FDIC chair Sheila Bair spoke to about 200 people Friday at the Isenberg School of Management at UMass Amherst, where she is also a professor on leave. In her prepared remarks, she made three points:
(1) The overall banking system is sound, and the FDIC is prepared to cover its obligations, as it always has. It can draw on the general treasury if needed, though she doesn’t anticipate that. ”Main Street” has so far shown confidence in the banking system by keeping its deposits in banks, and this has been a stable source of what credit there is.
(2) The current crisis is in part a failure of regulation — other bank-like entities should be regulated as the FDIC regulates banks, and limiting the maximum size of such entities should be considered. However she did not anticipate or support full restoration of the Glass-Steagall mandated separation of banks from other financial operations.
(3) The PPIP or “Geithner Plan” for removing toxic assets from balance sheets is promising and not that risky for the FDIC. Though the FDIC offers loans that provide leverage to private investments, these loans are collateralized and the leverage is limited. (I didn’t get numbers, but she mentioned “50-50″ for the equity stake between the investors and the government, and said that the FDIC would also be paid fees on the loans.) The FDIC is also involved in this plan because of its expertise in dealing with liquidations and unloading diverse assets.
Comments on the Q&A after the jump:
The most interesting question, I thought, was from a woman who asked why Bair acted competently and effectively in the crisis when the rest of the Bush financial leadership did not. Bair didn’t really answer, but a good answer was implicit in what else she said and what was said (by former ISOM dean Tom O’Brien) — she was looking out for the public interest and that of the depositors, rather than that of the institutions she was regulating. O’Brien stressed her actions on behalf of individuals, including small depositors and even foreigners resident in the US, whom she helped to send their money back home more easily. She clearly took a long-term view of the FDIC in her remarks — it made loans to private companies during the worst of the credit crunch, for example, and she was proud that these loans actually made money “for the taxpayers”.
She still identified herself as a Republican, though she was critical of the Bush administration (“because the crisis intervention was done quickly, there wasn’t as much accountability as there should have been” [my paraphrase]) and she was fully supportive of administration policy. I hadn’t realized that the FDIC is not part of the Treasury Department but an independent agency, so that Obama did not have the option of replacing her when he “kept her on” this spring. (I have no idea whether she would have resigned if asked. She was under some consideration for the Treasury job, at least at the rumor level.) The five-member FDIC board can have no more than three members of each party, actually, so having an ally who is a Republican is actually better for Obama as he appoints new members. Anyway, she describes herself as part of the team whatever her legal status.
The web site fdic.gov is worth looking up — there’s a clear emphasis on reassuring ordinary investors about their deposits, particular if their bank has actually failed as about 30 (mostly small) banks have done so far this year. Bair has done a round of talk shows and PSA’s lately to stress the stability of the system.
Overall, I was very impressed — Ms. Bair seems to have been one of the few grownups in charge in the previous administration, and is providing sensible leadership now.