WSJ takes Bazooka Hank and Sheila Greasy-Hair Bair to the woodshed:
http://online.wsj.com/article/SB12198826....Calling Hank Paulson
August 28, 2008; Page A14
The good news about the year-old credit crunch is that we are finally getting to the main event, which is the condition of the banking system. The bad news is that federal regulators are still trailing events, and prolonging financial trouble and uncertainty in the bargain.
Exhibit A is the revelation by Federal Deposit Insurance Corp. Chairman Sheila Bair that her $45 billion deposit insurance fund may not be adequate to pay off account holders as banks continue to fail. This has been inevitable for months, but neither Ms. Bair nor Treasury wanted to admit the truth in public for obvious political reasons. Yet now we learn that the insurance fund shrank by $7.6 billion in the second quarter, bringing its reserve ratio well below the minimum required by Congress.
Banks are supposed to pay premiums into that fund, with riskier banks paying higher premiums. But for most of the past decade most banks were paying no premiums at all, as bank failures were few and the living was easy. Last year the FDIC started charging again, but bank failures -- and insurance payouts -- are up sharply.
This has Ms. Bair talking about sharp increases in premiums, with the steepest being levied against the banks that are most in danger -- and so most in need of conserving their capital. Ms. Bair cannot be held entirely accountable for this bizarre state of affairs. "Reforms" of the deposit insurance fund in 1996 and again in 2005 required the FDIC to charge banks nothing, or close to it, when they're flush with cash, and to dun them hardest when the tough times hit. The banks themselves also lobbied hard to keep their contributions low in the fat years. Now they're screaming about having to pay more amid a nearly 20% increase in problem loans.
In its quarterly report released Tuesday, the FDIC said bank profits are down nearly 90% and loan-loss reserves are soaring -- but delinquencies are rising even faster than reserves. The number of banks on the FDIC's trouble list is up to 117 from 90, while the assets represented by those banks tripled to $78.3 billion between March and June. IndyMac wasn't on that list before it failed, and that could cost the FDIC as much as $9 billion more.
Ms. Bair also disclosed that she might need to tap the Treasury for short-term financing to maintain "liquidity." But she added that she didn't see any need for longer-term help from the Treasury or taxpayers, despite her growing list of problems and a shrinking pool of potential buyers for the assets the FDIC keeps collecting.
This is not the way to reassure depositors and anyone else amid a credit crunch. As long as we have federal deposit insurance, by all means let the banks pay for it themselves. But the perverse way that premiums are collected needs to be fixed by Congress -- and regulators like Ms. Bair and Treasury Secretary Hank Paulson ought to be saying so.
In the meantime, Ms. Bair could do the country a favor by making it clear that the FDIC is prepared to meet its obligations to depositors no matter what -- and asking Congress for an appropriation to do so. The longer we have to wait for that day, the more jittery people will become watching the insurance fund's balance decline quarter after quarter. Taking more money from the most troubled banks only makes more bank failures likely. And taking money from banks that are going to fail anyway, only to pay it back to depositors after the fact -- and still coming up short -- is merely dumb.
Mr. Paulson could also help if he used some of his own political capital to run interference for Ms. Bair, rather than making her plead poverty in public. One thing we've learned about Mr. Paulson is that for all of his reputation as a tough Wall Street guy, he's not a general who leads his troops up San Juan, er, Capitol Hill. No doubt having to ask Congress for more money for the FDIC is unpleasant, but if he doesn't do it, his successor will have to.
We wouldn't rule out something like the Resolution Trust Corp. that was designed to acquire and dispose of financial assets during the savings and loan meltdown of the early 1990s. That's normally the FDIC's job. But if the losses get too big, that bureaucracy can get overwhelmed. It can also succumb to political pressure not to sell assets quickly, which can prolong the crisis. A case in point is Ms. Bair's attempt to use IndyMac as a kind of social experiment, rewriting most of its delinquent loans to test her theories about how widespread loan modification could make the housing crisis vanish. With the right leader and a mandate to go out of business, a new RTC could contribute to a faster end to the mortgage and banking woes.
The same goes for pulling the trigger on Treasury's new authority to stabilize Fannie Mae and Freddie Mac. Mr. Paulson keeps saying he doesn't want to use that power, hoping that private investors will give the mortgage giants enough cash to spare him from having to make some hard decisions. This may be considered canny politics at Goldman Sachs, but it's a terrible way to govern in a financial mess. Letting Fan and Fred twist in the marketplace has only added to the stress in the credit markets and increased borrowing costs for nearly everyone.
Mr. Paulson gives the impression of wanting desperately to pass these problems along to someone else. If that's true, he should have stayed on Wall Street. His labyrinthine proposal earlier this year to redesign the entire financial bureaucracy was a nice thought experiment for the future. But it does nothing to address the immediate task at hand: stabilizing the current financial system.
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