losses should be borne by the stockholders and bondholders of the holding company, and senior management should be replaced,” Bair said in her testimony. “Consideration also should be given to imposing some haircut on secured creditors to promote market discipline.”

Ms. Bair makes sense on cents with that statement. Who could possibly think otherwise and promote a policy inconsistent with Ms. Bair’s approach? The Obama administration. How so?

The administration’s proposed legislation would assess charges on the industry ex-post facto. That’s going to work, right?

Wall Street has little interest in incurring charges up front and setting aside capital which they could utilize to generate returns.

Thank you Sheila Bair for calling ‘bull$*#&” on that.


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