Sheila Bair’s Double Standard

Yet another interesting set of pronouncements from the FDIC’s outgoing Chairman, Sheila Bair.  It seems that the Chairman is once again wrapping herself in the blanket of the US taxpayer, taking just a few more final swings at the banking community that her department oversees.

In today’s Financial Times interview, Ms. Bair suggests that the standard of “Too Big to Fail” should have a big stake run through it, so that it is clear once and for all, that taxpayers will not be responsible for bailing out big banks that run into trouble.  She is suggesting that the banks should “ring-fence” their most risky activities, so that taxpayers will be protected from excessive risk.

We almost can’t believe that she said ring-fence.  We read the interview several times to make sure we weren’t somehow mistaken.

Is this coming from the same person that has led an FDIC that has campaigned against the development of a legislative framework for a covered bond market in the US?  Isn’t the notion of a “ring-fence” around assets pledged to the holders of covered bonds issued by banks, exactly what the FDIC is contesting. 

Oh….. we get it!  The FDIC wants to be sure it can control what assets and businesses are valuable and which are not.  They want to control what they are obligated to stand behind and what they are not.  This almost sounds like a private sector insurance company’s business model.

Isn’t putting a ring-fence around certain assets, exactly what the entire securitization industry was built on.  Financial institutions should have the right to sell both good and bad assets from their balance sheet.  The “true sale” standard withstood a test of more than 30 years in the market.  Now the FDIC wants to use a ring-fence to pick and choose what it backs but won’t afford the same freedom of choice to their members.

The problem with wrapping oneself in the blanket of the taxpayer is that it is the taxpayers which are hurt the most when the markets collapse.   The government “loans” that were made to the financial services industry resulted from a very, very complex set of events that transpired over many years and these events demanded that the Federal Government step up in the very same way it does after a major natural disaster.

 Keep in mind that it is the banks themselves that fund the FDIC’s insurance fund and while things were very good during the past 15 years, we are sure that the FDIC was very happy to collect the premiums that supported that fund. 

We think it is easy to forget just how desperate and bleak those days were in late 2007 and 2008 and just how important it was for all taxpayers that the financial system was able to fall back on the same type of safety net that every important part of the “infrastructure ” in this country relies upon.  There will always be some things that are just “too big to fail” or put another way, too big and too important for us to not try to save. 

Ms. Bair’s reference to Lehman in her interview as an example of how she suggests it could have been done differently is rather ironic.  Given the enormous gain that Barclay’s made as a result of the fire sale price it paid for Lehman’s assets, you have to continue to wonder if the US Government should have stepped in sooner and, if they had, would the overall price tag that Ms. Bair is referring to been less; perhaps much less.

The Financial Crisis was/is a natural disaster in every sense of the word.  Quite simply, there were too many people, in too many parts of the economy (including regulators like the FDIC), involved in creating the mess to suggest it was anything different.  On that basis, it was exactly the right thing to step in and prop up the largest US (and Global) financial institutions in this time of disaster.  Without those institutions, there isn’t a U.S. economy to talk about.

If the Chairman and other regulators want to discuss whether a bank should be engaged in one business or another or discuss whether the insurance premiums for institutions engaged in certain activities are high enough, we think that is a different conversation; perhaps one that should be had.

However, we can only hope that both this discussion about “ring-fencing” certain businesses while severely restricting securitization and the beating of the “end too big to fail” drum will also ride off into the sunset in the coming months.

About markferraris
Managing Principal Orchard Street Partners LLC

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