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FDIC Conductor Wields a Steady Hand
Early Voice of Warning Leads in Effort to Stem Crisis

By Binyamin Appelbaum
Washington Post Staff Writer
Thursday, October 2, 2008

Hundreds of people desperate to withdraw money lined up outside the branches of IndyMac Bancorp after the California bank was seized in July by the Federal Deposit Insurance Corp.

FDIC officials were stunned. The bank now belonged to the federal government. The deposits were insured by the FDIC. Bank runs were supposed to end once the government arrived.

"It had just been so long since there had been a significant bank failure in the U.S.," FDIC Chairman Sheila C. Bair said in an interview yesterday. "People had just forgotten that banks fail."

And, she added, they had forgotten about the FDIC.

Three months later, Bair and her agency have moved to the forefront of the government's response to the financial crisis. Observers say the FDIC's recent actions may offer the best hope for limiting the consequences of the crisis.

On Tuesday, Bair may have broken the deadlock over the administration's $700 billion bailout plan by proposing to increase the FDIC guarantee of bank deposits beyond the limit of $100,000 per account.

On Monday, Bair brokered the sale of Wachovia to Citigroup in a deal that experts said could serve as a model for limiting the cost and consequences of dealing with troubled banks.

And in August, Bair announced a program to modify thousands of the mortgage loans held by IndyMac to help homeowners avoid foreclosure. The program may be expanded to include other loans that the government buys as part of the bailout.

Bair, who resumed a long career in public service when she took over the FDIC in 2006, is characteristically pragmatic about the opportunity and the responsibility.

"I don't think we really have any choice, and we've been preparing for some time," she said. "We saw this coming before anyone else did, and we're as ready as we can be."

People who have worked with Bair describe her as well-suited to the challenge. They say she is principled and blunt without being confrontational. She has the talent, more often observed in diplomats than in banking regulators, for simultaneously communicating opposition to an idea and personal warmth for the holder of the idea. And she knows how to make a deal.

Martin Eakes, chief executive of the Center for Responsible Lending, which seeks stricter mortgage regulations, described a meeting organized by Bair in early 2007 and attended by consumer advocates and mortgage executives.

"There were some really heavy egos around that table, people with 30 and 40 years' experience in the minutia of mortgage loans, and she just moved that group in a way that I marvel at," Eakes said. "Had I pushed the same issues, I would have had everybody screaming at me."

Nonetheless, Bair's relationship with the banking industry has sometimes been rocky. Bankers, subject to Bair's authority, are reluctant to talk about her publicly. Her first action at the FDIC was to raise the premiums banks must pay to insure deposits, an inherently unpopular idea.

More recently, Bair has ruffled feathers by arguing repeatedly that mortgage companies should perform mass modifications of loans to help borrowers avoid foreclosure. Industry executives say that loans must be modified on an individual basis and that Bair is touting an impractical plan because it sounds good.

Bair acknowledges that she sometimes walks on the wingtips of bankers, but says she has the industry's health at heart.

"It didn't make me popular with a lot of people, but there needed to be a light cast on this," she said of her advocacy for loan modifications.

Bair, 54, was born in Wichita and went to the University of Kansas for a degree in philosophy and then for law school. Then she moved to Washington to work for Sen. Robert Dole (R-Kan.). One of her fellow staff members was Joshua B. Bolten, who would become chief of staff to President Bush.

Bair left Washington intending to return. She ran for a U.S. House seat in southeastern Kansas in 1990, riding a bicycle between homes in the small towns that dotted the district. She lost in the Republican primary. She favored abortion rights, and she was outspent by about three dollars to one.

So she spent the go-go 1990s working in the financial markets, as a regulator at the Commodity Futures Trading Commission and then as a lawyer at the New York Stock Exchange.

She first became concerned about subprime lending in 2001, after she became an assistant secretary at the Treasury Department, overseeing financial institutions. She wrote and spoke about her belief that some lenders were taking advantage of borrowers, and together with other early sirens such as Federal Reserve Governor Edward Gramlich, she warned of the need for more regulation to protect consumers.

There was no audience for that advice at the time, and Bair soon left Washington again to teach at the University of Massachusetts. She said she believed she was done with public life.

She moved into an old house that faced the former home of poet Emily Dickinson, opened an account at a local community bank and wrote a book for children about the importance of saving money. She also taught and wrote extensively about issues such as the need for banking services for lower-income families.

"She was terrific in demonstrating why the history of the policy is important to the shaping of policy itself," said Thomas O'Brien, who was dean of the Isenberg School of Management and taught a class with her. "She showed how ideas got shaped and how policy came from those discussions and compromises."

Then, in 2006, she was called back to Washington.

At the time, the FDIC was seen by observers as a Maytag agency. It had been two years since the last bank failure, the longest quiet stretch since the agency was created in 1933. Hundreds of FDIC employees had been laid off. Many banks were no longer required to pay insurance premiums because the money wasn't needed.

Bair, however, soon decided that the sleepy days were ending. Old friends told her that aggressive lending practices were no longer a danger only to consumers but also to the industry. At Bair's direction, regulators bought a database of information about securitized loans. They saw an alarming pattern of disregard for traditional underwriting.

By the spring of 2007, Bair was arguing with increasing vigor, first in private meetings and then in public speeches, that the industry needed to modify loans on a massive scale -- not only to help customers avoid foreclosure but also to help companies avoid the consequences of those foreclosures.

She remains frustrated that such a program is absent from the government's response to the crisis.

"I think that's been a frustration of mine throughout this," Bair said. "The thrust has still been on the back end, of providing assistance to institutions, and not on fixing the loans themselves. And for whatever reason, the borrowers have been viewed as politically unpopular, which has made it difficult to get the political will to fix the mortgages. And that's the core of the problem. That's what needs to be fixed."

As foreclosures continued to rise, financial institutions started to crumble. Investment banks fell first because they were more highly leveraged, but the crisis soon spread to commercial banks, which are insured by the FDIC.

Even many of Bair's critics applaud her recent performance. In the past week, the FDIC has overseen the rescue sales of Washington Mutual to J.P. Morgan Chase and Wachovia to Citigroup. The two deals, involving banks with more than $1 trillion in assets, could cost the government nothing.

To seal the Wachovia deal, the FDIC agreed to absorb any losses above $42 billion on a portfolio of Wachovia's most troubled loans in exchange for a $12 billion stake in Citigroup. Experts say that combination of shared risk and shared reward offers a model for dealing with other troubled banks.

But Bair was no more able than other regulators to predict that things would get this bad.

After the failure of IndyMac, Bair told Reuters that she would be "very surprised" to see another large bank fail. "Based on what I'm seeing now, I really don't see we will have institutions of that significant size having serious problems," she said.

Almost exactly two months later, the FDIC would take possession of Washington Mutual in the largest bank failure in U.S. history.

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