Briefing Book
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BRIEFING BOOK Data Information Knowledge WISDOM SHEILA BAIR Location: Forbes, New York, New York About Sheila Bair .............................................................................. 2 Debriefing Bair ………………………………………………………….. 3 Bair in Forbes "The Need For Failure,” 05/27/09........................................... 7 "Short-Sellers Set For Flame Forum," 05/27/09……………… 9 “For Most Banks, Not Too Stressful," 05/07/09………………. 11 "A Captive FDIC," 04/15/09...................................................... 14 The Bair Interview ………………………………………………… 16 ABOUT SHEILA BAIR Intelligent Investing with Steve Forbes Sheila Bair is the nineteenth chairman of the Federal Deposit Insurance Corporation. She will hold that role for five years until July 2013. As the FDIC chairman, she has added programs to the agency including ones that provide temporary liquidity guarantees, increases in deposit insurance limits and systematic loan modifications to troubled borrowers. Before becoming FDIC chairman, Bair was the dean’s professor of financial regulatory policy for the Isenberg School of Management at the University of Massachusetts – Amherst from 2002 to 2006. While she was there, she served on the FDIC’s advisory committee on banking policy. Bair has also served as assistant secretary for financial institutions at the U.S. Department of Treasury, senior vice president for government relations at the New York Stock Exchange, a commission and acting chairman of the Commodity Futures Trading Commission and research director, deputy counsel and counsel to then Senate Majority Leader Robert Dole. Since becoming FDIC chairman, she has been named top Time Magazine’s “Time 100” most influential people list in 2009; she has also been awarded the John F. Kennedy Profile in Courage Award and the Hubert H. Humphrey Civil Rights award. In 2008, Bair topped the Wall Street Journal’s annual 50 “Women to Watch List”; that same year she was named the second most powerful woman in the world after Germany’s Chancellor Angela Merkel by Forbes magazine. Bair received her bachelor’s degree from Kansas University and a J.D. from Kansas University School of Law. She is married to Scott P. Cooper and has two children. - 2 - DEBRIEFING SHEILA BAIR Intelligent Investing with Steve Forbes Forbes: What is the greatest financial lesson you’ve ever learned? Sheila Bair: My 87-year-old mother is a classic "buy and hold" investor who would make Warren Buffett proud. Her investment returns always exceeded those of my father, to his eternal consternation. He actively traded his stocks and got decent returns ... but nothing like the returns my mother got by simply buying stocks of companies she understood and liked, and then holding onto them. This is also a lesson we've learn watching the financial sector. Too many financial institutions took risks they did not understand for short-term profit. So I'm a strong advocate of the "basics" and prudence when it comes to money. When the economy gets healthy again, I hope for a new "back-to-basics society." A new "old world" where banks and other lenders promote real growth and long- term value, where your generation rediscovers the peace of mind of financial security that comes from: thinking before spending, cutting up the credit cards, and maybe even living at home for a year to save some money to pay off student loans. You’ve opposed the Obama administration’s idea for one over-arching finance regulator. Why, and what do you propose in its place? It's now obvious that just being bigger isn't necessarily better. I don't mean to imply that there are no well-managed big banks. But when you have a handful of giants, with global reach, and a single regulator ... you're making a huge bet that a few banks and their regulator ... over a long period of time ... will always make the right decisions at the right time. So, instead of hoping that these risks will be competently managed ... we also need a "fail-safe" system where if any one large institution fails, the system carries on without breaking down. We need to reduce systemic risk by limiting the size, complexity, and concentration of our financial institutions. We need to create regulatory and economic disincentives aimed at limiting the size and number of systemically important financial firms. For example, we need to impose higher capital requirements on them in recognition of their systemic importance, to make sure they have adequate capital buffers in times of stress. We also need to impose greater market discipline by creating a legal mechanism for the orderly resolution of a large troubled institution. - 3 - The ad-hoc response to the banking crisis is because we don't have a playbook for taking over an entire complex financial organization. As we saw in the case of Lehman Brothers, bankruptcy is a very messy way to go. As you know, the FDIC has that authority but only for insured depository institutions. The FDIC has the experience and manpower to handle the task of taking over a large a nonbank institution. We need a special receivership process that is outside bankruptcy, patterned after the one we use for insured banks and thrifts. To protect taxpayers, a new resolution regime should be funded by fees charged to systemically important firms, and would apply to any institution that puts the system at risk. These fees should be imposed on a sliding scale, so the greater the risk, the higher the fees. In a new regime, roles and responsibilities must be clearly spelled out to prevent conflicts of interest. For example, Congress gave the FDIC backup supervisory authority and the power to self-appoint as receiver when banks get into trouble. I hope Congress acts soon. Nobody wants to go through another banking crisis like this one, and another ad hoc response. One way to organize a system-wide regulatory monitoring effort is through the creation of a systemic risk council (SRC) to address issues that pose risks to the broader financial system. Based on the key roles that they currently play in determining and addressing systemic risk, positions on this council should be held by the U.S. Treasury, the FDIC, the Federal Reserve Board and the Securities and Exchange Commission. It may be appropriate to add other prudential supervisors as well. The SRC would be responsible for identifying institutions, practices, and markets that create potential systemic risks, implementing actions to address those risks, ensuring effective information flow, completing analyses and making recommendations on potential systemic risks, setting capital and other standards and ensuring that the key supervisors with responsibility for direct supervision apply those standards. The standards would be designed to provide incentives to reduce or eliminate potential systemic risks created by the size or complexity of individual entities, concentrations of risk or market practices, and other interconnections between entities and markets. The SRC could take a more macro perspective and have the authority to overrule or force actions on behalf of other regulatory entities. In order to monitor risk in the financial system, the SRC should also have the authority to demand better information from systemically important entities and to ensure that information is shared more readily. - 4 - The creation of a comprehensive systemic risk regulatory regime will not be a panacea. Regulation can only accomplish so much. Once the government formally establishes a systemic risk regulatory regime, market participants may assume that the likelihood of systemic events will be diminished. Market participants may incorrectly discount the possibility of sector-wide disturbances and avoid expending private resources to safeguard their capital positions. They also may arrive at distorted valuations in part because they assume (correctly or incorrectly) that the regulatory regime will reduce the probability of sector-wide losses or other extreme events. To truly address the risks posed by systemically important institutions, it will be necessary to utilize mechanisms that once again impose market discipline on these institutions and their activities. For this reason, improvements in the supervision of systemically important entities must be coupled with disincentives for growth and complexity, as well as a credible and efficient structure that permits the resolution of these entities if they fail while protecting taxpayers from exposure. What is the status of the PPIP program now? You’ve said that banks have been able to raise a lot of capital privately. Banks have been able to raise capital without having to sell bad assets through the LLP, which reflects renewed investor confidence in our banking system. As a consequence, banks and their supervisors will take additional time to assess the magnitude and timing of troubled assets sales as part of our larger efforts to strengthen the banking sector. As a next step, the FDIC will test the funding mechanism contemplated by the LLP in a sale of receivership assets this summer. This funding mechanism draws upon concepts successfully employed by the Resolution Trust Corporation in the 1990s, which routinely assisted in the financing of asset sales through responsible use of leverage. The FDIC expects to solicit bids for this sale of receivership assets in July. The FDIC will continue its work on the LLP and will be prepared to offer it in the future as an important tool to cleanse bank balance sheets and bolster their ability to support the credit needs of the economy." You’ve voiced concerns in the past about whether the amount of funds in the FDIC will be adequate to cover potential banking losses. What do you think about this now? The U.S. banking industry has the willingness and capacity to provide the necessary backing to the insurance fund. The entire capital of the banking industry stands behind the fund, as does the full faith and credit of the United States government.