A July 1
First and foremost, a Treasury secretary must be a team player. Unfortunately, Ms. Bair has frequently demonstrated otherwise, especially when regulators and senior administration officials were dealing with the financial crisis.
For example, Ms. Bair and former Treasury Secretary Henry Paulson clashed over the extent to which Tarp funds should be used for mortgage-modification purposes. More recently, Ms. Bair has differed with other regulators over mortgage servicing standards and securitization safe harbors.
The FDIC chairman should not be an administration lapdog, but strident independence is not desirable in a Treasury secretary who must bring other officials together in working towards administration goals. Ms. Bair has not demonstrated that talent.
An effective Treasury secretary must have a deep understanding of financial markets. Although Ms. Bair has held numerous government positions dealing with financial services, she has no hands-on financial-markets experience. That lack of real-world experience is reflected in numerous unsound policy positions she has taken over the years
Perhaps Ms. Bair's worst policy judgment involves pending legislation to create a sound legal framework for a U.S. covered-bond market to fund home mortgages. Ms. Bair threatens to cripple a financing technique, extremely successful in Europe, by pressing for excessive FDIC control over the assets securing covered bonds issued by a failed bank. I must admit that I champion covered bonds as key to improving American housing finance.
Ms. Bair also apparently has ignored the fact that the FDIC will collect insurance premiums on covered bonds even though the FDIC has no insurance obligation for those bonds.
In advocating higher capital levels for large banks, Ms. Bair has shown no concern for the negative consequences of pushing capital levels higher and higher, increasing the incentive for financial engineers to create financial products and legal structures that profitably arbitrage those higher capital requirements. That arbitraging will create new forms of shadow banking and systemic risks.
Other policy positions Ms. Bair has taken, such as on brokered deposits, clawing back executive compensation in failed banks, and leverage capital requirements, demonstrate her lack of understanding as to how financial markets respond to nonsensical regulatory schemes. A successful Treasury secretary must have that understanding.
Ms. Bair's track record running the FDIC should raise serious questions about her abilities as a regulator. Not only did 372 bank failures occur on her watch, which cost the Deposit Insurance Fund, and therefore the banking industry, more than $80 billon but in 61% of those failures, the FDIC was the bank's primary federal regulator. That loss number and high percentages hardly attest to Ms. Bair's regulatory acumen.
The FDIC's loss experience in those failures — 24% of assets and 31% of deposits — is very troubling, and far worse than the FDIC's loss experience during the last wave of bank failures in the 1980s and early 1990s. Numerous inspector general reports attest to the regulatory failings contributing to these expensive failures.
Despite the FDIC's statutory obligation to levy risk-sensitive deposit-insurance premiums, Ms. Bair has failed to ensure that the FDIC charges premiums which deter unwise risk-taking by banks, such as rapid growth and lending in overheated real-estate markets.
Worse, although the FDIC has expended substantial resources to calculate bank-by-bank premium rates for the safest banks, it has failed on Ms. Bair's watch to establish sufficiently differentiated risk-sensitive premiums for the riskiest banks.
The FDIC’s high loss rate is due partly to the FDIC policy quietly adopted three years ago, shortly after the IndyMac failure, to fully protect uninsured depositors in failed banks if the FDIC cannot find a buyer for the bank's deposit franchise. In 93% of the bank failures since IndyMac, uninsured depositors have been protected against any loss, including in all but two of the 48 failures so far this year.
If Ms. Bair is nominated for Treasury secretary, the Senate should closely examine whether such extensive protection of uninsured depositors contravenes the least-cost resolution requirement of the Federal Deposit Insurance Act.
A more grievous statutory contravention occurred on April 1 when the FDIC, in accordance with the Dodd-Frank Act, expanded the deposit-insurance assessment base to total global assets minus tangible equity capital. In effect, the FDIC now taxes all bank liabilities. However, the FDIC ignored the statutory mandate that a bank's deposit-insurance premium rate must reflect that bank's potential loss to the DIF.
Consequently, larger banks now pay the lion's share of deposit insurance premiums even though community banks account for most of the DIF's losses. This premium shift reflects Ms. Bair's bias against larger banks. Worse, this new tax on non-deposit liabilities harms the competitiveness of U.S. banks, large and small, inside and outside the United States. A Treasury secretary should not champion harmful policies.
The scariest thought of all is Ms. Bair's apparent willingness to blow up the financial system if she believed that would rid the United States of "too big to fail," or as the BankThink article put it, "take a big bank out back and shoot it." That attitude may please some, but is that approach the best way to deal with a large, troubled bank during the next financial crisis? More rational minds will differ, which is why Ms. Bair is unlikely to ever be secretary of the Treasury.
Bert Ely is a financial institutions and monetary policy consultant in Alexandria, Va.
