Bair Attacks Too-Big-to-Fail as Enforcer Geithner Must Trust

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by Alison Vekshin

(Bloomberg) -- Sheila Bair, chairman of the Federal Deposit Insurance Corp. and a lifelong Republican, boarded Air Force One for the first time in February. Neither President George H.W. Bush nor his son, President George W. Bush, had invited her on the world’s most famous jet in the five years she worked for them. It was a Democratic president, Barack Obama, who asked her to fly to Washington after the two had unveiled his administration’s foreclosure relief plan in Mesa, Arizona. “Sheila, come on back. I want to talk to you,” Obama told Bair, who was seated in the plane’s conference room. He then escorted her into his airborne Oval Office for their first private meeting, where they discussed the government’s role in alleviating the worst financial crisis since the 1930s.

“It was great,” Bair says of her meeting with the president. “He’s got an agenda which we share. Banks are a means to an end. You stabilize the banks to support the economy. But you don’t stabilize the banks for the sake of stabilizing the banks.”

After being left out of big decisions by Bush administration officials, such as the push last year for the $700 billion bank bailout, Bair, 55, has become one of the most powerful policy makers in Washington. Driven by a combination of circumstances and her own candor, Bair has presided over the biggest expansion of the FDIC’s authority since its founding in 1933 to insure bank deposits.

‘Bites Like Jaws’

“She looks like Bambi and she bites like Jaws,” says Wade Henderson, president of the Washington-based Leadership Conference on Civil Rights, who has known her for 27 years. “There’s a quiet intensity about her. She’s idealistic in spite of her 30 years in Washington.”

Under Bair, the normally invisible agency was the prime mover behind Obama’s $75 billion program to curb foreclosures. Last year, the FDIC became the go-to agency to insure hundreds of billions in bank debt to boost liquidity, and it’s currently spearheading half of the initiative to encourage investors to buy up to $1 trillion in troubled assets.

The FDIC head isn’t done expanding her influence over Wall Street. An opponent of the “too-big-to-fail” policy for firms like Citigroup Inc., Bair is lobbying Congress to give the FDIC authority to wind down bank and thrift holding companies -- a move she says is necessary to protect taxpayers. And she wants lawmakers to include the agency in a systemic risk council to prevent future financial shocks.

Populist

As Bair builds her power, soaring bank failures are jeopardizing her agency’s deposit insurance fund, which had dwindled to $13 billion in the first quarter, the lowest amount since 1993 following the savings-and-loan crisis. She requested more funding from Congress, which on May 19 more than tripled the FDIC’s borrowing authority from the Treasury Department to $100 billion. Lawmakers also approved a temporary boost of the credit line to $500 billion.

A self-described “populist,” Bair has won allies in the Democratic Party, such as Representative Barney Frank of Massachusetts, in muscling the FDIC into prominence. She has also fought battles with the Independent Community Bankers of America, representing 5,000 banks, and the Bush administration.

In 2008, Bair says, her struggle with midlevel Treasury Department officials turned tense as they stonewalled her proposal to use federal funding to prevent foreclosures. And she tussled with Timothy Geithner, then the president of the Federal Reserve Bank of New York, over the request last year that the FDIC guarantee all debt issued by lenders -- a move she rejected because it would expose her agency to big losses.

Geithner’s Respect

“I’m from Kansas; I’m not from New York,” Bair says. “I’m a lot of things that are different. So maybe that does give me some more independence of thought and daring to not care who I offend.”

Following Obama’s election in November, Geithner tried to have her ousted for not being a team player, according to people familiar with the matter. Through a spokesman, Geithner declined to say whether he sought to remove Bair from office.

“I have great respect for her,” Geithner told Bloomberg TV on May 21. “She’s a strong advocate for her agency and a strong advocate for her points of view.”

In May, after the FDIC assisted the Federal Reserve in stress testing 19 lenders, Bair put their executives on notice. She said some of them could lose their jobs in the next few months after the companies submit capital-raising plans to the government, according to an interview with Bloomberg TV and a statement from the FDIC on May 15. Bair didn’t say that the government would oust the chief executive officers of the banks.

$4.8 Trillion in Deposits

Bair says she’s seeking more authority over banks because her agency has so much at stake -- $4.8 trillion in insured deposits.

“There is some perception we want these programs, we want all this power,” Bair says. “That is not the case. We want a cleanup. This agency was born of a crisis and made for a crisis.”

Congress created the FDIC in 1933 at the depths of the Great Depression during President Franklin D. Roosevelt’s first term. As thousands of customers rushed their lenders to withdraw funds, toppling about 4,000 banks that year, Congress gave the new agency the powers to insure deposits and liquidate failed lenders.

Set up as an independent authority like the Federal Reserve, with a chairman serving a five-year term, the FDIC has been quiescent during most of its history. Then, in the 1990s, the agency expanded its staff to liquidate banks during the S&L crisis, when 124 insured institutions went down in 1991 alone.

1,000 Bank Failures

Now facing the largest number of bank failures since the S&L debacle, Bair has been fighting with bankers to protect the solvency of her deposit insurance fund. As many as 1,000 banks will go down from 2009 to 2012, says Gerard Cassidy, managing director of bank equity research at RBC Capital Markets in Portland, Maine.

The FDIC’s insurance fund, which covers deposits up to $250,000 after Congress temporarily boosted the amount from $100,000, is financed by banks. Most of them pay an annual fee of 12 cents to 16 cents per $100 in deposits. In February, Bair proposed an additional, emergency one-time charge of 20 cents per $100 in deposits, which ignited a firestorm of criticism from small banks.

Camden Fine, president of the Independent Community Bankers of America in Washington, sent a letter to more than 35,000 bankers in early March.

Hiking Bank Fees

“Shake the walls of the FDIC and Congress until they reverse this and other misguided policies,” Fine wrote. Bankers barraged the agency with letters complaining that the levy would wipe out profits.

After Congress agreed to boost the FDIC’s credit line to backstop the insurance fund, Bair moved to reach a compromise with the banks. On May 22, the FDIC approved a one-time fee on banks of 5 cents per $100 in assets, minus Tier 1 capital. By basing the fee on assets rather than deposits, the FDIC is putting more of the onus on larger institutions.

As the FDIC gains more regulatory clout, Republican lawmakers say the agency is stretching itself too thin in veering from its main job of insuring deposits.

“I’m very concerned ultimately about the core function of the FDIC, which is the cornerstone of our financial system, which is the safety and soundness of the insurance fund,” says Representative Jeb Hensarling, a Texas Republican.

ABA Opposition

The American Bankers Association, which represents banks of all sizes, is lobbying to stop the FDIC from gaining more turf. Bair’s proposal to give her agency the power to dismantle huge financial companies would have included government-controlled American International Group Inc. before the government took control of it, according to the Washington-based ABA. It says Congress shouldn’t give the wind-down authority to the FDIC because the financial burden of liquidating the large companies would likely fall on fee-paying banks.

“We think it would be a calamity for the country because the FDIC insurance of bank deposits has been so important,” says Edward Yingling, president of the trade group. “Why should a community bank in the middle of Iowa be paying for AIG? We pay insurance premiums to cover insurance on banks, not on everybody.”

As Bair’s stature rises, so does the number of hostile e- mails she receives from depositors who have suffered losses because their amount of money at failed banks exceeded the insurance limit. For the first time, starting in early 2009, the FDIC assigned a security detail to its chief. After speeches, Bair is often swarmed by crowds of reporters and citizens who sometimes jostle her 5-foot-4-inch (1.6-meter) frame.

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