banking

Accountability key to banking recovery

Every day, I receive a semi-deluge of industry related emails.  Between the various agencies, media sites, organizations and associations I tend to receive more communiqués than I know what to do with.  But I developed an interesting habit last year when the banking industry first started its tailspin dive by making certain to read every single issuance from the FDIC.

Going back to at least last September I have read and saved each and every one of them (several hundred I might add).  I’m sure some of my peers will beg to differ, but for me this is where anyone in the industry should’ve been looking during the crisis for the best indicators of what’s going on.

Yesterday, I was glad for this somewhat addictive habit of mine.  For what may be the very first time since Lehman went belly-up, I may have found the first true concrete piece of evidence that we’re on the road to recovery, if only in some small way.

The FDIC agency alert yesterday announced plans to bolster the Deposit Insurance Fund (DIF) by requiring insured institutions (mostly the banks you and I know) to prepay on their quarterly premiums so that the fund remains viable and liquid through the still unfolding resolution of the banking mess.  And that’s significant because unlike a year ago, this time around the plan calls for the industry to take responsibility for itself and not go running to Capitol Hill for help, an option FDIC Chairman Sheila Bair has denounced on several occasions.

Here’s what Bair had to say in the announcement:

“The decision today is really about how and when the industry fulfills its obligation to the insurance fund. It’s clear that the American people would prefer to see an end to policies that look to the federal balance sheet as a remedy for every problem. In choosing this path, it should be clear to the public that the industry will not simply tap the shoulder of the increasingly weary taxpayer. This proposal is a vote of confidence for the banking industry’s resilience, and it will continue to recover its strength as we work through the significant challenges ahead.”

The reason for my optimism is that this action shifts control back to the banking sector to fix its own mess.  It puts greater emphasis on each individual institution to fulfill its obligations to the DIF in advance of using those same funds for more traditional activities commonly associated with generating profits.  I think accountability is necessary, if not essential, to repairing the damage inflicted on the industry and repairing its reputation with depositors, investors and borrowers (something the NCUA had figured out much sooner).  And so I’m feeling a little better about where we’re heading, economically speaking.

Oh, and Comptroller of the Currency John C. Dugan (that’s the OCC head honcho in case you didn’t recognize the handle) agrees with me.  Mr. Dugan said of the FDIC plan: “The actions we are taking today represent a balanced approach to raising needed money for the deposit insurance fund without impairing the ability of our banks and thrifts to support economic recovery.”  He added, “I think this is a very positive proposal. The staff did an excellent job, and I support the way you handled it”.

I’d like to chalk it up to “great minds think alike.”

By the way, if anyone knows of a Sheila Bair Fan Club or is thinking of starting one I’d appreciate if you would let me know.  She won my admiration last year (no surprise to my regular readers) and has routinely found ever more ways to score points with me.  She continues to step up and talk straight, smart and to the point about what’s going on with the banks and what to do about it.  I look forward to the President acting out on the banking reform plans announced earlier this year and I sincerely hope he put Bair in charge of the new entity.

For now, though, I have to go; seven more FDIC email alerts have landed in my inbox and I need to check ‘em out.

Let the FDIC lead the way!

I can’t think of any more telling comment about where I am in my professional life than what I’m about to offer:

Sheila Bair rocks!

If you don’t know who she is, well, shame on you.  Because over the past year or so as the banking world has been in a near free-falling, tail-spinning heap of confusion, the chairman of the Federal Deposit Insurance Corporation (FDIC) remains perhaps the only reason why we haven’t been experiencing pure panic in the banking sector.  We’ve all watched as she calmly navigates from bank failure to bank failure, never losing her composure or allowing the dire circumstances to consume her or the FDIC.  She routinely offers sound and sensible insight and perspective, framing what’s happening in the banking world and making sure that everyone knows that the FDIC continues to have our back.   From the very first publicized collapse last year (IndyMac) straight through to last week’s speech before the Senate Committee on Banking, she has proven that there’s no substitute for having the right person in the right job.

As to why I’m waving my Sheila Bair banner so vigorously this week you need only read the transcripts from her aforementioned Senate testimony last week.

She was among the very first and remains one of the very few industry leaders to rail against the idea that any financial institution is “too big to fail.”  Last week, she expanded on that considerably.  She discussed how the “notion of too big to fail creates a vicious circle that needs to be broken” or rather, “we need to end too big to fail.”  She highlighted how so much of what’s caused this nightmare stems from “the presence of significant regulatory gaps with the financial system” and followed that up by suggesting that “we need to develop a resolution regime that provides for the orderly wind-down of large, systemically important financial firms, without imposing large costs to the taxpayers.”

Wow!  I mean, like, wow!

So really what she’s saying is that if you’re, say Citigroup or Bank of America, and you’ve managed to paint your institution into a financial corner from which you can’t legitimately escape, the only thing to do is go out of business.  Y’know, sort of like the core principles of a free market economy would dictate, or so we all believed until this past year.  None of this government bailout activity would be allowed that essentially transferred risk from for-profit institutions to us, the taxpayers.  You mismanage your bank, you run out of options, you close; simple and fair.

Chairman Bair further expanded on her proposal by explaining that with a resolution regime “losses would be borne by the stockholders and bondholders of the holding company, and senior management would be replaced.”  Or rather in my own words, accountability would be enforced; those who made the decisions that caused the problem would be forced out and those that were banking on a windfall that until now was almost guaranteed would have to accept the unfortunate risk-side of their investment (no more “sure things”).  And towards that end, she suggested that “each bank holding company with subsidiaries engaged in non-banking financial activities would be required to have, under rules established by the FDIC, a resolution plan that would be annually updated and published for the benefit of market participants and other customers.”   This I’ve come to think of this as a disaster recovery plan of an entirely different nature.

Think about what’s being proposed: accountability, acceptance of risk and the need to plan for all potential outcomes, favorable or otherwise.  What a concept!  And what a breath of fresh air!

Chairman Bair also offered the concept of forming a Financial Services Oversight Council that effectively “should be able to harmonize rules regarding systemic risks to serve as a floor that could be met or exceeded, as appropriate, by the primary prudential regulator.”  But wait, there’s more.  Of the council she also suggested that “primary regulators would be charged with enforcing the requirements set by the Council. However, if the primary regulators fail to act, the Council should have the authority to do so.”  This would eliminate the current design restrictions in which individual oversight agencies could only pursue punitive and/or corrective actions to a point but once their jurisdiction ended so too would their ability to take additional and often necessary steps to address the issues at hand.  Generally speaking, this would eliminate a number of loopholes that currently exist in the system.

I find all of this remarkably refreshing.  It’s so simple and straightforward, it’s all but impossible to reject or ignore (but I’m sure our politicians will try just the same).  And to a very large degree, these proposed changes would work, maybe not completely but certainly enough so that it would be worth our time to at least attempt implementing them.

But does everyone think so highly of Ms. Bair and her proposal?  It’s received pitiful little coverage in the press (I couldn’t find anything on two of the major news sites and on the third it was skewered to look like partisan politics) and none of my contemporaries were even aware that she had spoken.  Frankly, I don’t understand why.

I’ll put it out there right now: If I have a vote that can be cast in support of her plan it’s hers; there’s no need to ask me twice.  And if I need to poke a senator or two from my home state to help inspire them to support her plan, someone only has to let me know and I’ll happily go call on them (at home or in DC, it’s close enough to drive).

FDIC: More than just a sticker on the bank’s door.

I opened my front door last week and found my industry waiting for me on my very own doorstep, seriously.

The Raleigh News and Observer had a story on page one about how U.S. Senator Richard Burr called his family during the early days of the banking crisis last Fall and instructed them to withdraw as much money as they could from their bank accounts via ATM in reaction to the onset of the economic crisis.  Apparently what he heard during closed door sessions with our government leaders scared him so much that he was willing to be amongst the first to start a run on our banks.  And the amazing part of the story is that he’s been fond of sharing this story during speeches in the time since as a way of underscoring how dire things were.

From the cheap seats where I write, I would have to say that the only thing the story itself and the retelling of it time and again underscores is that being a U.S. Senator does not indicate any particular ability to comprehend or apply information.  It also serves as a reminder that despite being presented with evidence to the contrary, people believe what they hear ahead of what they read.  Because every time you’ve been in an FDIC insured bank there are signs all over the place that clearly state that “Each depositor [is] insured to at least to $100,000″.

I recall earlier in 2008 when the first set of banks went under due to worsening market conditions Sheila Bair, the person running the FDIC, stated loud and clear that all depositors money was safe up to the $100k limit.  She calmly and rationally explained how things were going to work, how each depositor would have unrestricted and uninterrupted access to their money as if though nothing had happened and that there was absolutely no reason to panic.  And she was right.  In the months since that first time (with IndyMac) she’s had plenty of chances to hone her “all is well” mantra as one bank after another simply reached the end of their useful lives.

When people started questioning what would happen if they had more than the covered amount, Ms. Bair worked with the various financial leaders in our government to have that amount temporarily increased to $250,000 (good through at least year end, 2009) thus assuaging the concerns of that very small percentage of people who might have such worries.  But at no time since this nightmare began to firm up nearly a year ago has anyone even remotely paying attention been presented with any evidence whatsoever that there are legitimate concerns as to the viability of the FDIC.

As matter of fact (and of interest), the FDIC has always fulfilled its promise in any situation during which it was required to do so… always. Senator Burr should have known that all along.

Sadly in the time since the story broke Senator Burr has been doing a little two-step trying to soften the absurdity of his statements saying that he “did what many people did.” Well, no, not really. He acted based on privileged information and made certain to take immediate steps to protect his constituents, except it was limited to those living in his home rather than his home state. But he didn’t think to warn me, or you or anyone else trusting their leadership to look after their best interests. His assertion that other people did exactly the same thing, particularly those from North Carolina, doesn’t hold up under scrutiny either. I’ve asked at least a half-dozen friends (and fellow Tar Heels) over the past week or so if they ever thought to run to the bank last Fall and horde cash; none did. They all wondered why I was asking and I was all too happy to share with them the story of their Senator, Bank-run Burr (kudos to MSNBC’s Rachel Maddow for that clever nickname).

The good news is that the FDIC has all of our backs, unlike Senator Burr. The better news is that I’m registered to vote in North Carolina and will have the privilege to let the Senator know first hand whether or not I have his back come Election Day 2010.