Sheila Bair's Irony of History

Tim Cavanaugh | August 11, 2009

If you spend any time watching the small-enough-to-fail financial market, you're familiar with the media's swooning love affair with Federal Deposit Insurance Corporation Chairwoman Sheila Bair. Only Bair, we're told, has the courage to stand up to the too-big-to-fail mentality that has hobbled the government and calcified the credit economy.

The Bair version of thinking small, of course, isn't about keeping banks small by refusing to give them free money and extend every possible advantage in lending terms and monetary policy. Instead, it's about using procrustean regulation to make sure they can't outgrow Uncle Sam's bed.

In a fawning profile earlier this summer, The New Yorker's Ryan Lizza depicted Bair as a Quixotic fighter for justice in a hard political universe, citing her (unsuccessful) effort to impose more restrictions on Citigroup, her (unsuccessful) effort to get President Obama to toughen his position on regulation, her willingness "to take her fights public" (i.e., to reach out to pliable journalists), her status as the "only voice" in the administration to express "tremendous popular discontent," and her Teddy Rooseveltian outrage at (in Bair's own words) "the inequities of how the smaller institutions are dealt with versus the larger institutions."

Smaller is better -- who could say no? Nobody, according to a recent The New York Times headline that informs us, "You Gotta Love Sheila Bair."

Maybe we gotta, but it's pretty hard ta, when you measure what's actually happening to the U.S. banking system on Bair's watch against what she claims to want. On Friday, Community First Bank of Prineville, Oregon became the 72nd bank failure of the year. This Friday will bring a few more liquidations. Corus Bank continues its Rasputin-paced death. The roster of other teetering banks is vast, and last month Bair discussed the possibility that another 500 banks could fail. Now comes this from Congress' TARP watchdog:

According to a report from the Congressional Oversight Panel, which is charged with overseeing the $700 billion Troubled Asset Relief Program, or TARP, the 18 largest financial institutions with over $600 million in assets would "be able to deal with" whole-loan portfolio losses projected in an analysis the group completed.

However, the report's analysis of troubled whole loans -- based on a model developed by SNL Financial -- suggests they pose a threat to smaller public banks, those with $600 million to $100 billion in assets.

What do all these dead and dying institutions have in common? They're not tall enough to ride the government's fun train. Bair's administration-straddling tenure is a period of punctuated equilibrium, in which the U.S. banking industry is rapidly evolving into a system with no small players and a class of mammoths that will be dependent on taxpayer largesse forever.

Bair's fans would say that none of this is her fault, that the FDIC doesn't have the resources to cope with large bank failures, and that fighting the good fight deserves praise. That may be good enough for government, which is paved with good intentions. But it goes against contemporary pop psychology: If your actions keep leading to result B, it doesn't matter that you claim to want result A; your actions prove you want result B. (And why shouldn't you? It's easier for a national regulator to deal with a few big institutions than with many little ones.) The New Yorker and The New York Times tell us Sheila Bair wants to stop the public/private giganticization of banking. But former New York Giants coach Bill Parcells tell us that you are what your record says you are.

Comments

|8.11.09 @ 9:10PM|#

The FDIC is out of money. If you're relying on them to protect your deposits in an insolvent bank like JPMorgan, Bank of America, Citigroup, or Wells Fargo, you're flirting with disaster. Not that there are many sound banks in America of any size these days.

|8.11.09 @ 9:10PM|#

But it goes against contemporary pop psychology: If your actions keep leading to result B, it doesn't matter that you claim to want result A; your actions prove you want result B.

Really? Contemporary pop psychology sounds pretty stupid.

|8.11.09 @ 9:17PM|#

#1: new institutions will start up to fill in gaps that either exist now or will exist in the future.

#2: it's a weak argument, but the TBTF are just dang hairy to unwind in a felled swoop over the weekend. A 5-10 year plan should be implemented to reverse the repeal of Glass-Steagal (thank you Robert Rubin) & begin to spin off the commercial banks from their investment bank counterparts (C, BAC, JPM)

#3: There exist plenty of smaller banks & BHC throughout this country that are privately owned & locally managed. These have not or will not go under.

#4: Implement another rule limiting amount of deposit share...JPM + WFC + BAC dominate the national market (broad terms anyway)

#5: Don't count out a foreign bank, like Santander, for making more inroads into the US market.

At best, Bair comes across well perhaps she has zero tie to wall street or Goldman specifically. Also at best, her organization is trying to manage the much as best that it can without being completely politicized in the process

|8.11.09 @ 9:20PM|#

# 6: vote with your money / business and join a credit union if complete unhappiness describes the banking relationship for you / yours.

There are options...just gotta shop

|8.11.09 @ 9:22PM|#

I thought libertarians were opposed to bank rescues? You are saying here that you want small banks rescued also. To what purpose?

Steve

|8.11.09 @ 9:24PM|#

I thought libertarians were opposed to bank rescues? You are saying here that you want small banks rescued also. To what purpose?

Who has said that?

The question of whether banks should be rescued is complicated by the messy fact that for the past 80 years the government has been promising depositors they can never lose a dime, no matter how many crappy loans their bank makes with their money. Simply letting that system go tits up overnight might not be the right approach here.

Punishing success?|8.11.09 @ 10:05PM|#

Rewarding failure.

|8.11.09 @ 10:06PM|#

But it goes against contemporary pop psychology: If your actions keep leading to result B, it doesn't matter that you claim to want result A; your actions prove you want result B.

Yes, well, classical logic says that just because you perform an action and result B happens, doesn't meant that your actions led to it. I like to call it post hoc ergo propter hoc.

This argument, Tim Cavanaugh, is worthy of LoneWacko.

|8.11.09 @ 10:09PM|#

Bair's administration-straddling tenure is a period of punctuated equilibrium, in which the U.S. banking industry is rapidly evolving into a system with no small players and a class of mammoths that will be dependent on taxpayer largesse forever.

Citation, please?

The roster of other teetering banks is vast, and last month Bair discussed the possibility that another 500 banks could fail.

Sounds very impressive until you realize that over 500 also failed in 1989.

The FDIC is winding up failed banks. That's its job. That doesn't mean that it made the banks fail. The target of your ire should be elsewhere.

BakedPenguin|8.11.09 @ 10:13PM|#

That may be good enough for government, which is paved with good intentions. But it goes against contemporary pop psychology: If your actions keep leading to result B, it doesn't matter that you claim to want result A; your actions prove you want result B.

What governmental agency does this not describe?

hmm|8.11.09 @ 10:34PM|#

This Friday will bring a few more liquidations.

It's more nefarious than just a "liquidation." The FDIC pushes P&A (purchase and acquisition) over payout for damn near every takeover. Who do you think does the purchasing and acquiring of the good assets?

Sounds very impressive until you realize that over 500 also failed in 1989.

I have a quote somewhere from Seidman talking to a group of MBA students (or it might have been a banking school) near the beginning of the 1989 crisis. He was asked how many institutions he foresaw being closed. He responded with an exact number just over 500. (532 I think or close) When asked how he figured such an exact number he said he took the maximum number of institutions he could close per his current staff per week and multiplied it by 52. He wasn't off by much.

Paul|8.11.09 @ 10:46PM|#

The New York Times headline that informs us, "You Gotta Love Sheila Bair."

Does one need read further to know there would be a problem?

Paul|8.11.09 @ 10:48PM|#

Corus Bank continues its Rasputin-paced death.

That's a literary win, Mr. Cavanaugh.

MJ|8.11.09 @ 10:52PM|#

"If your actions keep leading to result B, it doesn't matter that you claim to want result A; your actions prove you want result B."

It proves you are either lying about wanting result B, or you have no idea how to accomplish result B. Don't assume malice when a bad result can be explained by incompetence.

mr simple|8.11.09 @ 11:18PM|#

But how does this prove the existence of god?

|8.11.09 @ 11:41PM|#

But it goes against contemporary pop psychology: If your actions keep leading to result B, it doesn't matter that you claim to want result A; your actions prove you want result B.

I mean, honestly, isn't that exactly what LoneWacko keeps saying about Reason and libertarians not meaning their libertarian and anti-welfare state rhetoric? "Reason has been saying the same thing for years, and hasn't been able to stop the growth of the welfare state. Thus it doesn't matter that Reason claims to want limited government, this proves that Reason wants its arguments to fail."

Paul|8.12.09 @ 12:57AM|#

Thus it doesn't matter that Reason claims to want limited government, this proves that Reason wants its arguments to fail."

Except that Reason isn't in charge of anything. Sheila Bair, on the other hand...

Tim Cavanaugh|8.12.09 @ 3:01AM|#

The FDIC is out of money. If you're relying on them to protect your deposits in an insolvent bank like JPMorgan, Bank of America, Citigroup, or Wells Fargo, you're flirting with disaster.

I hear this a lot, and it's true the FDIC as funded by assessment rates doesn't have enough to cover a big bank failure. But couldn't you have solved that by not putting money into TARP and instead making it a reserve for the FDIC? The government has sunk bazillions into AIG, a private insurance firm that it had no mandate to guarantee. It could certainly have done the same for FDIC, a federal insurance firm that carries an explicit federal guarantee. (Not that there should be an FDIC in the first place, but still...)

Tim Cavanaugh|8.12.09 @ 3:06AM|#

Who do you think does the purchasing and acquiring of the good assets?

I haven't read the details on every bank failure, but my impression is that it's usually another medium-sized bank, not a megabank.

And P&A seems like the best way to handle it, right? I mean, rather than having the taxpayers pay 100 percent of the deposits? In most cases the FDIC ends up only picking up a fraction of the deposits -- which is another argument for letting more big banks fail.

Tricky Prickears |8.12.09 @ 7:09AM|#

Chair Bair is no the only one.

Congress Must Address Excessive Concentration

ICBA [Independent Community Bankers of America] remains deeply concerned about the continued concentration of banking
assets in the U.S. The current crisis has made it painfully obvious that the
financial system has become too concentrated, and - for many institutions - too
loosely regulated.
Today, the four largest banking companies control more than 40% of the nation's
deposits and more than 50% of the assets held by U.S. banks. We do not
believe it is in the public interest to have four institutions controlling most of the
assets of the banking industry. A more diverse financial system would reduce
risk, and promote competition, innovation, and the availability of credit to
consumers of various means and businesses of all sizes.
Our nation is going through an agonizing series of bankruptcies, failures and
forced buy-outs or mergers of some of the nation's largest banking and
investment houses that is costing American taxpayers hundreds of billions of
dollars and destabilizing our economy. The doctrine of too big - or too
interconnected - to fail, has finally come home to roost, to the detriment of
American taxpayers. Our nation cannot afford to go through that again.
Systemic risk institutions that are too big or inter-connected to manage, regulate
or fail should either be broken up or required to divest sufficient assets so that
they no longer pose a systemic risk.

Read the whole thing here (.pdf)

|8.12.09 @ 8:58AM|#

Regarding the acquirer of any failed institution, I believe the FDIC folks keep a listing of banks or BHC approved for bidding / buying in what is labeled here as the P&A...yet again the smaller to medium sized banks stand to gain share in this market.

As for the deposit fund, just call it fortuitous that a Wachovia or Washington Mutual were rushed into the arms of a waiting acquirer...in the case of Wachovia eventually WFC. Otherwise the deposit insurance would likely be quite under-funded.

|8.12.09 @ 9:41AM|#

I haven't read the details on every bank failure, but my impression is that it's usually another medium-sized bank, not a megabank.

Sure, so how are you arguing that the FDIC letting small to medium sized banks fail (which almost always has meant P&A) has led to concentration of the industry?

And P&A seems like the best way to handle it, right? I mean, rather than having the taxpayers pay 100 percent of the deposits?

Sure, which is why they're doing it.

In most cases the FDIC ends up only picking up a fraction of the deposits -- which is another argument for letting more big banks fail.

Just because medium sized banks are able to purchase the assets of other small to medium sized banks doesn't meant that they would be able to purchase the assets of giant banks when the giant banks are undercapitalized. And it especially doesn't make it Sheila Bair's fault.

Russ 2000|8.12.09 @ 11:13AM|#

So the New Yorker's favorite member of Obama's economic team is the one appointee left over from the Bush administration.

hmm|8.12.09 @ 11:15AM|#

It is usually a medium or large bank. Who buys those banks when they fail? The assets move up the chain. Before long you end up facilitating the very reason the FDIC prefers P&A, they can't payout. Credit unions used to use private insurance, but when that ran into some problems the government moved the credit unions under the FDIC. The FDIC is so underfunded that it can't pay out, so it fire sales assets to other banks, the larger the failed bank the larger the bank you need to buy the assets. The larger the banks get the more banks you can't payout on and have to P&A out. Until you get to BofA, Citi, WFC and so on. At the same time the FDIC, Fed, and comptroller all raise the bar to enter banking. It almost looks like a manufactured push to a Canadian system of banking.

When I interviewed with the FDIC the one thing that struck me as funny was they were currently trying to figure out how to reduce the 250 insurance level.

Banking in the US has one problem. Attitude. The days of a conservative uptight guy in a suit who won't let go of a dime running the bank are gone. The focus on the income statement and Q profits replaced the focus on the balance sheet and the long run ability to generate cash flows. Banking is different than other businesses. That doesn't need there need to be more rules, there needs to be better people. Hell, even minimum rules like cap adequacy ratios back fire since banks looking to maintain short term profits will see those minimums as a false floor. The reality being that it's possible that minimum is below what the bank should be maintaining. But the presence of it creates a false sense of security for all.

If an example of the failure of government intervention is needed you just need to look at banking.

|8.12.09 @ 1:54PM|#

GM and Chrysler, anyone ?? Government intervention at it's worse, at least, has a finite stopping point in the bank/financial system. For all the focus on the BAC and Citigroups of the US, there are always lesser known institutions that stay close to their knitting...those institutions just aren't big enough for huge marketing campaigns or (most likely) those entities are regional players.

Far too much attention / focus is given to the biggest players, perhaps because financial news outlets drone onward about the short-term performance proxy for shares & earnings.

Vote with your dollars...banking is a voluntary function. Visit a local co-op or start one.

|8.12.09 @ 7:17PM|#

Once upon a time a psychologist said, "men look for someone to blame and women look for solutions". Perhaps men look for a woman to blame and now they have found Sheila Bair. But it doesn't solve our economic woes does it.

Kolohe|8.12.09 @ 11:57PM|#

To her credit, Ms. Blair ensured the FDIC was better prepared for a rash of bank failures by hiring a bunch of people about a year prior to the wave. (this was documented on calculated risk)