FDIC Head Differs With Geithner On Handling Failed Big Banks

Sheila Bair, chairwoman of the Federal Deposit Insurance Commission, just won't get with the program whether she's working alongside a Republican or Democratic administration.

Bair made a point of not falling into line when the Treasury Secretary was Hank Paulson under the Bush Administration. Then she pushed for more more taxpayer dollars to be directed to homeowners defaulting on their mortgages instead of all the money going to financial institutions.

On Wednesday, she was publicly disagreeing with Paulson's successor, Treasury Secretary Tim Geithner.

 

At a House Financial Services Committee hearing to discuss a new proposal for monitoring too-big-to-fail financial institutions as well as providing a process to actually let them fail, she said she disagreed with the proposal's idea that all large banks would pay, after the fact, the costs associated with winding down a failed competitor.

Critics of this idea have said it would allow a risk-taking firm off the hook since it wouldn't have to pay for the mess it made and Bair agreed.

She, instead, favored assessing large banks beforehand to create a fund to be used to resolve a collapsing too-big-to-fail bank.

"To protect taxpayers, working capital for this new resolution process should be pre-funded through industry assessments. We believe a pre-funded reserve has significant advantages over an ex post fund.

All large firms, not just the survivors, would pay risk-based assessments into the fund.

This approach would also avoid assessing firms in a crisis. The assessment base should encompass only activities outside insured depository institutions to avoid double counting.

Geithner opposes that idea. He argued before the committee that supersized financial institutions might take more risks if they knew such a fund existed to bail them out.

Bair also advocated that the head of a new Financial Services Oversight Council to be composed of officials from the regulatory agencies not be the Treasury secretary but a full-time chair appointed by the president and confirmed by the Senate in order to establish that person's independence from the administration.

That is likely to meet fierce resistance from the Treasury Department since the proposal as it currently stands envisions the department running the show, with the secretary not only heading the council but the staffing from the department and its budget coming from Treasury.

By advocating that the federal government focus more on distressed homeowners before most other officials did, Bair has become one of Washington's most listened to regulators. So her views on the new proposal on how to manage failed superbanks is likely to draw a lot of notice.