One question for Sheila Bair

By Felix Salmon
November 12, 2009
Paul Solman is taking questions for Sheila Bair. If I could ask her just one question, it would be about her actions taking over WaMu and wiping out all its senior unsecured debt. That's the wholesale interbank market right there, and in the wake of the WaMu collapse, banks pretty much stopped lending to each other, fearful that at any point Bair could step in and wipe out billions of dollars in assets. The ensuing credit crunch was responsible for trillions of dollars in stock and bond-market losses, and Tim Geithner, for one, was furious at Bair for her precipitous decision.

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Paul Solman is taking questions for Sheila Bair. If I could ask her just one question, it would be about her actions taking over WaMu and wiping out all its senior unsecured debt. That’s the wholesale interbank market right there, and in the wake of the WaMu collapse, banks pretty much stopped lending to each other, fearful that at any point Bair could step in and wipe out billions of dollars in assets. The ensuing credit crunch was responsible for trillions of dollars in stock and bond-market losses, and Tim Geithner, for one, was furious at Bair for her precipitous decision.

So the question is this: was the WaMu intervention a mistake, given the knock-on effects it had on the broader economy? Or, more generally, is there anything Bair would do differently, in hindsight?

Bair’s a political beast, and I suspect she’ll brazen it out, saying that her WaMu decision was the right one. But that would put her in the dubious company of all the other executives who feel they have nothing to apologize for. Is it too much to hope that she might show a glimpse of humanity or fallibility?

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Comments
16 comments so far

WaMu seizure was a big mistake and the justice will prove that. Talk about financial reform with Sheila Bair is a joke, just seriously evaluate her decisions.

Posted by Alvaro Niemeyer | Report as abusive

I’d be happy if she told the truth and said it was: the right thing to do regardless of the immediate consequences, that she would have continued doing it were she not threatened with her job and the very relevance of her institution, and that failing to do so in the present poses the biggest risk to America since the Soviet Union.

But you’re right, Felix. Sheila is a political beast. We’re more likely to get some mumbo jumbo about how “WM was the right decision, but we are taking strong action to ensure nothing like that occurs again,” astutely sidestepping the question while transitioning into a ramble about various reform proposals.

Felix, this is a real issue and I don’t want to dismiss it with snark. But one question for Felix Salmon: is there any kind of bank debt you would /not/ underwrite? Or are we in a failure-free zone here?

Bair was dumb enough to believe the things that Jamie Dimon (JPM) told her about WAMU.
Don`t fret. WMI (WAMU`s holding co.)is suing both JPM and the FDIC in two different courts. They are WINNING both cases. Have faith, the truth will come out.

Posted by Dan Taylor | Report as abusive

Sheila Bair not only panicked and took over Washington Mutual when it was solvent, she falsley conveyed all of it’s holding company assets to JP Morgan for under 2Billion dollars. The subsequent bankrupsy filing by the holding company against JP Morgan and the FDIC has raised the probability that if Sheila loses the two case filed, the FDIC will be liable for all the penalties won including those of JP Morgan. Jamie Dimon through Sheila under the bus when his lawyer stated at the delewaire court “the Washington Mutual was solvent when it was taken over by the FDIC.”

Posted by Jack | Report as abusive

Sheila Bair not only panicked and took over Washington Mutual when it was solvent, she falsley conveyed all of it’s holding company assets to JP Morgan for under 2Billion dollars. The subsequent bankrupsy filing by the holding company against JP Morgan and the FDIC has raised the probability that if Sheila loses the two case filed, the FDIC will be liable for all the penalties won including those of JP Morgan. Jamie Dimon threw Sheila under the bus when his lawyer stated at the delewaire court “the Washington Mutual was solvent when it was taken over by the FDIC.”

Posted by Jack | Report as abusive

Felix,
You’re in over your head with this subject matter, please stick to simple journalistic matters.

Rgrds
KL

Posted by kosta | Report as abusive

Good post Felix! Although I am confident justice will prevail, I am almost certain the American public will never be made aware of the behind doors dealing which took place during the fateful month of September 2008. The American public must never know how close to insolvency both the FDIC and JPM were on the eve of 25 September 2008 and any official documents will be sealed far from the FOIA. At best we will be treated to a brief short lived Hollywood picture, much like “The Informant” five to ten years down the road which will be completely forgotten a few months there after.

Posted by hobbes | Report as abusive

I find it interesting that WMI senior and junior bonds are trading at 80 to 100 percent of face value. Somebody knows something.

kosta, care to enlighten us about what Felix and the rest of us are missing or do you feel being obtuse and acting like a jack— is adequate for supporting your opinion?

Posted by Stephen | Report as abusive

Reuters or for that matter any media organization would never attack this story with the ferosity it deserves, simply put you ‘don’t bite the hand that feeds’ you and JPMorgan being a major client of Reuters has been feeding them for quite a long time.

btw …
http://blogs.reuters.com/fulldisclosure/
“This week brought more distressing news for journalists, as a new survey by the Pew Research Center for the People & the Press found the U.S. public more critical than ever of the accuracy and independence of the media.”

Sir, may I ask who is the ‘blank’ now?

Posted by kosta | Report as abusive

kosta,

I think any objective coverage of the WaMu destruction
by the media that tries to shed some light on the FDIC
involvement with JPM in the deal is an improvement over
the ususally news blackout we’ve seen over the past 14
months.

Posted by Stephen | Report as abusive

First Bank of Idaho/FBOP/San Joaquin Bank: Premature FDIC Seizures And Waste Of Insurance Fund

FDIC is the federal regulator for most of the smaller banks ( class NM), including three out of the four that failed today ( Gateway Bank, Prosperan Bank, and United Security Bank). In fact, two out of the four banks that failed two weekends ago were also under its supervision ( Hillcrest Bank Florida and American United Bank).
www2.fdic.gov/idasp/main.asp
fdic.gov/bank/individual/failed/banklist .html

Yet unlike the financial giants who received billions in government assistance, these smaller banks were offered very little help. Regulatory agencies, callously oblivious to local needs, often manipulated rules and situations to account for the “least cost solution,” with the FDIC taking on huge liabilities and sharing losses as the agency continued the massive transfer of wealth from little banks to the favored institutions.
http://seekingalpha.com/instablog/387205 -ppy/35365-first-bank-of-idaho-fbop-san- joaquin-bank-premature-fdic-seizures-and -waste-of-insurance-fund

Notice the similarities among San Joaquin Bank, FBOP, and First Bank of Idaho?

SAN JOAQUIN BANK/ COST TO FDIC: $103 MILLION
fdic.gov/news/news/press/2009/pr09185.ht ml

” Bakersfield and Kern County have lost an excellent institution: San Joaquin Bank. As a community, we are left with numerous questions about this closure. The main question: ‘How could this happen?’

Shutting down a successful local business bank does not strike me as being in our community’s best interest. It is all the more puzzling because the bank, in a heroic effort, raised the capital needed to meet the FDIC’s formula for liquidity.”
bakersfield.com/opinion/letters/x2990760 …

” Elation over the last-minute rescue of San Joaquin Bank halted with the ring of a cell phone at 3:11 p.m. on Oct. 16… Even among those closest to the situation, the decision to shut down the bank came as something of a surprise. They had been told that the banking commissioner had extended a deadline that officially passed the night before, on Oct. 15, and that if the $27 million goal could be met by the end of the next business day, San Joaquin would be spared… New investments topped the $27 million mark that Friday afternoon.”
finreg21.com/news/san-joaquin-banks-fina …

“ San Joaquin Bank’s failure is especially disappointing in light of suggestions that it need not have happened. The bank was said to have secured the $27 million in capital that regulators demanded it nail down in order the stave off closure, only to face the axe anyway.”
bakersfield.com/opinion/editorials/x1675 …

FBOP/ COST TO FDIC: $2.5 BILLION
fdic.gov/news/news/press/2009/pr09195.ht ml

Nine banks, part of FBOP Corp, were seized and sold to U.S. Bancorp. Unlike most other troubled financial institutions, the banking operation failed not because of poor and reckless management but primarily because of its investments in FNM and FRE. Due to rule changes it was no longer eligible for the TARP assistance originally promised. Its plan to re-capitalize itself with private funding was not accepted. The least cost solution for the FDIC at the time of seizure was probably sharing the $2.5 billion loss, but we would never know the “real least cost solution” if FBOP got more time or its re-capitalization proposal was accepted.

“The largest privately held banking group in the nation, the best community bank operation around, had been taken over… FBOP Corp. was felled by its investments in quasi-governmental Fannie Mae and Freddie Mac. The common banking industry practice of investing short-term assets, 30- or 60-day money in Fannie and Freddie, lost FBOP the majority of its capital base virtually overnight and allowed the government to claim the bank was seriously undercapitalized…

And why wouldn’t the FDIC give the bank the extra week they requested to raise the funds… Why are taxpayer needs better served by putting us potentially on the hook for $2.5 billon, rather than by giving the bank another week?”
wednesdayjournalonline.com/main.asp

“Michael Kelly says bank holding company had been promised TARP funds, but rule change left it scrambling to raise private investments… FBOP was working with private investors to invest up to $750 million of new capital into the banks… we submitted a proposal to the regulators, but it has not been approved. Regulators picked U.S. Bancorp to take over FBOP’s banks.”
chicagotribune.com/business/chi-tue-fbop …

Our current FDIC chairwoman, Ms. Sheila Bair, got even better with this one, invoking an old rule to gift USB 2 extra banks that didn’t even fail. I wonder why WMBfsb, with allegedly $17 billion in cash, was not allowed to help its sister bank Wamu remain operative until TARP passed.

“Park National Bank didn’t fail. It was ambushed… Park National Bank – days from closing on the $600 million in private capital that the FDIC demanded be raised – is dead. Simultaneously, the FDIC is handing over to another bank a reported $2.5 billion to take on Park National’s assets.”
wednesdayjournalonline.com/main.asp

“When Bad Banks Sink Good Ones… The Federal Deposit Insurance Corp. is allowed under a 1989 law to assess the costs of disposing of a failed bank that is part of a holding company to other banks with the same owner. The agency has used the mechanism just six times.”
online.wsj.com/article/SB125720151735123 867.html

FIRST BANK OF IDAHO/ COST TO FDIC: $191.2 MILLION
http://www.fdic.gov/news/news/press/2009  /pr0906...

First Bank of Idaho had a June 30, 2009 deadline to raise its capital level but on April 24 OTS appointed FDIC as the receiver. On the same day FDIC seized the bank and sold it to U.S. Bancorp. Apparently FDIC had already found a buyer in secret just like it did with Wamu, therefore ignoring the deadline and the quick transaction. On May 4 a bank board member Nancy Schauer argued against this action as being the least cost solution for FDIC and on May 9 Idaho state lawmakers demanded answers to such broken promises and reckless actions.

April 24, 2009
“First Bank of Idaho in Ketchum was closed by the Office of Thrift Supervision. The Federal Deposit Insurance Corp. was named receiver… U.S. Bancorp… [assumes] First Bank of Idaho’s deposits, excluding $112.8 million in brokered deposits. U.S. Bank agreed to buy $17.8 million of the failed bank’s assets, or less than 4 percent.”
bloomberg.com/apps…

May 4, 2009
“‘The FDIC says they will lose $191 million because of what has happened but if they’d waited a few weeks it never had to happen, ‘ said Schauer… Now the losses are incalculable.”
newwest.net/city/a…

May 9, 2009
“U.S. Reps. Mike Simpson and Walt Minnick sent letters Friday to the heads of the Federal Deposit Insurance Corp. and the Office of Thrift Supervision, asking for information about the decision to close the First Bank of Idaho… OTS gave the bank until June 30 to raise $10 million and bring its capital level to 12 percent. But regulators moved to shut down the bank before that June deadline, shocking bank executives who contend they had investors lined up to give the bank a cash infusion and clear millions in bad loans… On April 24, the OTS appointed the FDIC receiver of the bank, and more than 60 FDIC officials seized it. US Bank officials moved in that same day.”
idahostatesman.com…

What happened to First Bank of Idaho was a travesty of justice, condoned by those who had the power to intervene but did not do so, as well as by the lack of mainstream media coverage.

Then it happened again to FBOP, and to San Joaquin Bank.

What was the justification for OTS/FDIC to ignore their own deadline and seize First Bank of Idaho, with private funding already in place, earlier than promised but would not grant a short extension to Park National (FBOP), also with private funding in place, for the completion of necessary paperwork?

Why bother giving banks deadlines to raise capital or find a buyer when the FDIC already picked the winner?

Why charge assessment fees that hurt these banks even more to solve its insolvency, because the insurance corporation underestimated the magnitude of the current crisis and failed to build up its reserve fund?

FDIC’s main mission was deposit protection, not TLGP or PPIP financing. Why didn’t Ms. Bair ask for money from TARP or the Stimulus bill to help raise the DIF ratio that already fell below the mandatory Congressional minimum since June 2008 and turned negative last month?

Worse, TLGP was created to improve lending but Ms. Bair used this bond guarantee program to help non-lending banks such as Goldman Sachs raise billions of dollars without any restriction on how this money must be used.

Why were these regulators not held accountable for their inconsistent and unfair actions, especially when the Fed, OCC, OTS, and FDIC have all been criticized for their poor, slow, and weak supervisory efforts in many reports released by the Office of Inspector General?

*imho*

Posted by PPY | Report as abusive

That’s interesting. How about asking which was the better “failure”, Wachovia or WaMu, and why? They were similar in very many respects (size, composition, outlook, timing) that had very different outcomes. After you mentioned Geithner, I remembered reading how he called Bair during the Wachovia debacle and said, point blank, “There won’t be another WaMu”.

Posted by jason | Report as abusive

Of course it’s too much to ask for. She seized the bank WAMU), claiming it was insolvent when it was in far better shape than JPMC, with the full intention of handing it over to Chase to bail them out. The FDIC and Chase are in bed together and conspired to steal WAMU to help establish a strong presence for Chase out west. Why else would they sell WAMU on the cheap for $1.8 billion overnight, literally. Now with the lawsuit moving forward it will all come out in the wash, unless the FDIC/Chase are forced to settle for big bucks in order to keep their dirty alliance from becoming public knowledge.

Posted by Chris | Report as abusive

The interview revealed nothing but Bair pushing her own agenda and taking shots at Paulson ‘Treasury’ as she remarked. Given the fact that the question from Reuters was so benign you’ll have to forgive me for sticking to my original statement ‘Felix needs to stick to simple journalistic matters’

‘good night and good luck’

Posted by kosta | Report as abusive

Given the extreme dearth of viable Republicans with sufficient stature to be considered a serious candidates to replace Mr. Obama, the GOP should look to select a person with appeal to voters looking for intelligence, experience, national gravitas, the ability to think while standing and appeals to over 50% of the voter population……………Bring on Shelia Bair.

Posted by george | Report as abusive
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