Wednesday, May 27, 2009
(Cont'd from above)...

Jim (cont'd):   


Jim:       Chairman Bair welcome to Mad Money...

Bair:       Thank you, I am happy to be here.

Jim:       Alright, should I take it from your queue earlier, when you said that we are not out of woods. Or can I switch metaphors and say that maybe we see the light at the end of the tunnel?

Bair:       Yeah, I am seeing some light at the end of the tunnel. And I would like to say first, before I say anything, that insured depositors have nothing to worry about. We still have money, we are staying in positive territory in our reserves. We obviously have a back stop with the government, the full faith and credit, and ample lines of credit. So depositors have nothing to worry about, whatever happens. And I do see some light at the end of the tunnel. I think things have stabilized. We have got some cleaning up to do, but I see some positive signs out there.

Jim:       Why do we think that these new fee hikes will be enough to cover the FDIC deficit?

Bair:       Well, we make a lost projections going out for a five year period, and we are currently predicting losses of $70b over the next 5 years. Most of that is going to be front loaded, this year and next. So, these projections can be as much art as science. But we have a lot of economists and examiners who work together to make these projections. And we have been doing it for many years. So I am comfortable. I think that they are as good as they can be, and we are raising assessment premium to make sure that our reserves, our industry funded reserves, stay in positive territory throughout the year. We may have to do another assessment in the 4th quarter, but we will have the most recent data to make a decision at that time.

Jim:       The Washington Post talked about a dispute between you and the controller. Talking about who should really have to bear the brunt of these additional fees. Where some people feel that the smaller community banks should do it. I mean isn’t it true that if it weren’t for TARP, we would be hopelessly in favor of the big banks paying the fee?

Bair:       Well, we took a lot of factors into account. We came up with a hybrid approach. So we used our assets, as opposed to domestic deposits, for the assessment base. Which shifted the burden somewhat to larger institutions, by about 10%, not an inordinate amount. But we do think that there is an equity argument, yes, we have all of these government programs. The TARP capital investments, our debt guarantee programs, all of the Fed equity guarantee facilities, that have raised 100’s of billions, if not trillions of dollars, primarily that have helped save the lives of large institutions. So we do think that shifting a bit of the burden to them is equitable, and, so we think that it was fair. We tried to balance all of the comment letters, and I am comfortable with the approach that we came out with.

Jim:       Alright, earlier you are quoted as saying that some banks should have to change management. Could you tell me what the criteria is to be able to give some managers the hook?

Bair:       Well, yes, that was in response to a question. I think that we look as part of the capital plans that are being required of the 19 institutions that were stress tested, that we said in our inter-agency statement that the boards and management should review the adequacies and the capabilities of the boards and management. Are they doing a good job? Could they be doing a better job? Are there others, perhaps, that have better skill sets to manage the bank thru this crisis? We think that this really is the job of the board, first and foremost of the board to make sure that the senior management is the right leadership team to lead your organization. So we look to the boards, and the management, to come back to us with plans. But, yes, we want rigorous review of the management capabilities. And to make sure that they have the right mix there, and in some cases, they may not.

Jim:       Chairman Bair, why should we trust boards?… For instance, we had the absolutely worst management I have ever seen of a major bank, Washington Mutual, repeatedly, repeatedly okayed by a board of directors that was allegedly supposed to be… I am trying not to use the word honest, because that would reveal me not as a statesman… but lets just say they are supposed to be critical of pay. But instead they just kept re-upping the CEO. How can we trust boards?

Bair:       Well, boards need to do their jobs. We all need to do their job. And their primal obligation is to make sure that the executive management, the leadership at the top, is the right team in place to run that organization. If not, then they need to make changes. And the boards themselves need to have the right skill set, so we need people with experience in bank management. In dealing on bank boards. In dealing in a stressed credit environment. So we want to review both the composition of the board, as well as the executive management. But really it should be the job of the regulators to make sure that there is scrutiny of the process, whether the boards or managements are doing their jobs. We should not do their jobs for them. That is what they are there for, that is what they are paid to do.

Jim:       Take a bank like Citigroup, which everyone knows is just a gigantic mess. That board has not been scrutinized by the FDIC or anybody else. The board that checked off on every bad decision on a major bank, still sitting pretty, still making a lot of money.

Bair:       I cannot comment on any individual open operating institution, I am sorry.

Jim:       Okay, can you tell me why it takes so long to close zombie banks like Indy Mac, or recently Bank United, when we all know… you and I know, we can all read balance sheets… I took a couple of years of accounting… you and I both know that that bank was making hideous loans for so long. Why did it take so long to close them?

Bair:       Right. Well, I think timing is one of judgment. And I think one of the things about this crisis that is different from the S&L days, is most of these losses are already cooked. So even if the bank stays open awhile, they are on a downward spiral, it really does not increase our losses that much. Unlike the S&L days, when we had S&L’s going out and making high risk loans trying to grow their way out of it. I think these institutions for the most part, not all, but for the most part are, and we work with the primary regulators to make sure that this is the case, are under a close supervisory attention already. But it is, we do like to try to market these institutions prior to their being closed by their primary regulator. That helps assure more of a seamless transition, it helps depositors, it helps borrowers too. So we can facilitate that. We like to take some time in advance to market it and try to sell it as a whole bank institution, which makes it better for the consumers and the borrowers. But we do closely monitor this, and certainly we also weigh in the balance any potential increase in our resolution cost, thru the timing, but I think for the most part that the staff has managed it well. But it is a difficult decision. You also do not want to close an institution prematurely, if you do that, if it could be acquired on an open bank basis. That is always best for the FDIC, then that does not cost us anything. So we want to be careful not to prematurely close, as well. But, again, like all things it is a matter of judgment.

Jim:       Okay, but we have a whole bunch of institutions between the range of $5b and $25b that are screwing up the profitability of the system. You can go to a lot of web sites, it is all public. And you see that some of these banks are offering much higher rates for deposits than others. We know that these banks are killing profitability and hurting the system. We do we not seize them?

Bair:       Well, I will tell you that you should look at our board meeting on Friday, because we are going to be finalizing some rules to try to get a better handle on some of these high rate deposit takers. We do not like those, we do not like high rate deposits. They cost us a lot of money. It is very difficult to sell off those deposits if we have to dissolve an institution that is paying those high rates. So we are going to be more aggressively using the tools that we have to try to get those deposit rates down, and we will be finalizing it all on Friday just for that very purpose.

Jim:       Alright, Financial Times took your organization to task this morning talking about private equity. And perhaps they should not be a consortium of Blackstone and Carlisle and others, that maybe they should be made to compete against each other. In order to be able to bank united. And maybe we did not give the taxpayer a fair shake by not having competing interest by this bank.

Bair:       Well, we did have a competitive process with Bank United, actually we had three bidders in. And this was by far, the best deal for us, given the terms of our bid package. So there was a competitive process. If the Financial Times has ideas to bring in more bidders, I would be happy to do that. I think we are pretty thorough already. We very aggressively market and reach out to institutions and investors that have expressed interest, particularly in a geographic area or what have you, so we are on the ground all the time trying to solicit bidding interest. And there was a multiple bidding process and this was the best bid that we received given the bid package that was put out. So we are doing the best that we can. If people have other suggestions, I would welcome them. But I think the reality is that a lot of the larger banks are capital constrained to make these acquisitions, so we have to expand those who are illegible to bid. But we also want good corporate citizens bidding on these banks, those are committed to operating them on well regulated banks. As prudent, safe, and sound banks. And are willing to serve as a source of strength to those institutions. So, but I think overall we struck the right balance. We are going to be working on some generic guidance to help provide clarity about when non-traditional acquires a bank, such as private equity, their appropriate role and about how their bidding process needs to be structured and how their ownership structure needs to be maintained to make sure that they will be a source of strength for the bank.

Jim:       Can you explain to me why Illinois and Georgia have a higher percentage of under capitalized banks than even some of the larger states like California, Texas, Florida?

Bair:       Well, Georgia is an interesting case. I think that we just ended up with too many banks in Georgia. And there was a lot of higher risk, commercial real estate, and construction development lending. And so we are dealing with that now. It is a painful process. I know that we have had a lot of bank closings in that state. And we have done the best that we can to try to sell them off or to transition them into other relationships with acquired institutions where we can. But, I do not know, that is kind of the situation when I arrived at the FDIC. And there were just a lot of banks in Georgia, in retrospect, too many banks. There may be some lessons learned for the FDIC in terms of granting deposit insurance. And maybe about chartering banks. I think one of the lessons going forward is that we need to be careful even in very healthy robust economic times for the banking sectors. We need to be careful about giving out bank charters and deposit insurance.

Jim:       Alright, one last question. I know that I look at the stock market every day, and I am sure that that is not the prevue of the Chairman, but there are banks, banks like a Chorus Bank of Illinois. Selling for .38 cents. Massive insider selling. Why is that bank allowed to stay in business when a Washington Mutual or a Wachovia, at one time considered to be very solid institutions, were immediately pushed to other banks. Chorus Bank seems like an accident waiting to happen.

Bair:       Well, again, I do not comment on open an operating institutions. I can speak generally to the criteria process that is used when a bank is closed. First of all, the decision is almost always made by the primary regulator, the chartering entity. And it can be based on a variety of factors, one is funding. If they cannot make their funding obligations, if they can’t make their depositor obligations, or their creditor obligations, that can be the basis for closing a bank. If their capital is solvent, obviously, and a prompt and corrective action, that can be grounds. And generally if they are operating in a unsafe and unsound manner, they can be closed. But generally, if a bank is meeting regulatory capital standards and can fund itself, then it is more difficult to determine grounds to be closed by their primary regulator. But those are the statutory criteria that we use.

Jim:       Alright, thank you Chairman Bair. Great to have you on the show.
 

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