By this time next year, Sheila Bair hopes to be writing a book. Working titles include "Skunk at the Picnic" and "The Audacity of That Woman."

OK, that's only partly true. The Federal Deposit Insurance Corp. chairman is planning to write a book after she leaves the agency next June, but the working titles are merely references to some choice comments made about her tenure.

Barbara A. RehmA New Yorker profile of Bair in 2009 included a comment by the economist Robert Kuttner who described her as the skunk at a picnic, adding, "She's the only voice on the other side of many of these issues."

The "audacity" comment comes from an e-mail former Office of Thrift Supervision Director John Reich wrote to his deputy about Bair's insistence that regulators come up with a contingency plan should Washington Mutual fail. "I cannot believe the continuing audacity of this woman," Reich wrote on Sept. 10, 2008. A couple of weeks later, Wamu failed.

Bair has just over seven months left in her five-year term — June 26 is to be her last day — and she has made it clear she has no intention of staying longer.

"My son is going to college in September, so I am really looking forward to spending July and August with him," Bair said in an interview this week.

We sat down to discuss her priorities for the rest of her term, and the many bankers who think she is too focused on consumer protection will be surprised to hear her list.

"My biggest priority is to get the resolution rules in place," she said. This includes both the FDIC's rule on how resolutions of large financial institutions will be handled and claims processed and a rule the agency is writing with the Federal Reserve Board on living wills. This joint rule is to ask large institutions to detail how regulators could unwind them should the company fail.

"Not having the appropriate tools to deal with the larger institutions once they became troubled was a real problem during this crisis. It was a key driver for bailouts, with all the moral hazard that created and the adverse political fallout," Bair said. "So doing what I can while I am still here to make sure we have an infrastructure so that, if and when the next cycle hits and these tools need to be used, we are ready to use them. That is very important."

The Dodd-Frank Act gave the FDIC the authority to seize and resolve any systemically important financial company that gets into trouble; the agency also can examine institutions supervised by the Fed or the Office of the Comptroller of the Currency. Bair does not apologize for this redundancy and makes it clear the agency will focus on resolution planning.

"We don't want to duplicate what the OCC and the Fed do. On the other hand, I think it helps serve as a check on regulatory quality for everybody overlooking everybody's shoulder," she said. "And we are going to be looking at it more from the perspective of how are they organized, how are they structured. If we have to resolve them, can we map the business lines with the legal structure? ... If we want to break off the mortgage origination [unit] and sell it, where is the funding for that coming from? That's what we are going to be looking at, and nobody has really looked at this before."

Bair said some banks are taking living will preparation more seriously than others, and she predicted the exercise will lead some companies to restructure. "It's not going to just be a paperwork exercise," she said. "They may have to do some structural reorganization to demonstrate to us that they can be resolved."

Bair is perhaps at her most blunt when it comes to the largest financial companies. She thinks they are too big, too complicated and too powerful. "I think living wills can be the lever to" force banks to shrink and simplify, she said.

"It's not a bad thing for the cost of capital at these institutions to go up. It's a constraint on growth. It creates more demand on investors' and creditors' part to understand what's going on inside the financial organization."

In a speech Wednesday in New York, Bair warned that regulators are serious about large companies' taking steps to become more resolvable. Dodd-Frank gave the FDIC and Fed authority, when companies submit subpar living wills, to force divestitures.

"Let us be clear: We will require these institutions to make substantial changes to their structure and activities if necessary to ensure orderly resolution," she said.

Turning to her second priority, Bair sounded frustrated, even depressed. It is a topic she has been hammering at since the beginning of her term: capital.

"There is just so much to do," she said, repeating the thought several times. "We need to fix the trading book rules. We need to put floors under the advanced approach along the lines of the Collins amendment. We need to get the ratios up. We need better quality of capital. … And we need a new framework for the smaller banks."

But it's not hard work that is overwhelming Bair. It's that Dodd-Frank bars using ratings by the credit agencies to assess the risk posed by various bank assets and the regulators are having a hard time finding a suitable replacement.

"The fact that we can't use credit ratings any more, even as a factor, is a real problem," she said. The alternative of using a bank's own internal models has been discredited. "Coming up with something that will substitute for credit ratings … is going to be really hard to do, and it's really slowed us down."

If Congress does decide to make technical corrections in Dodd-Frank, Bair said, she would ask lawmakers to ease up on this restriction.

"I think on credit ratings, they [lawmakers] went too far," she said. "It really has made our need to move forward with stronger capital requirements much more complicated."

Critics have joked that FDIC stands for "Forever Demanding Increased Capital," but Bair said she feels a particular duty to get stronger capital requirements buttoned down before she leaves. "It's our role. Capital, capital, more capital. Once I am gone, who is going to be that voice? There are so many counter-pressures to not raise capital or to take forever to raise the capital or to fudge a little on the quality of capital."

Bair finally got around to mentioning consumer protection when she said her third priority is to complete some organizational changes. She created a "consumer and depositor protection" unit in August and in October hired Mark Pearce, a state regulator from North Carolina, to run it. Bair said the unit will merely enforce the rules to be issued by the new Consumer Financial Protection Bureau. (Dodd-Frank created the bureau but said banking regulators would still enforce consumer protections at banks with less than $10 billion of assets.) Bair said Pearce's group will "help facilitate coordination [with the CFPB] to ensure that we are all working to the same end and we aren't sending conflicting signals."

Plenty of bankers are dreading the agency's supervisory guidance on overdrafts, which Bair said will be out soon. Again she makes no apologies.

"If there is one consumer issue where community banks have a chink in their armor, it is this," she said of overdraft products. "Consumers, many are paying way too much for this, especially lower- to middle-income folks. … It's a terrible reputational issue, and it's a safety and soundness issue to the extent that folks overdraft over and over again.

"What we have suggested is pretty balanced. It's not draconian. It's basically asking community banks to do what they do best, which is, if you see someone inappropriately using a product, reach out to them and talk to them."

Bair does not look for the easy way out, and she is perplexed by anyone who just hopes the banking business returns to "normal" without the agencies' making big changes in the way they oversee the business.

"What we all hope is the economy keeps improving, and we get out of this crisis and the good times start rolling again," she said. "But then are examiners going to be pressured to go back to what they were doing before? 'Banks are making money, so you don't need to ask any more questions?' "

That is not how Bair sees the future, so she is pressing her fellow regulators to make the Camels rating system more proactive.

"We need a more forward-looking Camels supervisory process," she said. "Whether we can get interagency agreement on that or whether we go it alone, I don't know. That's what we are talking about now. Clearly Camels were a lagging indicator coming into the crisis. Now I am afraid they are going to be a lagging indicator coming out of the crisis."

Camels, she said, must incorporate stress testing of bank portfolios and must assess how well a bank is managing its risks. "Looking at the integrity of risk management, looking at how the loans would perform in stress scenarios and also digging down further into loan underwriting quality is important," she said.

"In the past we relied too much on whether the loan was making money. If the bank was making money and the loan was current, we didn't look much past that. So digging down and looking at how well loans are underwritten is important. It will be a significant change for supervisory staff."

The idea is still being discussed by the Federal Financial Institutions Examination Council, she said, but if the other agencies do not go along, "I think we will probably go ahead and change our own examination process. We could get most of it done in six months, especially if we go it alone."

The number and cost of bank failures will be lower in 2011, she predicted. (The number will peak this year, and costs peaked in 2009.) Bair said she expects the agency will start to downsize next year.

She hopes the Obama administration will start looking for her successor early next year, Bair said. "This agency needs a strong hand. It needs a person who can speak to the public, be a reassuring voice for the public and be a conservative supervisor because, at the end of the day, we have more exposure than anybody."

If you are wondering whether she would take the CFPB job, the answer is a simple "no."

"I may well go back into government at some point in the future, but for now I would like to just be in the private sector for a while and have more time with my kids and my husband."

And write a book. Bair says a couple of publishers have approached her and that she does not think the only book by an insider so far — "On the Brink," by former Treasury Secretary Henry Paulson — told the full story of the 2008 financial crisis.

"I have a lot of things to say," she said, adding with a smile, "always constructive and positive."

Though she may write the definitive insider's account, she also wants to write about "what happened, what could happen, what to worry about."

The budget deficit tops Bair's list of concerns.

"I am worried about our fiscal situation and the impact that could ultimately have on the banking system," she said. "The next banking crisis may be on interest rate risk because at some point these chickens are going to come home to roost. The system is just awash with liquidity, and if and when foreign investors start losing confidence, … interest rates are going to shoot up in a way that is not going to be controlled by the Fed or anybody else."

Barb Rehm is American Banker's editor at large. She welcomes feedback to her weekly column at

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