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The Real Legacy of Sheila Bair's FDIC
June 22, 2011
The following post is by Michael Krimminger, General Counsel for the Federal Deposit Insurance Corporation.
On June 16, 2011, Forbes.com published an opinion piece by Vern McKinley and Tom Fitton about FDIC Chairman Sheila C. Bair’s legacy (Sheila Bair’s Legacy: Bailouts, Secrecy and Power Grabs, June 16, 2011). Unfortunately, the piece is more personal attack than commentary and is replete with errors and inaccuracies that should be corrected. It reflects the view of a disgruntled litigants, not reality.
Mssrs. McKinley and Fitton are simply wrong in charging Chairman Bair and the FDIC with supporting bail-outs. It is well-established that Chairman Bair opposed Too Big to Fail and has been the leading advocate of reforms – codified in the Dodd-Frank Act – to prevent future bail-outs of financial companies. Even Mssrs. McKinley and Fitton recognize this fact, but then attempt to tar the FDIC’s response because of the actions taken to prevent a more catastrophic financial meltdown in 2008.
The facts are that in 2008 there was no law that could have permitted the orderly liquidation of the largest financial holding companies. The consequences of the bankruptcy of Lehman Brothers in September 2008 demonstrated that further bankruptcies of other financial behemoths would only have led to a complete financial meltdown. It is often forgotten, or ignored, that the Lehman bankruptcy would have been even more devastating if the Federal Reserve Bank of New York had not lent more than $130 billion to the Lehman securities subsidiary over the first few days. Given the disruptions after Lehman, and the absence of any alternative insolvency framework for holding companies like Wachovia, policymakers had to make unpalatable choices. The FDIC’s recent Lehman paper – far from the “fantasy” claimed by the authors – simply describes how Lehman could have been wound down in a more orderly way based on pricing then being used by potential bidders for the company.
Mssrs. McKinley and Fitton cite the systemic risk determinations for Wachovia, Citigroup, Bank of America Corporation, and the creation of the Temporary Liquidity Guarantee Program. Even here, their facts are wrong. These were not simply decisions by the FDIC Board – each required the Federal Reserve, the Secretary of the Treasury and the President to agree as well – and as has been well-documented these agencies were strongly pushing for the FDIC to act. In 2008, we did not have the legal authority to put these large holding companies into our bank receivership process. Similarly, we had little authority to access information outside of the insured institutions. Since these were holding companies, and not banks, we had to rely on information from other regulators.
Messrs. McKinley and Fitton also mention the Temporary Liquidity Guarantee Program (TLGP). TLGP provided an important liquidity support to small and large banks across the country during a period of intense pressure on banks. There is little doubt that it alleviated liquidity stresses on both large institutions as well as community banks and probably avoided the failure of many others, all without any net cost to the FDIC. The TLGP program also included the transaction account guarantee (TAG), used by 86% of insured institutions at its inception. The TAG brought stability and confidence to businesses for accounts that are commonly used to meet payroll and other business needs. This allowed institutions, particularly smaller ones, to retain these accounts and maintain the ability to make loans within their communities. The TLGP and TAG programs are fee based to protect against losses to the FDIC. All of these uses of the special systemic authority were fully documented based on the information then available, which was sometimes less than ideal during the midst of the crisis.
The fact that no cost was incurred for these programs does not make the bailouts “right.” Chairman Bair has been a leading critic of Too Big to Fail, and vigorously advocated for the new resolution authority in Dodd-Frank to finally end bail-outs. The absence of any statutory tools to close the largest financial firms and make their shareholders and creditors bear the losses without creating a systemic disruption directly led to the 2008 bail-outs. The new resolution authority was not a “power grab” but rather was motivated by Chairman Bair’s strong desire to end Too Big to Fail. Similarly, we advocated for greater access to information outside the insured bank – and to require financial firms to prepare detailed ‘living wills.’ Far from the “hurried” process that the authors claim, the Dodd-Frank Act was the result of over a year of Congressional hearings and debate.
Finally, Mssrs. McKinley and Fitton also essentially imply that, because the Deposit Insurance Fund (the DIF) went into the red in 2009 and remains negative, Chairman Bair did too little to bolster its resources. Nothing could be further from the truth. In 2006, shortly after Chairman Bair arrived at the FDIC, we moved to implement new authority to charge all banks a risk-based premium. In response to the crisis, the FDIC increased assessment rates at the beginning of 2009 and, in June 2009, imposed a special assessment that raised additional funds for the DIF. In December 2009, to buttress the DIF’s liquidity, we required the industry to prepay almost $46 billion – or more than three years of estimated assessments. These measures enabled the FDIC to avoid borrowing from the Treasury – reaffirming the longstanding obligation of the banking industry, and not taxpayers, to fund the deposit insurance system.
Beyond all of these details, the bottom-line is that when all else went wrong in our financial system, confidence in bank deposits and the banking system did not falter. The FDIC has resolved nearly 370 failing banks, representing $645 billion in assets, since the start of the crisis in 2008, while protecting insured deposits so that not a penny in insured deposits was lost.
The authors also try to relitigate Mr. McKinley’s Freedom of Information Act (FOIA) case against the FDIC. While I prefer not to comment on pending litigation, a few items are clear from the public record of the case. First, the FDIC has produced documents to Mr. McKinley in response to his requests. Second, the Court did not find FDIC’s position on disclosure “baseless.” The Court simply held that the case was not moot because Mr. McKinley continued to contest whether the FDIC reasonably interpreted the scope of his request. The Court specifically provided the FDIC with the option to submit additional evidence demonstrating that its original search was complete. The FDIC has done so and the issue of the scope of the search is now before the Court. FOIA requests must “reasonably describe” the documents so that we can identify and produce them or, as is fully appropriate, decline to produce documents where confidential business or supervisory information might be compromised. FOIA is not simply the fishing expedition that McKinley seeks.
The FDIC has long been a leader in transparency in government. Since January 2008, the FDIC has responded to over 5,750 FOIA requests and produced thousands of documents to the public. The FDIC also has made publicly available extensive information on asset sales, purchase and assumption agreements and bidding information from failed banks, while pioneering tools to make call report data more accessible. As part of Chairman Bair’s commitment to openness, we have disclosed the names, affiliations and subject matter of outside groups meeting with FDIC officials on Dodd-Frank implementation.
In short, McKinley and Fitton seek to besmirch Chairman Bair’s legacy without the facts to back it up. I hope that my response has corrected the record and laid to rest their misconceptions and misstatements.
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