FDIC Chief Raps Rescue for Helping Banks Over Homeowners
By _DAMIAN PALETTA_
* _Article_
(http://online.wsj.com/article/SB122411533644338623.html?mod=djemTMB#articleTabs=article)
*
WASHINGTON -- Federal Deposit Insurance Corp. Chairman Sheila Bair on
Wednesday criticized the federal government for failing to take more aggressive
steps to prevent Americans from losing their homes, highlighting a rift between
her and other senior U.S. officials over terms of the $700 billion rescue
package.
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Reuters
FDIC Chairman Sheila Bair after Treasury Secretary Henry Paulson announced
Tuesday a plan to take stakes in banks.
The government plan will help stabilize financial markets but it doesn't do
enough to address home foreclosures, the root of the crisis, she said in an
interview with The Wall Street Journal.
"Why there's been such a political focus on making sure we're not unduly
helping borrowers but then we're providing all this massive assistance at the
institutional level, I don't understand it," she said. "It's been a frustration
for me."
Ms. Bair didn't single out government officials or leaders, but her
criticisms brushed on decisions made by both the Bush administration and
Congress.
For example, she described painstaking efforts made by lawmakers in crafting
the federal Hope for Homeowners program to make sure it limited resale profits
for borrowers who received affordable home loans.
Ms. Bair, who was nominated by the White House and confirmed by the Senate in
2006, has frequently said government and industry efforts to prevent
foreclosures aren't effective enough. She has long defended her focus on
consumer
protection as an important role for the FDIC, which is charged with protecting
bank deposits.
Her comments Wednesday came amid growing tensions with key figures in
resolving the financial crisis, notably Treasury Secretary Henry Paulson and
Federal Reserve Chairman Ben Bernanke, according to people familiar with the
matter.
Defenders of the Bush administration's rescue plan say tackling problems at
the heart of the banking industry, in particular the loss of public confidence
in financial institutions, is the government's primary responsibility.
Officials say the freezing up of many financial markets threatens consumers
and
businesses by choking off the credit that is the lifeblood of the economy.
"We just did a massive bill that does a lot for homeowners," said White House
spokesman Tony Fratto. "You are always going to have different views on some
specifics on policy. But I think we're all trying to pull in the same
direction."
Ms. Bair's comments are expected to provide new fodder for critics of the
government's response to the financial crisis, especially among those who say
it
has done too little to help families falling behind in their mortgage
payments.
"I support all the measures; I've been a part of all the measures that have
been taken," she said. "But we're attacking it at the institution level as
opposed to the borrower level, and it's the borrowers defaulting. That is
what's
causing the distress at the institution level. So why not tackle the
borrower problem?"
Increasing Power
The FDIC has accumulated increasing power as it has become a central player
in the government's rescue plan. In recent weeks, it has handled some of the
largest bank failures in U.S. history, and now is charged with guaranteeing
not only consumer bank deposits but new debt issued by companies. That move,
announced Tuesday, was part of a broader series of efforts to get credit
flowing again.
Ms. Bair has argued the plan should have a bigger focus on homeowners, whose
travails are at the heart of the current crisis. Until home prices stop
falling, financial markets and the economy are unlikely to stabilize. "This
agency, probably as much as anybody, given our genesis in the Depression, has
a
sense of purpose now perhaps more than any other agency," Ms. Bair said.
Former FDIC Chairman William Isaac said he agreed. "One of the things we need
to do is slow down foreclosures," he said. "The chairman of the FDIC, who
has to pick up a lot of the pieces when banks fail, is certainly entitled to
make such a statement."
Ms. Bair and the FDIC are central to the government's plan to stabilize the
banking sector. The agency is temporarily offering unlimited deposit insurance
for non-interest bearing accounts and guaranteeing roughly $1.4 trillion in
new unsecured bank debt.
Negotiations over details of the deal proved tense, with U.S. officials
rushing to catch up with their foreign counterparts and the U.S. stock markets
reeling. Last week, Ms. Bair met Messrs. Paulson and Bernanke and the two men
tried to convince her to offer the debt guarantees to a broad range of
institutions and a wide range of debt, according to people familiar with the
matter.
Ms. Bair, who declined to comment on the meeting, was initially resistant and
eventually sought a formal legal opinion over whether such measures would be
valid, according to people familiar with the matter. A day after the
discussions, she sent a memo to the Treasury secretary and Fed chairman
proposing a
compromise. Rather than guarantee bank debts up to 100% of their value, she
proposed guaranteeing them up to 90% of their value. The debt guarantees were
eventually limited to 100% of unsecured debt issued by June 30 with three
years or less of maturities.
Multiple Efforts
The federal government has launched multiple efforts since last year to help
homeowners rework distressed mortgages. The programs, which have been largely
voluntary for the mortgage industry, have done little to reverse the trend
of rising foreclosures. Falling home prices in some areas have continued
putting pressure on banks and homeowners. A giant program created by Congress
this
summer to help homeowners started just two weeks ago.
The agency's growing role has given her views a more prominent platform after
spending much of this year arguing her point from the sidelines.
Ms. Bair, a one-time Republican congressional candidate and children's book
author, had suggested direct action to modify mortgages en masse before many
other regulators in Washington. In April, she pitched a plan that would
authorize the Treasury Department to make loans to as many as one million
homeowners to minimize foreclosures. In July, after failed thrift IndyMac
Bancorp
Inc. reopened its doors under FDIC control, the agency said it would halt
foreclosures on the mortgages it owned and would try to modify loans for
struggling
homeowners.
Her stance has led to tangles with government officials, including a
disagreement with White House Chief of Staff Joshua Bolten, a longtime
colleague.
She wrote a newspaper article about using government money to help homeowners
avoid foreclosure, without running it by the White House. Ms. Bair declined to
comment on the exchange. "We are an independent agency, and we've been
talking about this a long time," she said. Speaking on behalf of Mr. Bolten,
the
White House spokesman, Mr. Fratto, said: "Josh thinks very highly of Sheila,
and thinks she's doing a terrific job at FDIC."
The public role of the FDIC, which was created during the Great Depression,
comes and goes in waves. It had a huge presence during the savings-and-loan
crisis of the 1980s and 1990s, and has re-emerged as a crucial player. Ms. Bair
was one of the regulators who sat across the table from top bank executives
Monday at the Treasury Department when the final details were unveiled.
"The decisions we're making are historic," she said. "How many times can you
be in public service when you know that the decisions you make will go into
history books? How will future generations judge what we're doing? I think
about that a lot."
Her term as chairman of the FDIC lasts until mid-2011 and her term on the
FDIC board lasts until 2013. Ms. Bair said she would stay in her role if the
new
president wanted her to remain. If she leaves, she said, she would likely
return to academia.
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