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Tags: Bair | banks | JPMorgan | FDIC

Sheila Bair on C-SPAN – Part III

By    |   Wednesday, 07 August 2013 01:56 PM

As the interview continued with Greta Brawner, it was time to plug the paperback version of former FDIC Chairman Sheila Bair's highly promoted book, "Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself," which is due out in September.

My comment: Perhaps it's time for urgent regulatory action to restrict the length of book subtitles. To heck with the First Amendment. At a minimum, this book should win an award for Most Narcissistic Title, or Most Pretentious. I hope the industry has awards in these categories. Objectively, she probably grabbed the wrong part of the bull, perhaps the tail or just one of the horns. Or maybe she grabbed Tiny Tim Geithner by the horns. The best part of the initial release was to see these two go at it. Bair seems to be at her best when she's tangling with Tim. This could have potential as a reality show.

Readers looking for summer reading might consider Neil Barofsky's book, "Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street." The title could have read, "While Rescuing Wall Street, with the Help of K Street, then Grabbing a Bite on M Street, before Catching a Train at Union Station and Heading for Times Square."

Q: by tweet: How is funding controlled for the bank regulators?

A: Bair responded that the FDIC funds itself through deposit insurance premiums, while the Fed is funded through open market operations and charges no fees to banks, and the Office of the Comptroller of the Currency (OCC) is funded through examination fees charged to banks, a system she said "has strengths and weaknesses."

She concluded, "At the end of the day, if you want strong, credible regulators, they need to have the capacity to fund themselves, because with the SEC [Securities and Exchange Commission] and CFTC [Commodity Futures Trading Commission], who have to go through the appropriations process, it creates a lot of uncertainty." She added that regulation requires spending on information technology systems and that "lobbyists play games" by attaching amendments to funding legislation to prohibit funds from being used to enforce regulations they don't like.

She acknowledged that Congress is disappointed by mistakes of the SEC and CFTC, but she argued that they would be better regulators if they could fund themselves.

My comment: This is an example of the difficulty readers will have in following Bair's arguments and why her words have to be closely parsed. Sometimes she is least authoritative when speaking about the agency she used to run and most accurate when criticizing other regulators, such as the Treasury and Federal Reserve.

To say that the FDIC is funded through premiums charged to the banks is only partly true and a bit aspirational. When the banks were in a profitable stage of the last cycle, they established the principle that they didn't have to pay premiums, so when the next wave of failures hit, it took the fund below its statutory minimum, even as Congress was expanding the coverage of premiums and extending coverage on an ad hoc basis during the 2008 episode of the ongoing financial crisis.

Bair conveniently omitted that the FDIC has a draw on the Treasury that serves as a de facto subsidy to the industry and that under the current funding plan, the fund will not return to the statutory minimum until 2017. Certainly, she is right to point out that the Fed does not charge the industry for its regulatory activities. If these are worth anything, which is questionable, the industry should be charged.

The weakness that Bair alluded to in noting that the OCC is funded through examination fees probably refers to the fact that the banking agencies are notoriously captured by the banking industry. By parsing her words, one can glean that Bair realizes the current system of bank regulation is not credible. Former Comptroller of the Currency Jerry Hawke used to say that while no one would have designed the current system of bank regulation, it should be left in place, because it works.

However, after the experience with the 2008 episode, it is past time to think about how the system could be restructured to be credible by virtue of being independent of the industry. At a minimum, "too big to fail" banks should not be allowed to pay more than nominal salaries to top executives, dividends to shareholders and buy back stock while the FDIC fund remains below the statutory minimum level.

Q: Democrat from New Jersey: Since 2008, the too big to fail banks have gotten even bigger and engaged in crazy activities like Goldman Sachs moving aluminum and JPMorgan Chase manipulating the energy market. Isn't there any impetus to get these banks to shrink and to reinstate Glass-Steagall?

A: Bair responded that substantially raising capital requirements would create pressure to downsize the largest banks, and she asserted that the resolution planning process would require "teasing out of risky activities."

She stated bluntly that the bill introduced by a group of senators led by Sen. Elizabeth Warren, D-Mass., "won't go anywhere." She defined the issues as not of size but of complexity. Bair contended that "even with a very large bank, you can deal with it through traditional 'processeez,' but when they get into multiple business lines, they become extremely complex, very difficult to manage and unwind."

Q: Brawner invited Bair to comment on a report in the Financial Times that the Federal Energy Regulatory Commission (FERC) has charged JPMorgan with rigging power markets in California and the Midwest. She asked whether $400 million is a big enough fine, then she also showed a Wall Street Journal editorial accusing the FERC of squeezing Barclays for $430 million and JPMorgan for $410 million, and she referred to the prospect that Congress might look at how the Federal Reserve approved these activities for bank affiliates.

A: Bair demurred on the ground that she has not seen enough information to make a judgment, but she called it "astonishing" that the Fed approved these activities and said Congress should look into how the Fed approved them.

My comment: This is another example of why Bair's words need to be parsed. If the regulators have "traditional processeez" to deal with these risky activities, why have they never done anything to restrain the banks and at least force them to internalize the costs of these risks?

Instead, the bank regulators have acted as extensions of the industry lobbies to prevent regulators from implementing "pushout" rules that require activities that are inappropriate for institutions supported by the federal safety net, such as trading, be conducted through separately capitalized subsidiaries of the holding company.

Please note that I have coined the word "processeez" to denote that regulators use this pronunciation when they want to create the impression that this is really serious stuff, these really work, even if, in reality, they may be only cosmetic at best.

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As the interview continued with Greta Brawner, it was time to plug the paperback version of former FDIC Chairman Sheila Bair's highly promoted book, "Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself," which is due out in September.
Wednesday, 07 August 2013 01:56 PM
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