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Who Is Regulating FDIC?


"The new powers would be sweeping... It would enable the government to come in, repudiate employment contracts, pick and choose who you want to keep, who you want to get rid of, what you want to pay them, replace the management, get rid of the boards and bring in better management" - Sheila Bair  
This is a serious misrepresentation of FDIC jurisdiction over insured banks.  Please explain to me how a government agency has the right to do whatever it wants because of its own interpretation of its powers.  No official in this country, including the President, should hold such dictatorial authority.  Sheila Bair now wants to have these same jurisdictions over bank holding companies and other large institutions.  I am shocked by the pervasive media support for this regulator, calling her a crusader and protector of average American taxpayers.
Please explain to me why Sheila Bair deserves more power when five of the last eight banks (Mirae Bank, Metropacific Bank, Horizon Bank, Cooperative Bank, and Southern Community Bank) failed fell under FDIC jurisdiction (class NM) and after Office of Inspector General posted numerous reports demonstrating FDIC's deficiency in its supervisory effort.  In the latest report, dated May 18, 2009, on the failure of Security Pacific Bank in California, OIG found "[i]n 2006, the FDIC reported concerns about SPB's rapid CRE/ADC loan growth through a heavy reliance on wholesale funding sources but did not make recommendations regarding the risks of the bank's high CRE/ADC concentrations that ultimately led to SPB's failure."
Please explain to me how Sheila Bair is a hero after she continuously made inconsistent statements and decisions, following no rules whatsoever.  One minute she rejected the notion of charging bigger and irresponsible banks more assessment fees because it violated FDIC statute but the next it was a reasonable and fair thing to do.
I want to know why FDIC could wipe out Wamu bondholders but then launched Temporary Liquidity Guarantee Program just days later to help Goldman Sachs, JP Morgan, and others sell billions in bonds.  I want to know why nobody held Bair accountable for her FDIC insolvency statement that could have led to a nationwide panic and bank run, even though she recognized her agency "can't run out of money" and merely wanted "cushion."  I want to know why FDIC has the time and resources to sponsor various programs but is unreachable for many people and projects suffering from its poor management of receiverships across the United States, from Galena, Missouri to Augusta, Georgia, and now Thompson Station, Tennessee.  I also want to know why she stated she would not use our tax dollars to help fund her agency but then demanded a huge increase in borrowing power from Congress in exchange for a fee reduction for the banks. 


Agencies such as OTS and FDIC were created to help supervise and stabilize, not control, the financial industry.  FDIC's main responsibility is deposit guarantee.  It is supposed to maintain a DIF ratio of 1.15% (this means there should be $1150 backing up every $100,000 of insured deposits).  "Once the ratio falls below below 1.15 percent, FDIC is required to develop a restoration plan to replenish the fund."

Back in June, 2008 this ratio had already fallen below the minimum to 1.01%.  Between December, 2008 and first quarter of 2009, it dropped further to 0.4% and 0.27%, respectively.  In other words, FDIC could only pay out about $400 at the end of last year and even worse, $270 at the end of March 2009 for every $100,000 it insured.
Yet in that same period, as the DIF ratio sank lower and lower, Sheila Bair made the ridiculous decision to use the $19 billion FDIC reserve, critical for at least $4 trillion of our deposits, to back over $300 billion in bank bonds via TLGP and with the expectation to finance up to $500 billion for PPIP.  Why was FDIC even involved in those programs when its priority should have been securing capital to build up its reserve specifically for deposit protection?  Remember AIG, the company that wrote and sold credit default swaps with no reserve and ended up getting billions from taxpayers?  This was exactly what FDIC had turned into, except it could get unlimited funding from Congress in the name of deposit protection.  
Please explain to me how Sheila Bair cares about unemployment rate and is a true fighter against foreclosure when FDIC took the following actions, including breaking Wamu employee contracts, allowing JP Morgan to "pick and choose" Wamu branches in NYC, and demanding farmers with the impossible task to find new loan sources within a month after New Frontier Bank failed.  Why did FDIC decide to terminate leases on those unwanted Wamu locations, leaving landlords millions in mortgages and in some cases, loss of properties due to foreclosure because these owners no longer received regular rent income?  Recently, "FDIC's grim reapers are out in full force in Orange County, shuttering bank offices and rejecting leases without the customary remedies afforded to landlords under Chapter 11."  As for the farmers who borrowed from New Frontier Bank, FDIC only rescinded its threat to liquidate their properties after state legislators intervened and USDA pledged a $253 million emergency loan from Farm Service Agency.  How was it fair to the real applicants of FSA loans when their funds were being diverted to Greeley because FDIC refused to grant Colorado farmers more time to find new lenders? 
Please explain to me why it was legal for a regulator to threaten Wachovia management with a seizure unless it agreed to be sold to Citigroup for $1 per share.  WB shareholders lost 90% of their stock value when this bad news hit, since FDIC failed to coordinate with SEC for a trading halt.
Please explain to me why Sheila Bair chose an insolvent Citigroup to "rescue" Wachovia and even offered to back billions of toxic WB loans with our tax money in the deal, but then months later decided to force Vikram Pandit out because she no longer liked him.  Media outlets have reported that Bair tried to influence rating agencies to downgrade Citigroup and had already talked to a former US Bancorp executive as a possible replacement.  Such chains of events could not help but lead me to remember how Wamu was downgraded by one agency after another, day after day, right before its seizure.
Please explain to me why Sheila Bair is an effective regulator when she is completely untrustworthy.  This is not about her versus Tim Geithner and Wall Street, never mind how I personally don't see that to be true at all considering her strong support for the big, bad bank idea and PPIP.  This is about character and honesty.  OTS and FDIC hypocritically encouraged troubled banks with promising plans and outlooks but at the same time privately obstructed these banks' efforts.  Wamu was told to find a buyer but FDIC was conducting its own secret bidding process with sweetened guarantees.  First Bank of Idaho was told to improve its capital ratio by a certain deadline that was ignored by the same regulators who granted it.  The minute Bair found a buyer, OTS declared the bank a failure and FDIC went ahead and completed the seizure with US Bank officials moving in on the same day.
Recently, article after article written by esteemed journalists have been posted, praising Bair's stance against "too big to fail" corporations.  I don't understand how they could have possibly forgotten she was the one who sold Wamu to make JP Morgan "too big to fail" and also the one who rejected Wachovia's plea to stay independent.
Throughout this economic crisis, a number of federal regulators have been feuding in public and asking for more power and jurisdiction.  They argued that by giving them more authority, taxpayers would be better protected as a result of tighter regulation.  This facade of concern for taxpayers by our regulators was sudden and served as a great warning on their integrity and sincerity.  For example, maybe the reason that FDIC now demands control over bank holding company is to prevent any lawsuit over the potential wrongdoing in its management of receivership.  I believe such limitation of absolute power is necessary, because, for instance, it gave the parent company of Wamu a chance in court to find out if FDIC really did find the least cost solution while getting the best value for the institution.
Pallavi Gogoi from USA Today, asked a very simple but extremely important question: "Where were regulators when banks were failing?" 
Where was SEC when Madoff stole $50 billion?
Where was OTS when Indymac backdated capital infusion?
Where was FDIC when insurance premiums were supposed to be collected?
When normal workers fail, they get fired.  However, after our regulators failed and in many occasions were found to be at fault by the Office of Inspector General, they spent our tax money to rectify their mistakes and were not held accountable for their actions.  Why was FDIC able to waste billions trying to run Indymac and when that failed, simply sold the bank to private investors without any apology or explanation to the American people?  With a meager reserve of $19 billion, it would eventually be our tax dollars FDIC ended up using to finance this "project" and other "experiments."
Poor supervision of AIG by OTS resulted in bilions of our tax dollars being used to pay counterparties.
Destruction of the bond market by FDIC resulted in billions of our tax dollars being used to help guarantee bank bonds.
As far as I am concerned, none of these regulators deserves more power, especially a morally dubious Sheila Bair.