“Taxpayers should not be called on to foot the bill to support non-viable institutions because there is no orderly process for resolving them.”

TO BE NOTED: From Bloomberg:

"Bair Seeks to Expand Power, Ending ‘Too Big to Fail’ (Update1)

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By Alison Vekshin

April 27 (Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair sought authority to close “systemically important” financial firms, marking her boldest attempt yet to expand the agency’s reach.

The FDIC should be able to take over and shut bank-holding companies and other large institutions instead of just failed commercial banks, Bair said today in a speech at the Economic Club of New York. Such power would shield taxpayers from losses when government protects companies deemed “too big to fail,” a concept that should be “tossed into the dustbin,” she said.

“The FDIC is up to the task, and whether alone or in conjunction with other agencies, the FDIC is central to the solution,” Bair said. “Given our many years of experience resolving banks and closing them, we’re well-suited to run a new resolution program.”

The speech represents the first time Bair has said she wants the new power, countering arguments that the Federal Reserve is best equipped to manage the authority as Congress prepares to write legislation on the issue this year. Bair has previously said that some regulator should have resolution authority and suggested her agency could do the job.

U.S. regulators have improvised programs in the past year to prop up financial companies hit by the financial crisis by handing out more than $90 billion to Citigroup Inc. and Bank of America Corp., providing more than $180 billion in loans to American International Group Inc. and establishing debt guarantee programs. The FDIC wound down 29 failed banks and thrifts this year.

‘No Orderly Process’

The absence of an authority to shut failing firms “has contributed to unprecedented government intervention into private companies,” Bair said. “Taxpayers should not be called on to foot the bill to support non-viable institutions because there is no orderly process for resolving them.”

Bair recommended it be formed under a “good bank-bad bank” model, in which the government would take over troubled firms and force stockholders and unsecured creditors to pay the costs. “Viable” portions of the company would be put into the good bank, while the ailing portions would remain at the bad bank to be sold or closed over time, Bair said.

The costs imposed on the stockholders and unsecured creditors and fees collected from other “systemically risky” firms would pay for the bad bank, Bair said. “This has the benefit of quickly recognizing the losses in the firm and beginning the process of cleaning up the mess,” she said.

FDIC Opponents

Bair’s request follows remarks last week by John Dugan, who heads the Treasury’s Office of the Comptroller of the Currency, an agency that supervises national banks. The Federal Reserve “is the logical choice” for new authority as a systemic-risk regulator, Dugan said in an April 23 speech.

The American Bankers Association has challenged the idea of giving the authority to the FDIC, saying the agency’s mission would be jeopardized and banks may bear unnecessary costs.

“The direct use of the FDIC for resolutions of non-banks would severely confuse the public about FDIC deposit insurance,” Edward Yingling, the Washington-based industry group’s president, wrote in an April 14 letter. He suggested instead giving the authority to a council of the FDIC, Fed and Treasury to avoid giving too much power to the FDIC.

Bair said the government won’t need to ask Congress for additional taxpayer funds under the Treasury’s $700 billion Troubled Asset Relief Program to support lenders found to need more capital as a result of stress tests regulators conducted on the 19 largest U.S. banks.

Final results will be published May 4, the administration has said. Treasury Secretary Timothy Geithner said April 21 that $109.6 billion is left in the TARP.

“I don’t want to front-run anything but I do believe the current resources of the Treasury will be sufficient,” Bair said.

To contact the reporter on this story: Alison Vekshin in New York at avekshin@bloomberg.net."

AND:

Bair Seeks to Expand FDIC Authority to Close Financials

undermine the value of the collateral by allowing cram-downs, you make the loans riskier and banks will price that risk accordingly by rates going up

TO BE NOTED: From the NY Times:

"Banks Sway Bills to Aid Consumers

By STEPHEN LABATON and ERIC DASH

WASHINGTON — They may be held in low esteem around the nation, but the country’s largest banks still wield considerable influence in Washington.

The banks have made it difficult for Congressional Democrats and the White House to give stretched homeowners a stronger hand in negotiating lower monthly payments on mortgages and to prevent credit card companies from imposing higher fees and interest rates.

Having won some early skirmishes by teaming with Republican allies, the banks now appear to have the upper hand and may wind up killing — or at least substantially diluting — both pro-consumer measures.

To turn the tide, Democrats are calling in their big gun — President Obama — to pressure the executives at the largest credit card lenders. In coming weeks, officials say, the administration intends to make a major push on consumer finance issues, possibly including tough new lending standards for homeowners seeking mortgages.

Mr. Obama is set to meet at the White House on Thursday with executives from American Express, Bank of America, Capital One Financial, Citigroup, Discover Financial Services, JPMorgan Chase and others to discuss what officials say are abusive credit card fees and practices.

During the presidential campaign, Mr. Obama made an issue of what he considered excessive credit card fees, but he has been largely silent on the matter since his arrival in Washington. As a candidate, he also favored legislation to make it easier for troubled homeowners to use bankruptcy court to ease the terms of their mortgages, a proposal he again endorsed last month.

Despite the president’s support and strong Democratic majorities in Congress, both proposals are in jeopardy because of lobbying by banks and their trade groups, particularly in the Senate.

On Wednesday, the House Financial Services Committee is expected to approve credit card legislation proposed by senior Democrats that would reduce many of the fees and limit the ability of the companies to charge penalties. The legislation puts into law most of the credit card restrictions adopted last year by the Federal Reserve, although the industry strongly opposes the bill because it says it believes a law would be harder to overturn than a regulation.

But the bill, sponsored by Representative Barney Frank, the Massachusetts Democrat who heads the Financial Services Committee, and Representative Carolyn B. Maloney, a New York Democrat, faces an uncertain future in the Senate. A tougher counterpart to the House bill was adopted on a narrow, party-line vote in the Senate banking committee three weeks ago. It has yet to find any Republican support, which would be necessary for it to survive.

The banking industry has also succeeded in working closely with Republicans to water down and then block a measure that would give bankruptcy judges greater authority to modify mortgages, including reducing principal payments. Senate Republican leaders say they have the support of all 41 of their members — enough to kill the provision by making it impossible to get the 60 votes necessary to cut off debate.

Senate Democrats, hoping to resolve the impasse, have opened negotiations in recent days, but not with their Republican counterparts. Instead, in an effort to divide the industry, the Democrats, led by Richard J. Durbin of Illinois, Charles E. Schumer of New York and Christopher J. Dodd of Connecticut, have been in talks with Bank of America, JPMorgan Chase and Wells Fargo, along with a group of credit unions. The lawmakers’ hope is that those institutions would exert pressure on Republican lawmakers and reluctant Democratic moderates.

Even if those negotiations are successful, the Democratic lawmakers are still likely to water down the bankruptcy bill further in the industry’s favor.

Before the negotiations, Citigroup had been the only major bank to support the bankruptcy measure, often referred to as “cram-down” legislation because it would give judges the authority to dictate terms to lenders and investors who own mortgages bundled into securities.

“The cram-down provision, if it became law, would raise the costs of all mortgages for everyone,” said Edward L. Yingling, president and chief executive of the American Bankers Association. “It’s a fact that if you undermine the value of the collateral by allowing cram-downs, you make the loans riskier and banks will price that risk accordingly by rates going up.”

Supporters of the bankruptcy measure had been planning to tie it to another banking bill that the industry favors.

That legislation would make permanent the temporary increase in deposits guaranteed by the Federal Deposit Insurance Corporation, to $250,000 from $100,000. It would also increase the F.D.I.C.’s credit line with the federal government to $100 billion, from $30 billion, thus enabling regulators to reduce a proposed special premium the banks will owe the F.D.I.C. later this year by more than 50 percent — a $7.7 billion savings.

But as the opposition to the cram-down provision has firmed in recent days, senators say there is a growing recognition that the bankruptcy measure might have to be detached and voted on separately. Democratic lawmakers have already agreed to the industry’s demand that the bankruptcy provision be unavailable to homeowners if a lender offers to modify a mortgage through the Treasury Department’s new foreclosure mitigation program. And over the objections of Ms. Maloney, a House subcommittee handed the industry a significant victory when it delayed the effective date by a year. Ms. Maloney said that she expected the measure to move swiftly though the House, but that it faced an uncertain future in the Senate unless it got some Republican votes.

“We need bipartisan support in the Senate,” she said. “We got 84 Republicans in the House on the same bill last year.”

Republican supporters of the industry have been helped in part by the decision by some Democratic campaign committees, fearful of voter reaction, to reject contributions from banks that have received bailout money.

Some prominent Democrats, including Nancy Pelosi, the House speaker, also are refusing donations from bank political action committees. Mr. Frank will not take money from employees of banks that received bailout funds.

Republicans “are never going to beat the Democrats in the fund-raising game in D.C. as long as they are the minority,” said Sam Geduldig, a lobbyist for several banking trade associations at Clark Lytle & Geduldig. “To the extent the Republicans can show they can impact policy, it causes professional donors and lobbyists to look at them in a different light, as opposed to when they just got bludgeoned” in the last election."

“It almost makes the Treasury look like a payday lender.”

TO BE NOTED: From Bloomberg:

"U.S. May Retain Grip on Banks With Warrants After Share Buyback

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By Rebecca Christie

April 17 (Bloomberg) -- The Treasury may retain a stake in many U.S. banks even after they buy back the shares the government currently holds.

The government will continue to hold warrants, attached to every capital injection it has made, even after any share buybacks, Treasury officials said. Banks seeking to escape the government’s grip want to retire the warrants -- which give the right to buy stock in the future at a preset price -- at the same time they acquire the government-owned preferred shares.

The officials said the U.S. would give up the warrants only after subsequent talks with appraisers and the banks to agree on a price. As long as the warrants remain, lenders would continue to face some federal constraints, including limits on hiring non-American citizens, the officials said. Lenders would be freed of restrictions on executive pay and dividends, they said.

“When this program was created, everything was done so fast, I don’t think people were contemplating they would be exiting this quickly,” said Diane Casey-Landry, chief operating officer of the American Bankers Association.

Escalating federal demands on the banks have spurred institutions including Goldman Sachs Group Inc. and JPMorgan Chase & Co. to seek an early exit from the Treasury’s rescue program. The warrants issue may be the latest complication in a $700 billion effort to unfreeze credit that has sparked an outcry among both lawmakers and some bankers.

Most of the funds from the Troubled Asset Relief Program distributed so far have been used for buying stakes in financial companies. Warrants apply to all elements of TARP, and officials are still wrestling with how to include them in their plan to finance purchases of distressed assets.

Toxic-Debt Programs

Treasury representatives are working with the Federal Deposit Insurance Corp. and potential participants in the toxic- debt programs on how to apply the warrants requirement.

Lawmakers pressed for warrants in the TARP law enacted in October as a way for taxpayers to benefit from future profits of companies getting help. When exercised, the government can buy newly issued shares from the company at a pre-determined price.

It’s unclear how much the warrants may be worth and valuing them may prove contentious. Bankers said the warrants, under current market conditions, may turn out to be expensive for those looking to exit the rescue programs quickly.

“If you look at the cost of those warrants and turn it into an annual percentage rate, it’s enormous,” said Camden Fine, president of the Independent Community Bankers of America. “It almost makes the Treasury look like a payday lender.”

Goldman Share Sale

Goldman Sachs Chief Financial Officer David Viniar said in an April 14 interview that “there’s a prescribed process for how you do it -- where you propose a price, they accept or not, you negotiate and then you hire appraisers and come up with an agreed-upon valuation.”

“We’ll figure it out, we don’t know” the cost, Viniar said. Goldman Sachs raised $5 billion this week in a share sale in order to help pay back the $10 billion it took from the government in October.

JPMorgan Chief Executive Officer Jamie Dimon said April 16 his firm could repay U.S. government rescue funds “tomorrow.” He called the receipt of the $25 billion in TARP money last year “a scarlet letter.”

JPMorgan spokesman Joseph Evangelisti declined to comment on the warrants.

For the top 19 banks, any TARP repayments will have to wait until after the so-called stress tests conclude, a Treasury official said. U.S. regulators are reviewing the biggest banks to gauge whether they have enough capital to survive a deeper economic slowdown. A Federal Reserve official said yesterday that the results are planned for release May 4.

To repay, a bank must apply to the Treasury. The request then goes to the bank’s regulators, who review the soundness of the institution. If the bank is deemed in good shape, it’s allowed to buy out the government stake.

Some smaller banks are already in the process of repaying their TARP funds. Of the six who have repaid so far, five have outstanding warrants that need to be addressed."