Facing Two Bad Options, and Seeking a Third Way

WASHINGTON — Federal Deposit Insurance Corp. Chairman Sheila Bair appears poised to forge a compromise that manages to satisfy disparate political interests while achieving her goals.

At an FDIC board meeting Tuesday, Bair is expected to advocate rebuilding the Deposit Insurance Fund by asking banks to prepay three years worth of premiums — which delays a hit to bank earnings while immediately boosting the agency's reserves.

The move would sidestep two more obvious — and controversial — choices: charging another special assessment or tapping a credit line at the U.S. Treasury.

It would be the latest example of Bair's willingness to seek unconventional ways to deal with the financial crisis. Time and time again, she has gambled on alternatives to solve sticky policy questions, been the first to offer unexplored proposals and been ahead of the next brewing problem. As a result, she holds influence far beyond the typical FDIC chairman. "She was very early on raising concerns about the subprime issue correctly, and she raised concerns about Basel capital, which turned out to be prescient," said Edward Yingling, president and chief executive officer of the American Bankers Association. "Those built her credibility going into this crisis. She will be seen as one of the most — if not the most — powerful FDIC chairmen."

Starting with the agency's moves to ease the furor in 2006 over commercially owned industrial loan companies, Bair has been in front of nearly every major issue of the past few years, including reining in subprime lenders, pushing loan modifications, instituting an international leverage ratio, strengthening a proposed systemic risk oversight council and limiting the enforcement powers of a proposed consumer protection agency.

She has also faced the daunting task of attempting to keep public confidence in the reserve fund as dozens of failures have eroded it to its lowest balance since the savings and loan crisis.

Her visible presence at the center of the policy storm has drawn comparisons to the last FDIC chairman to lead in a crisis: the late L. William Seidman.

"She has faced what I would call 'generational' challenges — challenges that are unlike challenges that the FDIC has faced in the past — and she generally finds the right solution," said Camden Fine, the chief executive of the Independent Community Bankers of America. "When the history of the FDIC is written, at least to now, the two chairmen that are going to stand out are Bill Seidman and Sheila Bair."

The dilemma over the state of the fund has put most of Bair's political and regulatory skills to the test. Before a speech on Sept. 18, just two options were publicly discussed, both likely to draw heavy fire. Several prominent lawmakers urged Bair to avoid charging another special assessment by borrowing from the Treasury, but media outlets have played up that idea as another government bailout and raised questions about the security of deposit insurance as a result.

Bair, however, said the agency was willing to consider obscure options, including prepayment of premiums and issuing debt to banks. "You have to give credit to anybody who can find maneuvering space between a rock and a hard place," said V. Gerard Comizio, a partner in the Washington office of Paul, Hastings, Janofsky & Walker LLP.

Finding a third, previously unknown solution is nothing new to Bair. Her first policy dilemma when she arrived at the agency in 2006 was whether Wal-Mart Stores Inc. and other commercial giants should gain a path to banking powers through the ILC charter. Though community bankers and many lawmakers vigorously opposed the bid, most lawyers said it was perfectly legal. Instead of ruling one way or the other, Bair found another way out: She imposed two moratoriums while lawmakers considered a bill on the issue. As opposition to the applications rose, Wal-Mart withdrew, and the issue dissipated.

"A lot of folks thought she was indecisive by declaring the moratorium," said Comizio. "But I'll compare it to John F. Kennedy's blockade of Cuba during the missile crisis. It wasn't the first thing that occurred to people, but in retrospect it ended up being a good decision."

In an interview, Bair said that, sometimes, taking more time to decide is the best solution. "Taking a deep breath and allowing time to think it through can be helpful," she said. "In a crisis situation, obviously a 'buying-time' strategy doesn't always work. But in another context it can be a good way to get things cooled off. Anybody with a clearer head can make better decisions."

To be sure, Bair was not new to Washington policymaking when she arrived. As her profile has risen — she has twice been ranked by Forbes as the second-most-powerful woman in the world — many have come to know her biography. A former assistant Treasury secretary for financial institutions, she previously was a senior staffer for then-Sen. Robert Dole, who hailed from her home state of Kansas.

Observers said her experience in dealing with the different branches of government has given her a valuable perspective.

"She has a depth of experience that is not unprecedented but is somewhat unusual," said Yingling.

That experience helped win Bair strong support from Democratic leaders in Congress despite her status as a Republican holdover from the Bush administration. Former lawmakers say she understands how to work the channels of Capitol Hill — keeping House and Senate staffers abreast of proposals she will be unveiling and using congressional support to further the agency's agenda.

"How does one improve your lot in life as a regulator? You spend time over on the Hill," said former Rep. Richard Baker, R-La., who sat on the House Financial Services Committee and is now the chief executive of the Managed Funds Association. "You get them comfortable that, one, you can listen, but two, that you can develop responses to the current problems that don't ignore the congressional concerns. Chairman Bair is very good at [this.] She certainly understands that you can't really act unilaterally."

Many agree that Bair's credibility in Congress originated from her early warnings about the mortgage crisis, the need for greater modification efforts to stem foreclosures and that the nation's proposed Basel II capital standards were insufficient. As a result, Bair has been able to use political support in Congress to make sure FDIC priorities are part of the legislative discussion, and she has room to make bold proposals — such as the systemic risk council — where others may have to remain quieter. In May, Bair broke with the Obama administration's proposal for regulatory reform by calling for a more powerful council to oversee systemic risk. Under the Obama plan, a council would advise the Federal Reserve Board. In Bair's view, the council should lead any effort to detect and rein in systemic risks.

After Bair endorsed the idea, several lawmakers began focusing on the council idea — and Treasury Secretary Timothy Geithner later blasted her and others during a private meeting for undercutting the administration's proposal.

"The fact that she's willing to express herself in an independent way makes her much more influential in how decisions are made," said David Nason, a managing director at Promontory Financial group and a former Treasury official in the Bush administration.

She is also now at odds with Senate Banking Committee Chairman Chris Dodd, who is pushing a bill to create a single prudential regulator. Bair was an early opponent of that idea — well before Dodd endorsed it — warning that consolidating power in one agency could lead to its giving preferential treatment to the largest banks, undermining the dual banking system. If Dodd continues to push the idea, Bair and an army of community bankers are likely to be very active in trying to stop it.

In the interview, Bair said she has found it more effective to be out in front of issues rather than waiting for them to develop.

"Effective legislative work and effective regulatory work is really trying to anticipate where the debate might go and get ahead of it," she said. "We've always tried to do that. If you're leading the debate instead of following it or responding to it, you're always in a much better position. That's true on the Hill. That's true with the FDIC."

She has also proven adept at rapidly defusing crises that do appear. When the agency first proposed a premium of 20 basis points on domestic deposits this year, the industry was outraged, insisting it was too much, too soon. Instead of dropping the plan, however, Bair changed how the rate was charged, levying assessments on assets rather than deposits. The result was that large institutions, which rely less on deposits for their funding, paid more in premiums than smaller institutions. Though the larger banks opposed the move, the agency earned fans among community banks, who felt it was a fairer method of shifting the premium burden to institutions that had benefited from government bailouts.

Bair said the move was not aimed at cementing the agency's support among community banks but was simply the fairer solution.

"Community banks are an important constituency and have a lot of credibility now," she said. "But on the assessment, we really just thought that was the right way to do that. Small banks were being closed and were not getting a lot of the capital investment... There really wasn't a political calculus in it."

Still, observers said the agency has moved deftly on the politically charged issue of premiums, and a decision today that stayed clear of another special assessment would be further proof of that.

Despite the success of her tenure, Bair has had plenty of detractors. Observers doubt that the agency's recent guidelines on allowing private-equity firms to own banks will have the same positive result as other policies. Bair was also a champion of a government plan to buy up toxic assets, an effort that to date has failed to get far off the ground. Bair has also clashed with other regulators, notably Geithner. The agency has "almost been in some way like a think tank — a hotbed of ideas on how to solve the crisis," said Brian Gardner, an analyst at KBW Inc. "Anytime an agency is that active you're going to make somebody mad or upset. That's certainly been the case here."

But many said even her critics have developed a respect for Bair, believing that her decisions have been made in good faith.

"I know Sheila Bair has thought through these issues," said Kevin Jacques, a finance professor at Baldwin-Wallace College, who worked for Bair at the Treasury. "I know she's taken into account what the administration wants to do, what the other regulators think is right and what Congress might want to do. I know that at the end of the day she honestly went through that mental calculus and said, 'Here's what I believe is the best, most practical solution.'"