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Sheila Bair And The FDIC: Bigger Than President Obama And The White House

Apparently our government officials have decided that CIT, a major lender to small to mid-size businesses such as Dunkin' Donuts and Pizza Hut, is NOT too big to fail.  FDIC, in particular, has refused to approve its application to TLGP. 


The reason?  “FDIC remains concerned that backing the company’s debt would put at risk the insurance fund that is used to repay deposits when banks fail.


Bingo!  FDIC insurance fund is supposed to be used to pay deposits!


So why did Sheila Bair even get her agency involved with this bond guarantee business, or that infamous $500 billion financing support for PPIP, in the first place?  Further, since FDIC did launch TLGP, why did she choose NOT to back bonds for a "LENDING" institution like CIT in the middle of a "LENDING CRISIS?"  "CIT put in for guarantees back in January, but Bair sat on the application and provided no reason why." 


Instead Bair decided to guarantee bonds for financial giants such as JP Morgan, Goldman Sachs, Morgan Stanley, and Bank of America, whose speculative and derivative trading contributed significantly to this"economic meltdown."  In fact, according to an analysis by The Center For Public Integrity, these were the same banks that financially backed many top "lenders who were responsible for nearly $1 trillion subprime loans:


#1 Countrywide Financial Corp


Total high-interest loans 2005-2007: At least $97.2 billion

Financial backers: Countrywide relied on credit agreements with a variety of parties, including Bank of America, JP Morgan Chase & Co., etc


#2 Ameriquest Mortgage Co./ ACC Capital Holdings Corp


Total high-interest loans 2005-2007: At least $80.6 billion

Financial backers: Underwriters of Ameriquest's asset backed securities includedMorgan StanleyJP Morgan Chase & Co., etc


#3 New Century Financial Corp


Total high-interest loans 2005-2007: At least $75.9 billion

Financial backers: Goldman Sachs Mortgage CompanyMorgan StanleyMortgage Capital, etc."

Someone please remind Sheila Bair she is the CHAIRWOMAN of the FDIC, NOT the PRESIDENT of the UNITED STATES.  She needs to stop her insatiable thirst for power and focus her attention and resources on FDIC's three main responsibilities: deposit protection, management of receivership, and supervision  



FDIC’s DIF ratio had fallen below the mandatory minimum of 1.15% since "JUNE 2008."  As of March 31, 2009 that number has plummeted to 0.27%.  This means technically one can get only $0.27 for every $100 deposit insured.  Instead of securing capital to strengthen her reserve specifically for deposit protection, she chose to jeopardize her most important responsibility and used FDIC fund to sponsor TLGP and PPIP. 


“If you include debt issued prior to the new year under FDIC’s ‘Temporary’ Liquidity Guarantee Program, FDIC’s total commitments would increase an additional $224 billion to $6.4 trillion.”




FDIC has been running some type of “seize and dump” operation on most of the banks it took over.  In many instances, it blatantly ignored its missions to “minimize disruption to the local community” and “maximize net recoveries” during its management of receiverships.


Taxpayers, in many towns across the United States, have found FDIC inaccessible and unhelpful regarding problems such as project delays and loan issues that stemmed from local bank failures:


Galena, Missouri-

“’I’ve heard it so many times from the FDIC. We have a process to go through… It took us six weeks before we could get anyone from the FDIC to talk to us.We’ve had to let workers go because we can’t pay them.’”


Augusta, Georgia-

“Loudermilk accuses FDIC representatives of everything from indifference to incompetence.   ‘We were close to a draw well before the bank failed, so we were already in a position that we were owed money for a few weeks before the FDIC took over,’ he says. ‘Then, the FDIC took over on Dec. 12 and it has just absolutely stopped. There are lots of promises being made, but absolutely nothing has happened.’  One of those promises was access to an emergency fund, something the FDIC never delivered.”        


But lets not blame Sheila Bair because she has had no time to deal with all these problems in receiverships.  She is a very busy lady.  For example, “she’s directed her staff to draft a pilot program for a lottery-linked savings plan.”


She's also issued rules on the purchase of failed banks by private equity groups, one of which requires the maintenance of " a Tier 1 capital ratio of 15%."  Personally I think she should throw in a rule about Bair herself, because what idiots would buy banks from FDIC if she could seize institutions on a whim and via her own assessment of their potential viability?  Case in point: Wamuhad a Tier 1 capital ratio of 8.4%, a TCE ratio of 7.8%, with Washington Mutual Holding Inc. having $4 billion in deposit.  Even more discouraging to these investors, FDIC has been in court trying to claim the $4 billion, even though it has publicly stated it has no authority over holding companies.


Then of course there was that loan modification program she passionately advocated:


“Making Home Affordable plan tells the banks to conduct a Net Present Value analysis, which is a fancy phrase that means comparing the cost of foreclosure with the cost of modification. If it costs less to modify than it does to foreclose, the banks are supposed to modify the loan instead of foreclosing, and thus save another home from being lost to foreclosure… While in the sub-prime neighborhood, the cost of modification was often less than the cost of foreclosure, in the prime neighborhoods the relatively higher values and greater equity will cause the reverse to be true.  Modification will cost more than foreclosure, and the [BANKS WILL BE FREE TO FORECLOSE].”  Oops!


Speaking of maximizing asset value in receivership, remember that $1.9 billion sale of Wamu to JP Morgan?  The MAIN STREET bank that OTS and FDIC thought were NOT too big to fail and whose failure would not pose a systemic risk?


They were WRONG, big time.


Even though it would have only cost about "$24 billion" for a "federal takeover" of Wamu, reckless actions by OTS and FDIC on this Seattle financial institution have exacerbated "liquidity hoarding [that led] to [an international] market breakdown;" there was no money available to lend because banks, in fear of potential seizure due to temporary liquidity issue, hoarded and held all the available cash.  Worse, after Sheila Bair wiped out Wamu bondholders and destroyed the bond market, it became virtually impossible for banks, including Goldman Sachs and JP Morgan,  to sell bonds without any government guarantee. 


In Europe, for instance, according to analysts at the financial research division in European Central Bank (ECB), "amounts deposited with the ECB rise from a daily average of 0.09 billion euros in the week starting September 1, 2008 to a daily average of 169.41 billion in the week of September 29, 2008... The amounts deposited with the ECB start rising after the collapse of Washington Mutual when the crisis spreads outside the investment banking realm."




Now, let us take a look at what was happening on this side of the Atlantic:

"This is a chart of the excess reserves held at the U.S. central bank. The chart, compiled by the St. Luis Fed demonstrates that banks always lend out nearly every dime they can so as to make a profit.  They do not hold excess reserves at the Fed, sitting around making them no money.


But, notice how the blue line is flat near zero and then it spikes up to ridiculous levels close to $300 billion in 2008.  With our reserve ratio of 10%, that’s nearly $3 trillion of lending that isn’t being done. Banks are scared out of their minds and are holding a huge amount of excess reserves…just in case — profits be damned.


This chart demonstrates that banks are not lending.  This chart explains why the money multiplier is contracting. This chart explains why we have a credit crisis."




Before Sheila Bair tried to force management changes in Citigroup, maybe she should take a look at the effectiveness of her own agency’s supervisory effort and all those NEGATIVE review reports coming out of the Office of Inspector General.


This was the first page of the latest failed bank list on the FDIC website as of July 7, 2009; 11 out of 20 were under its supervision.


Mirae Bank (NM) June 26, 2009

MetroPacific Bank (NM)

Horizon Bank (NM)

Neighborhood Community Bank

Community Bank of West Georgia

First National Bank of Anthony

Cooperative Bank (NM)

Southern Community Bank (NM)

Bank of Lincolnwood (NM)

Citizens National Bank

Strategic Capital Bank (NM)

BankUnited, FSB

Westsound Bank (NM)

America West Bank (NM)

Citizens Community Bank (NM)

Silverton Bank, NA

First Bank of Idaho

First Bank of Beverly Hills (NM)

Michigan Heritage Bank

American Southern Bank (NM) April 24, 2009

*NM = commercial bank, state charter and Fed nonmember, supervised by the FDIC*


More recently, New York Times reported that "[r]egulators shut down the John Warner Bank of Clinton, Ill.; the First State Bank of Winchester in Winchester, Ill.; the Rock River Bank of Oregon, Ill.; the Elizabeth State Bank of Elizabeth, Ill.; the First National Bank of Danville in Danville, Ill.; the Founders Bank of Worth, Ill.; and Millennium State Bank of Texas, based in Dallas."


Again, FDIC was the main federal regulator; all these banks except for First National Bank fell under FDIC supervision (Class NM).


This week four more banks failed, two of which, Temecula Valley Bank and First Piedmont Bank, yet again were classified as NM.


Getting back to the CIT situation, Sheila Bair was probably right in that it would be extremely risky for FDIC to help guarantee its debt.  But then how could she explain backing bonds for Citigroup, an even more troubled institution, and probably a riskier move?


One reason CIT has problem raising capital stemmed from its heavy “reliance on credit markets for financing.”  “Unlike traditional banks, CIT can’t lean on customer deposits when it needs money.”  So here we had this scenario: 


-FDIC helped destroy the bond market.

-Goldman Sachs, JP Morgan, CIT, etc were unable to raise capital from selling bonds.

-FDIC helped Goldman Sachs and JP Morgan sell bonds but refused to guarantee CIT debt.

-Down went CIT.


What was even more interesting was that after "CIT was approved to become a bank holding company, which in theory allows it to take low-cost deposits and lend the cash out for a profit... [FDIC] has prohibited CIT from exceeding its deposit level as of July... at $5.5 billion."


Worse, what if our regulators were wrong about the systemic impact of a CIT failure, like they were with Wamu? 


"A CIT failure will mean to Main Street what Lehman Brothers meant to Wall Street… Analysts say insurers and other large investors could be hit with hundreds of millions of dollars in losses. Small businesses say they could be cut off from credit. That could cause more layoffs and further delay an economic recovery.”,8599,1911102,00.html?xid=rss-topstories


Finding new lenders can be a huge challenge for these small business owners.  Just ask the Colorado farmers who were originally given just a one month deadline to find new loan services and threatened with liquidation by FDIC after their New Frontier Bank failed.  That was, until state representatives and USDA (our tax money) intervened.


One farmer “questioned the timing of the Federal Deposit Insurance Corp’s April takeover of New Frontier, just as farmers were trying to get crops in the ground.” She also “offered to pay 80 percent of what she owes but instead said the FDIC is making farmers jump through hoops only to sell their loans.  ‘They won’t get 100 percent of the loan… I’m offering them 80 percent and yet I have all these roadblocks.’"  Another farmer said his loan was in "good standing," but that FDIC only gave him "30 to 60 days to find restructuring."  "He has been to 24 different banks trying to find financing and has been turned down 24 times." 


Where is that "$23.7 TRILLION" our government potentially spent on this financial crisis according to our TARP Special Inspector General Neil Barofsky?


No worries though, despite all these reckless actions and decisions, Sheila Bair “is on our side.”


After all, she has been “protecting the interest of taxpayers” by spending “some $7.6 million in media buys and public relations activities as part of [FDIC’s] 75th anniversary celebration” and “relocating [the office] to a more expensive part of New York.”


It must be nice to be Sheila Bair. 


Desperate Hank “reportedly kneeled” before Nancy Pelosi to keep TARP alive.


Poor Ben got slammed for handing out $2 trillion of the Fed money.


But not Sheila!


Our FDIC chairwoman actually gained respect for her efficiency in seizing many banks that failed due to poor FDIC supervision.  She then used its reserve ( in other words, with its meager amount, our tax dollars) to pay out share losses:


"The FDIC and The First National Bank of Beardstown entered into a loss-share transaction on approximately $20 million of The First State Bank of Winchester's [NM] assets."


She earned raves for her campaign against foreclosures even though FDIC has been "rejecting leases without the customary remedies afforded to landlords under Chapter 11" in New York and California.


Best of all, she has received endless adulation from many congressional leaders and news outlets for being a true protector of depositors and taxpayers.  She knew what bank to save and she got things done fast.  She refused to give Wells Fargo more than time to do due diligence on Wachovia because that sale just had to be done that weekend.  In addition, "FDIC has publicly stated that it expects the Citigroup deal to cost the FDIC nothing,"  even though the same deal "called for the FDIC to use taxpayer money, if required, to limit Citigroup's exposure to losses on Wachovia's $312 billion loan portfolio to no more than $42 billion." You mean like the $500 billion PPIP financing that was "risk-free" for FDIC? Here is the real kicker, Bair risked over $4 trillion of our deposits with a $19 billion reserve and over $300 billion worth of bond guarantee for banks of HER CHOICE. 


That is right.  She's been praised as a heroine for choosing to help Goldman Sachs sell $29 billion of government guarantee bonds, Bank of America $44 billion, and JP Morgan $38 billion but $0 for CIT through TLGP.


"Goldman probably saved up to $600 million by issuing FDIC-backed debt with yields reflecting Uncle Sam's guarantee."  That sounds great for GS, but just how many small business owners were lucky enough to get loans from that $600 million since it became a bank holding company in September 2008? 


Thanks to her, GS will be paying out RECORD BREAKING BONUS this year while smaller and responsible banks such as North Shore Bank lost millions in profit because of the more than "1,000 percent" increased, special assessment fee imposed by FDIC! 


No wonder she "wants limits on consumer agency authority."  Once that agency is created, she won't be able to do whatever she wants.  Bair will actually be forced to use FDIC reserve to PROTECT DEPOSITS instead of TLGP and PPIP, manage RECEIVERSHIP properly as mandated by Congress, and answer to the numerous, critical OIG reports that demonstrated her agency's incompetence in SUPERVISION. 


Here is her latest endeavor: Sheila Bair "seeks changes to Obama's financial reforms... to prevent excessive political influence."


Really?  I seem to recall that a few weeks ago there were reports about a particular government official who tried to "encourage another government regulatory committee to downgrade Citigroup's confidential rating" in an effort to force out its chief Vikram Pandit. This came in spite of the fact that she had originally chosen that same management to save Wachovia with billions of tax money guarantee on the line.


She was, SHEILA BAIR..