Friday, May 29, 2009

You stabilize the banks to support the economy. But you don’t stabilize the banks for the sake of stabilizing the banks.

TO BE NOTED: From Bloomberg:

"Bair Attacks Too-Big-to-Fail as Enforcer Geithner Must Trust

By Alison Vekshin

May 29 (Bloomberg) -- Sheila Bair, chairman of the Federal Deposit Insurance Corp. and a lifelong Republican, boarded Air Force One for the first time in February. Neither President George H.W. Bush nor his son, President George W. Bush, had invited her on the world’s most famous jet in the five years she worked for them. It was a Democratic president, Barack Obama, who asked her to fly to Washington after the two had unveiled his administration’s foreclosure relief plan in Mesa, Arizona.

“Sheila, come on back. I want to talk to you,” Obama told Bair, who was seated in the plane’s conference room. He then escorted her into his airborne Oval Office for their first private meeting, where they discussed the government’s role in alleviating the worst financial crisis since the 1930s.

“It was great,” Bair says of her meeting with the president. “He’s got an agenda which we share. Banks are a means to an end. You stabilize the banks to support the economy. But you don’t stabilize the banks for the sake of stabilizing the banks.”

After being left out of big decisions by Bush administration officials, such as the push last year for the $700 billion bank bailout, Bair, 55, has become one of the most powerful policy makers in Washington. Driven by a combination of circumstances and her own candor, Bair has presided over the biggest expansion of the FDIC’s authority since its founding in 1933 to insure bank deposits.

‘Bites Like Jaws’

“She looks like Bambi and she bites like Jaws,” says Wade Henderson, president of the Washington-based Leadership Conference on Civil Rights, who has known her for 27 years. “There’s a quiet intensity about her. She’s idealistic in spite of her 30 years in Washington.”

Under Bair, the normally invisible agency was the prime mover behind Obama’s $75 billion program to curb foreclosures. Last year, the FDIC became the go-to agency to insure hundreds of billions in bank debt to boost liquidity, and it’s currently spearheading half of the initiative to encourage investors to buy up to $1 trillion in troubled assets.

The FDIC head isn’t done expanding her influence over Wall Street. An opponent of the “too-big-to-fail” policy for firms like Citigroup Inc., Bair is lobbying Congress to give the FDIC authority to wind down bank and thrift holding companies -- a move she says is necessary to protect taxpayers. And she wants lawmakers to include the agency in a systemic risk council to prevent future financial shocks.


As Bair builds her power, soaring bank failures are jeopardizing her agency’s deposit insurance fund, which had dwindled to $13 billion in the first quarter, the lowest amount since 1993 following the savings-and-loan crisis. She requested more funding from Congress, which on May 19 more than tripled the FDIC’s borrowing authority from the Treasury Department to $100 billion. Lawmakers also approved a temporary boost of the credit line to $500 billion.

A self-described “populist,” Bair has won allies in the Democratic Party, such as Representative Barney Frank of Massachusetts, in muscling the FDIC into prominence. She has also fought battles with the Independent Community Bankers of America, representing 5,000 banks, and the Bush administration.

In 2008, Bair says, her struggle with midlevel Treasury Department officials turned tense as they stonewalled her proposal to use federal funding to prevent foreclosures. And she tussled with Timothy Geithner, then the president of the Federal Reserve Bank of New York, over the request last year that the FDIC guarantee all debt issued by lenders -- a move she rejected because it would expose her agency to big losses.

Geithner’s Respect

“I’m from Kansas; I’m not from New York,” Bair says. “I’m a lot of things that are different. So maybe that does give me some more independence of thought and daring to not care who I offend.”

Following Obama’s election in November, Geithner tried to have her ousted for not being a team player, according to people familiar with the matter. Through a spokesman, Geithner declined to say whether he sought to remove Bair from office.

“I have great respect for her,” Geithner told Bloomberg TV on May 21. “She’s a strong advocate for her agency and a strong advocate for her points of view.”

In May, after the FDIC assisted the Federal Reserve in stress testing 19 lenders, Bair put their executives on notice. She said some of them could lose their jobs in the next few months after the companies submit capital-raising plans to the government, according to an interview with Bloomberg TV and a statement from the FDIC on May 15. Bair didn’t say that the government would oust the chief executive officers of the banks.

$4.8 Trillion in Deposits

Bair says she’s seeking more authority over banks because her agency has so much at stake -- $4.8 trillion in insured deposits.

“There is some perception we want these programs, we want all this power,” Bair says. “That is not the case. We want a cleanup. This agency was born of a crisis and made for a crisis.”

Congress created the FDIC in 1933 at the depths of the Great Depression during President Franklin D. Roosevelt’s first term. As thousands of customers rushed their lenders to withdraw funds, toppling about 4,000 banks that year, Congress gave the new agency the powers to insure deposits and liquidate failed lenders.

Set up as an independent authority like the Federal Reserve, with a chairman serving a five-year term, the FDIC has been quiescent during most of its history. Then, in the 1990s, the agency expanded its staff to liquidate banks during the S&L crisis, when 124 insured institutions went down in 1991 alone.

1,000 Bank Failures

Now facing the largest number of bank failures since the S&L debacle, Bair has been fighting with bankers to protect the solvency of her deposit insurance fund. As many as 1,000 banks will go down from 2009 to 2012, says Gerard Cassidy, managing director of bank equity research at RBC Capital Markets in Portland, Maine.

The FDIC’s insurance fund, which covers deposits up to $250,000 after Congress temporarily boosted the amount from $100,000, is financed by banks. Most of them pay an annual fee of 12 cents to 16 cents per $100 in deposits. In February, Bair proposed an additional, emergency one-time charge of 20 cents per $100 in deposits, which ignited a firestorm of criticism from small banks.

Camden Fine, president of the Independent Community Bankers of America in Washington, sent a letter to more than 35,000 bankers in early March.

Hiking Bank Fees

“Shake the walls of the FDIC and Congress until they reverse this and other misguided policies,” Fine wrote. Bankers barraged the agency with letters complaining that the levy would wipe out profits.

After Congress agreed to boost the FDIC’s credit line to backstop the insurance fund, Bair moved to reach a compromise with the banks. On May 22, the FDIC approved a one-time fee on banks of 5 cents per $100 in assets, minus Tier 1 capital. By basing the fee on assets rather than deposits, the FDIC is putting more of the onus on larger institutions.

As the FDIC gains more regulatory clout, Republican lawmakers say the agency is stretching itself too thin in veering from its main job of insuring deposits.

“I’m very concerned ultimately about the core function of the FDIC, which is the cornerstone of our financial system, which is the safety and soundness of the insurance fund,” says Representative Jeb Hensarling, a Texas Republican.

ABA Opposition

The American Bankers Association, which represents banks of all sizes, is lobbying to stop the FDIC from gaining more turf. Bair’s proposal to give her agency the power to dismantle huge financial companies would have included government-controlled American International Group Inc. before the government took control of it, according to the Washington-based ABA. It says Congress shouldn’t give the wind-down authority to the FDIC because the financial burden of liquidating the large companies would likely fall on fee-paying banks.

“We think it would be a calamity for the country because the FDIC insurance of bank deposits has been so important,” says Edward Yingling, president of the trade group. “Why should a community bank in the middle of Iowa be paying for AIG? We pay insurance premiums to cover insurance on banks, not on everybody.”

As Bair’s stature rises, so does the number of hostile e- mails she receives from depositors who have suffered losses because their amount of money at failed banks exceeded the insurance limit. For the first time, starting in early 2009, the FDIC assigned a security detail to its chief. After speeches, Bair is often swarmed by crowds of reporters and citizens who sometimes jostle her 5-foot-4-inch (1.6-meter) frame.

Independence, Kansas

“She’s a very recognizable face now,” says Fine of the banking trade group. “All it takes is one disgruntled banker or depositor and bad things can happen.”

Bair’s populist politics were shaped in Independence, Kansas, a rural town of about 10,000 people where she grew up. Her mother, Clara, a nurse, and her father, Albert, a doctor, were children during the Great Depression and swayed her views about the importance of being thrifty.

“The culture out there is one of being in touch with the people and grassroots,” says Fine, who’s from Jefferson City, Missouri.

A classic overachiever, Bair graduated from Independence High School a year early and earned a degree in philosophy in three and a half years from the University of Kansas in Lawrence in 1975.

“I like to get things done quickly,” she says.

Robert Dole

Hoping to work in public service, she entered a law program at the same school and graduated three years later. Bair interviewed at several law firms that in the 1970s were mostly hiring men.

“They couldn’t compete with men for jobs in the law firms,” says Fred Lovitch, a professor at the law school who taught Bair in a securities regulation course. “She did what our best women students did then, which was to get as good a job as they could in the federal government and work their way up from there.”

The Department of Health, Education and Welfare in Kansas City hired Bair as a civil-rights lawyer. In 1981, she began her ascent in Washington, landing a job in the office of Robert Dole, a Republican senator from her home state. Dole, 85, says one of the reasons he hired Bair was because he knew her father, a political supporter. In seven years with the senator as a research director and counsel, she worked on civil rights, including legislation making Martin Luther King Jr.’s birthday a federal holiday and extending the Voting Rights Act; judicial nominations; and Dole’s presidential bid in 1988.

Runs for Congress

“She’s a hard worker, one of these people who if you say, ‘Sheila, would you do A, B, C or all three?’ then you didn’t have to worry about it every day,” Dole says.

Eager to make some money, Bair left Dole’s office in 1988 after his failed campaign for the White House and joined the New York Stock Exchange as its legislative counsel in Washington.

In 1990, at Dole’s urging, Bair returned to Kansas to run in the Republican primary in the 5th District for a House seat. The only pro-choice candidate among six contenders, she called for a balanced budget and the revitalization of economically depressed southeast Kansas. She rode around in rural communities on a bicycle with a yellow flag saying “Bair for Congress” before losing by 760 votes.

“She should have gotten married before the race,” Dole says. “At that time in Kansas, I think there were a lot of people, seniors and others, who would like to see young people married before they go to some public office.”

CFTC Commissioner

A year later, in 1991, the first President Bush nominated Bair to be commissioner of the Commodity Futures Trading Commission, an agency that fell under the jurisdiction of the Senate Agriculture Committee that Dole had served on. During her tenure at the CFTC, Enron Corp., the energy-trading company that would blow up in 2001, lobbied the commission to exempt over- the-counter energy derivatives from the agency’s rules banning fraud, says Susan Milligan, a senior vice president at the Chicago-based Options Clearing Corp. who worked for Bair at the CFTC.

Bair was the only commissioner of the three-member panel who dissented on the proposed exemption; she lost the battle.

“There was a lot of pressure to vote for the exemption from the OTC derivatives community,” Milligan says. “Sheila said, ‘Absolutely not. No responsible regulator exempts anyone from their anti-fraud authority.’”


Bair returned to the NYSE in 1995, where she ran its Washington lobbying office for six years during the Internet- fueled stock market boom and bust. At the stock exchange, Bair maintained her consumer protection bent, leading the successful effort to include limits in the 1999 Gramm-Leach-Bliley Act to prevent OTC derivatives dealers from offering equity swaps to retail investors. The law repealed part of the Glass-Steagall Act of 1933, which banned companies from acting as both a commercial and an investment bank.

“We didn’t want retail investors to be in a situation where they didn’t understand the product and had losses,” says Milligan, who followed Bair to the NYSE.

In June 2001, as the Standard & Poor’s 500 Index was on course for a 13 percent drop for the year, the second President Bush nominated Bair to the post of assistant secretary for financial institutions at Treasury. After her confirmation in July, she helped create an office to improve the financial knowledge of Americans. The office encouraged banks to open student-run branches in high schools.

University of Massachusetts

Bair departed Washington about 12 months later for a quieter life at the Isenberg School of Management at the University of Massachusetts in Amherst. She raised two children -- Preston, 16, and Colleen, 9 -- with her husband, Scott Cooper, vice president of government relations at the Washington-based American National Standards Institute, a nonprofit group that helps coordinate standards for U.S. products.

“Students were always impressed with how well prepared she was,” says Thomas O’Brien, a finance professor who taught a course with Bair in 2005. “Sheila wasn’t a showoff at all. She does her own homework, and she calls things the way she sees them.”

At the university, some of her research focused on improving financial services for low-income people. In one paper on Latin American immigrants, she recommended that banks provide bilingual documents and staff, open more branches in Latino neighborhoods and offer money transfers along with check cashing.

President Bush

In 2006, Bair published the first of two children’s books, Rock, Brock, and the Savings Shock. It’s a tale about twin brothers -- a spender and a saver -- and how saving makes one brother rich. The second, Isabel’s Car Wash, about investing, tells of a girl with a plan to take $5 from her friends to start a car wash and pay them back with interest.

Bair says she wasn’t seeking a government post when Bush’s personnel director called her in 2006 about replacing Donald Powell, the FDIC head who had left to oversee the Hurricane Katrina reconstruction program. While she enjoyed the freedom at the university to express her own views, Bair couldn’t resist a return to public service. The Senate confirmed her in June 2006 as banks were reporting record earnings and no lender had failed in two years.

Early the following year, Bair became one of the first policy makers to speak out about the coming housing crisis that would plunge the economy into recession. The FDIC chief saw that a rash of subprime mortgages issued at low teaser interest rates a few years earlier were about to adjust to higher rates, boosting monthly payments by more than 30 percent and threatening to spur a wave of defaults.

Early Warnings

Bair wanted lenders to change mortgage terms to reduce monthly payments and help borrowers stay in their homes. But she had no regulatory control over major mortgage servicing companies. So Bair resorted to a series of private meetings and congressional appearances to try to persuade the mortgage industry to voluntarily prevent foreclosures.

In April 2007, Bair organized a summit of lenders and regulators at the seven-story FDIC headquarters in Washington. Representatives from Countrywide Financial Corp., Morgan Stanley Bank and Wells Fargo Home Mortgage were among the about 40 people who attended the eight-hour meeting. During the gathering, the representatives vowed that they would begin modifying loans, Bair says.

“Everybody said they knew these loans were going to be resetting and unaffordable and the loans would be restructured because it was in everyone’s interest to keep people in the house,” she says.

Pressuring Investors

The Bush appointee also collaborated closely with Democratic leaders in Congress. On April 17, the day after her summit, Bair urged servicers to adjust the terms of loans when she testified before the House Financial Services Committee, chaired by Frank. She also said investors in mortgage-backed securities whose returns were guaranteed in contracts would have to take losses too.

“I thing we should hold the servicers’ and the investors’ feet to the fire on this,” she said. “It was clear to investors that these were high risk. So I think everybody needs to share the pain now.”

The following day, she attended another closed-door meeting with lenders convened by Christopher Dodd of Connecticut, the Senate Banking Committee chairman.

Her testimony -- coming three months before two Bear Stearns Cos. hedge funds collapsed under the weight of investments in subprime debt -- made Bair the darling of Democrats and immunized her from criticism by lawmakers who chastised other regulators for their lax oversight of banks.

Admired by Frank

“I admire the fact that she wouldn’t let people shut her up,” Frank says. “The people who’d appointed her were unhappy she was speaking out, and she was right.”

In the months following her summit, Bair was reminded of the limits of her own power: Loan servicers hadn’t begun reducing payments for homeowners because of resistance by investors.

“I was frustrated because everybody was privately singing this song to us, but there was no execution,” Bair says. “A lot of the pushback was coming from the investor community. And you still see it with the investor community.”

As the bankruptcy of Lehman Brothers Holdings Inc. in September 2008 froze credit markets and threatened to take down even bigger securities firms, Treasury Secretary Henry Paulson and Fed Chairman Ben S. Bernanke rushed to Congress to win approval of an emergency rescue plan.


Just before they went to lawmakers to set up the $700 billion Troubled Asset Relief Program, or TARP, Bair says, she got a perfunctory call from Paulson telling her of their plans and asking her if she wanted anything added to the bill.

“They made the decision to go to the Hill to start this program,” Bair says. “We were never part of any of that.” Paulson, who left office in January, didn’t respond to requests for an interview.

Paulson told Congress that TARP funds would be used to buy troubled bank assets. Bair says the administration included a mortgage modification provision in the bill to try to win votes from the Black and Hispanic caucuses and other Democrats. The provision said that Treasury would set up a program to help struggling homeowners if the department used TARP money to buy mortgages or related securities.

Bair says that although Paulson changed course, opting to use the money to buy preferred bank shares, he still seemed to support the use of some TARP funding to modify mortgages. So the FDIC developed a $24.4 billion plan that soon died because mid- level Treasury staffers didn’t want to use taxpayer money to bail out homeowners, Bair says.

‘Robust Discussions’

“Then it got nasty,” she says. “People started leaking our plan with derogatory comments, so we went public with ours. It was just a kind of classic Washington unpleasant process.”

William Isaac, who served as FDIC chairman under President Ronald Reagan from 1981 to 1985, says Bush officials objected to Bair’s push to modify loans.

“They thought she was way out in left field,” Isaac, 65, says. “I think she was right. Too many foreclosures were driving down real estate values, and if we didn’t address that issue, then the banking and economic problems would only get worse.”

As banks struggled to raise money, Paulson and Bernanke turned to Bair to start the Temporary Liquidity Guarantee Program to insure debt issued by banks -- a sweeping escalation of the FDIC’s role. Bair says she and Geithner had “robust discussions” about how much debt the FDIC would insure under the program.

“There were early discussions about us guaranteeing all bank liabilities, and we weren’t going to do that,” Bair says.

Insuring Debt

If the FDIC suffered losses, they would have to be recouped by charging fees to already battered banks. Bair did agree to temporarily insure new senior unsecured debt, such as commercial paper. And she insisted the agency charge banks that use the program a fee for the guarantee.

The program, which started in November, allows banks to issue debt with a top, AAA credit rating. Bair has said she doesn’t want to extend the program, which had insured $342.7 billion in debt and raised $8 billion in fees without incurring any losses as of mid-May, beyond its scheduled end on Oct. 31.

Lou Crandall, chief economist at research firm Wrightson ICAP LLC in Jersey City, New Jersey, says the program has been one of the government’s most successful responses to the financial crisis.

“It’s contributed to the funding stability of a large number of issuers and eased immediate concerns about their access to cash,” Crandall says.

President Obama

After the November election, Geithner, then Obama’s nominee for Treasury secretary, sought to push Bair out of office, according to people familiar with his thinking. Geithner said Bair was too focused on protecting the solvency of her deposit insurance fund rather than the financial system as a whole, the people said.

“He’s never indicated to me in any way that he had any problem with working with me or anything else,” Bair says. “President Obama has made clear he wants people to work together.”

As the head of an independent agency whose term overlapped two administrations, Bair could have kept her job without being reappointed by Obama. Bair says she would have stepped down if the president had requested it. Instead, Obama sent signals that he wanted her to stay.

Troubled Assets

Bair says the transition team, co-chaired by John Podesta, whom she’s known for years, reached out to her to discuss mortgage modifications. Dodd and Frank also wrote a letter to Obama in December asking him to keep Bair, stressing her willingness to buck the Bush administration.

“I wasn’t sure whether there would be a carryover of the friction with the Bush people, so that’s why I wrote that letter,” Frank says. Bair’s flight on Air Force One in February suggested to her that the new president wanted her to continue leading the agency. “With the new administration, the president has been very inclusive, and that’s helped us,” Bair says.

Early this year, as public hostility over Wall Street bailouts and bonuses reached a fever pitch, Bair says she played a significant role with Geithner and Bernanke in devising the Public-Private Investment Program to buy illiquid mortgage- backed assets from banks. Paulson’s decision in 2008 not to use TARP funds to buy these assets hurt the prices the FDIC was getting when it liquidated failed banks. Congress wasn’t about to hand the Treasury more money to acquire bad debt while unemployment soared, reaching 8.9 percent in April.

Buffett’s Idea

So Bair says the trio decided to create incentives for private investors -- an idea that billionaire investor Warren Buffett had proposed to Paulson in 2008 -- since they were better suited to establish market prices for the debt. The Treasury and Fed told her that the FDIC would have to provide financing to get the loan program for banks off the ground.

“They basically said, ‘If you want it, you’ll have to ante up too,’” says Bair, who agreed. Bair told the Treasury that her agency should operate the auction of assets since it had experience selling off failed banks. “Treasury was fine with that,” Bair says. “They are not really equipped to run a program like this.”

Under the PPIP, which was announced in March and will use up to $100 billion of TARP funds, the FDIC will oversee the sale of distressed loans. The Treasury will provide half of the equity to buy a pool of loans from banks, with private investors putting up the other half. The FDIC will offer debt guarantees to investors of up to six times the capital provided.

Reluctant Banks

“The debt guarantee by the FDIC is a huge sweetener,” says Mark Tenhundfeld, senior vice president at the ABA.

While investors have expressed a lot of interest in buying the assets, banks are reluctant to sell them.

“The troubled assets are still there, and the need is still there to clean that up,” Bair told Bloomberg TV on May 15. “Some need to be told that they need to deal with their troubled assets.”

Most banks may decide to keep the assets and take writedowns rather than sell them at a steep discount, says Christopher Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. in New York.

“I’d be surprised if you’re going to get many banks who feel their assets are worth 90 cents on the dollar right now selling at 60 cents to a hedge fund,” Rupkey says.

Dwindling Insurance Fund

At a May 27 news conference, Bair pointed to additional obstacles to getting banks and investors to participate. She said they may be hesitant because of concerns that Congress could change the rules governing the program. She cited an amendment lawmakers approved this month that requires the Treasury to write rules guarding against conflicts of interest in the PPIP, a process that could delay a test run of the program that had been scheduled for June. Banks also have been able to raise capital and may have less incentive to sell assets, Bair said.

With bank failures rising -- 36 have folded this year -- Bair is struggling to keep the deposit insurance fund solvent. In the first quarter, bank collapses had reduced the fund to $13 billion from $17.3 billion in the previous period.

The FDIC classified 305 banks as “problem” institutions in the first quarter, the highest total in 15 years and an increase from the 252 on the agency’s list in the fourth quarter. Banks are rated on measures including asset quality, earnings and liquidity.

“The banking industry still faces tremendous challenges,” Bair said on May 27. “Going forward, asset quality remains a major concern.”

Emergency Fee

Last September, Bair was still bullish about the fund. “Despite the recent drawdown to cover losses, the insurance fund is in a strong financial position to weather a significant increase in bank failures,” Bair told the Florida Bankers Association in Sarasota, Florida.

In moving to replenish the pool, Bair made a major misstep, says Fine of the community banking group. Her emergency fee proposal on Feb. 27 of 20 cents per $100 in deposits was immediately met with outrage from bankers. They deluged her office with protests, saying it would take a large chunk out of their 2009 profits at a time when they could least afford it.

The assessment would cost Citizens Bank of Ada more than 10 percent of its net earnings, Kassie Cothran, the Oklahoma-based bank’s senior vice president, wrote the agency.

Battle With Bankers

“Without these assessments, the deposit insurance fund could become insolvent this year,” Bair wrote in a letter to bank CEOs on March 2. That didn’t quell the brouhaha. The next day in his letter to bankers, Fine likened the proposal to “Japan’s sneak attack on Pearl Harbor.”

A day later, Bair called Fine on his cell phone to make peace while he was dining with two bankers. “You’re going to have to call the dogs off,” Fine says Bair told him. “You’ve got to tone down the rhetoric. We’re just getting bombarded.”

When Bair asked if sharply reducing the fee would help, Fine said it was a step in the right direction. On March 5, she turned to Congress for funding, sending a letter to Dodd urging lawmakers to expand the agency’s credit as a contingency and so the FDIC could reduce the bank fee. Two months later, Congress overwhelmingly approved the massive increase, including a $500 billion credit boost through 2010, and the president signed the measure on May 20.

Dismantling Giants

The FDIC has tapped this credit only once in its history, when the S&L crisis left the fund insolvent by $7 billion in 1991. The agency repaid the loan with interest two years later using industry fees.

Fine says the protests from bankers caught Bair flat-footed and taught her a lesson. “I believe if she had it to do over again, she would have explored alternatives and laid some groundwork before,” he says. “She, to her credit, adjusted very rapidly.”

The FDIC boss doesn’t think she misplayed her hand by proposing the fee.

“I don’t know if it was a mistake,” she says. “The 20 basis points -- we thought about that very carefully. I don’t think I had any choice.”

As financial behemoths such as Citigroup live off bailouts -- it’s received $45 billion in taxpayer funding -- Bair is asking Congress to give her agency the power to dismantle large bank holding companies. Currently, the FDIC can only unwind thrifts and banks such as Citibank, a division of Citigroup that operates retail outlets. The agency can’t disassemble the entire Citigroup, which also has trading and investment banking units.( NB DON )

Risk Council

“Done correctly, the effect of the resolution authority will be to increase market discipline and protect taxpayers,” Bair told the Senate Banking Committee on May 6.

While lawmakers begin the biggest regulatory overhaul since FDR, they’re split on who should get the power to contain systemic financial risk. Last year, Frank and Paulson pushed for the Fed to gain the authority to prevent shocks such as the one caused by the collapse of Lehman Brothers. In March, after the public outcry over government-funded AIG’s payout of $165 million in bonuses, lawmakers blamed the Fed because the New York Fed is the insurer’s main overseer while under government control. Following that flap, Bair told lawmakers on May 6 that they should divide the super-cop job among the FDIC, the Fed, the Treasury and the Securities and Exchange Commission.

While SEC Chairman Mary Schapiro backs Bair’s proposal to prevent concentration of power with a single regulator, Geithner opposes it.

Congress’s Priority

“Geithner believes that we need a single independent regulator with responsibility for systemically important firms,” Treasury spokesman Andrew Williams said in a May 8 e- mail. “He does see a role, however, for a council to coordinate among the various regulators.”

Ronald Glancz, chairman of the financial services group at Venable LLP, a Washington law firm, says Congress won’t let the debate over who gets authority prevent the creation of a super regulator.

“It is going to happen,” Glancz says. “This is the No. 1 priority in Congress for dealing with future financial crises.”

After trying to rescue struggling homeowners for almost two years, Bair says she felt vindicated standing with Obama in February as he announced his foreclosure plan in Arizona. It uses $75 billion to coax banks to make payments affordable for up to 4 million borrowers. The government will share in the cost of reducing the borrowers’ monthly payments to 31 percent of their monthly income.

JFK Award

The program hasn’t permanently altered any loans yet. Fourteen participating loan-servicing companies had extended trial modification offers to more than 55,000 homeowners, according to a May 14 Treasury release. At least 10,000 borrowers are making lower payments as part of a three-month trial, a requirement before borrowers can have their loans permanently modified, the Treasury said.

On May 18, Bair accepted the John F. Kennedy Profile in Courage Award at his presidential library in Boston for “sounding early warnings” about the subprime lending crisis. She shared the honor with Brooksley Born, former chairman of the CFTC, who in the late 1990s fought to regulate OTC derivatives in a losing battle against Robert Rubin, a former Treasury secretary and Citigroup executive committee chairman.

Bair says she’s not seeking the Treasury secretary post or any other higher position in Washington.

“I have no aspirations other than to return to academia after this job is over and have more time with my family again,” she says from her office, located a block away from the White House.

Bair’s legacy will mostly ride on the effectiveness of her new initiatives, from foreclosure relief to asset sales. As results are tallied, Bair’s friends and critics can then judge whether the idealistic populist from Kansas who ventured to Washington three decades ago has helped put America’s banks back on stable ground.

To contact the reporter on this story: Alison Vekshin in Washington at"

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