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FDIC And Its Trail Of Irresponsible Actions (Part II Of III)


Those of you in support of Bair getting more power, please explain to me what she accomplished to deserve that.  She made some of the worst decisions ever, ones that led to instability and loss of confidence in the entire financial system.

First, FDIC destroyed the bond market by wiping out Wamu bondholders.  I didn't support many things Tim Geithner did, but I believed he was right about "standing by Wamu bondholders... [because] it was critical for the health of the credit market."  This was the wrong time for Bair to "administer an object lesson of her own."

It was inconceivable our FDIC chairwoman could underestimate the importance of a healthy bond market to our economy, especially in the middle of a financial crisis.  How did she expect not just banks, but companies in every industry, to raise capital without that market? Who would invest in bonds when FDIC could declare debt to creditors void at will?

Worse, she further eroded the confidence in our financial system by allowing two giant institutions, Wamu and Wachovia, to fall one right after another.  These failures cast even more doubts in the minds of “main street” consumers on the stability of their banks.  These failures also sent “wall street” investors into panic because Wachovia’s inevitable collapse was a direct result of FDIC’s decision to wipe out Wamu bondholders.
Within days, Wachovia’s “financing costs [went] through the roof… options on Wachovia bonds showed confidence in the securities had collapsed”
Second, FDIC expedited deterioration in credit flow which led to lending freeze.  Bair took over Wamu because of liquidity pressure even though it was well-capitalized and solvent.  The result?  Every bank, in fear of government seizure due to liquidity pressure, started hoarding cash.  Both the Fed and ECB (European Central Bank) saw a dramatic increase in deposits, a shocking and abnormal pattern because historically, banks almost always lent all their money out for profits.  When banks wouldn’t even lend to each other and were keeping their money at central banks, did you think they would offer loans to average consumers or small business owners?

These two systemic risks, death of a strong bond market and a big drop in credit flow and lending, led to increasing business failures and unemployment.  People didn’t lose just their jobs, they also lost health and retirement benefits.  Worse, they risked losing their homes to foreclosure because they could no longer afford mortgage payments.
Would these be the kind of prudent decisions you expected from an intelligent financial regulator?  Did you think a media touted taxpayer advocate such as Bair, passionately fighting to keep people in their homes, actually contributed to the problem?  Of course not, because you wouldn’t know all the disturbing details, not with headlines like these:
“FDIC pushed mortgage help for jobless”
“FDIC has plan to help unemployed owners”

You wouldn't see how FDIC had been terminating leases without compensation in New York and California, or how Bair's loan modification program at IndyMac (now OneWest) was sabotaged by the agency's own loss sharing agreement in her typical seize-and-dump management of receivership:

"IndyMac's Mortgage Struggle... anger over former IndyMac's loan modification efforts"
"FDIC stepped in... according to their Loss Share agreement... OneWest put $101,760 in their pocket... thanks to the FDIC... And we wonder why nobody could get a loan modification... when OneWest... can foreclose and make over $100k?"

Similarly, when you read
“FDIC chair: ‘Too Big to Fail’ Strategy Must End”
you weren’t told that plenty of her actions ended up favoring bank consolidation.  Four major banks, Bank of America, JP Morgan, Citigroup, and Wells Fargo, " have grown to command 46% of the assets of all FDIC insured banks, up from 37.7% from a year ago."  JP Morgan was already “too big to fail,” but Bair made it even bigger with the Wamu fire sale. She refused to help Wachovia stay independent and forced the bank to sell itself to Citigroup or Wells Fargo.  She encouraged banks to buy banks.  She also “ hurt small, healthy banks” and endangered their existence with outrageously high special assessment fees.
Just like when you read:
“’Open bank’ assistance should be prohibited, Bair says”
you didn't see this:

"That's the role the FDIC played for Goldman Sachs and other firms, which took advantage of $940 billion in FDIC guarantees to raise cheap money for themselves and another $684 billion of backing for their trading accounts as an additional perk"

You weren’t told that programs such as TLPG and PPIP, in which FDIC participated, were none other than “open bank assistance.”  Bair used the bond guarantee program to help a few elite firms like Goldman Sachs and Citigroup raise capital in the very same bond market she helped destroy. Even more unscrupulous was the fact that this FDIC assistance did not come with TARP-like restrictions in executive compensation.  We knew about $11 billion went to Goldman’s bonus pool this year, but we never found out how much actually went to loan servicing for average taxpayers.  Bair also agreed to finance PPIP, Tim Geithner’s legacy asset program.  This was the very same individual who had to take her above-the-market price-tagged house off the market.  Obviously she knew nobody would overpay for her home, so why was she offering loans to help private investors buy toxic assets at bloated value and prop up the corrupt banks’ balance sheets?