Interview With FDIC Chairwoman Sheila Bair
HARRIS: Let's talk to Sheila Bair in Washington. She heads the Federal Deposit Insurance Corporation, the FDIC. And she was part of the news conference this morning announcing the latest steps to try and stabilize financial markets. Ms. Bair, thanks for your time this morning. We appreciate it. Thanks for being here.</s>SHEILA BAIR, CHAIRWOMAN, FDIC: Happy to be here.</s>HARRIS: You know, I want everyone to have a listen to some of what Secretary Paulson had to say earlier this morning, and then let's talk about it.</s>BAIR: OK.</s>HENRY PAULSON, TREASURY SECRETARY: Today we are taking decisive actions to protect the U.S. economy. We regret having to take these actions. Today's actions are not what we ever wanted to do, but today's actions are what we must do to restore confidence in our financial system.</s>HARRIS: Now, Linda (sic), as we get started here, I'm going to beg of you, please -- I'm sorry. Sheila, I'm going to beg of you to please break all of this down. I know you can talk us into circles on some of these financial matters, but try to break this down for us as best you can so we all can understand here. Lay a foundation for us here. What is at the root of the lack of confidence?</s>BAIR: Well, I think it's uncertainty about the economic future, and particularly the credit quality of assets on banks' balance sheets, particularly mortgage assets. We've obviously been seeing some distress in the housing market for some time now. So this uncertainty is creating a crisis of confidence. And this is, in turn, is leading to an unwillingness of banks to lend to each other, which has raised their funding costs. It's led to uncertainty with uninsured deposits -- for instance, the small businesses with large business checking accounts, payroll accounts that are above deposit insurance limits. They're pulling that liquidity out of banks, creating problems for otherwise healthy banks in terms of their own funding needs, increasing their funding costs, which in turn makes it more expensive for them to lend to businesses and consumers. So what we're trying to do today with the initiatives we are announcing today is, one, to inject a lot of new capital into banks to make sure the public understands they do have the financial wherewithal to withstand any additional loan losses in my experience because of the problem in the housing sector.</s>HARRIS: Sure.</s>BAIR: And also to provide guarantees for certain types of credits that's extended to banks, so that they will have plenty of liquidity to in turn lend to consumers and businesses.</s>HARRIS: Here's my follow-up. The job of your agency as I understand it -- and correct me if I'm wrong here -- is to maintain public confidence in the banking sector.</s>BAIR: That's right.</s>HARRIS: And I hope I have that correct.</s>BAIR: That's right.</s>HARRIS: So can I ask you -- and I'm not trying to be snarky in any way here. How did this happen? How did the FDIC, your agency, allow this banking crisis to happen here?</s>BAIR: Well, we are a deposit insurer. We're also a regulator for about 5,200 state-chartered banks. We have four bank regulators in total: the Federal Reserve Board, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, and the FDIC. I think collectively we have worked very aggressively over the past couple of years to make sure bank lending standards were prudent and safe and sound. I think it is important to note that a lot of this turmoil has occurred outside of the banking sector. It's been with investment banks, which have been highly leveraged, it's been with mortgage finance companies that are not FDIC insured institutions. They rely on the capital markets for funding. A lot of the economic distress has occurred outside of the banking sector. But nonetheless, we are having some spillover effects into banks. Overall, though, banks are overwhelmingly safe and sound. The overwhelming majority have lots of capital, lots of loan loss reserves. They are in a good position to weather the economic challenges that we have before them, but we do have a public confidence factor here. And the public typically does not distinguish between other types of -- what they call the shadow banking system and non-depositor institutions...</s>HARRIS: Yes. Will you forgive me for pushing a little bit on this?</s>BAIR: That's fine.</s>HARRIS: I just want to understand. I know that you have examiners that routinely visit these banks and make sure that compliance is in order.</s>BAIR: That's right.</s>HARRIS: I'm just wondering, was there a moment missed here when the clarion call could have been sounded so that we had a better understanding of what was going on in the -- specifically in the banking sector?</s>BAIR: Well, I assumed office in June of 2006. We started seeing the problems in the mortgage sector in the fall of '06. I instructed our staff to buy a database that would give us more information about the loan quality of private label mortgage-backed securities. A lot of these high-risk mortgages had been securitized into what they call private label mortgage-backed securities. So I think as an agency, the FDIC was among the first to sound the alarm bells on deteriorating underwriting standards that had infected the mortgage markets. And we certainly worked with our fellow colleagues at the other bank regulators to tighten bank lending standards. But again, a lot of this lending was being done outside of the banking sector. And it was only until the Federal Reserve Board recently imposed rules that applied across the board to banks and non- banks that we've really gotten a handle on tightening lending standards across the board. So I won't say banks are perfect. I won't say bank regulators are perfect. We are not. There have been mistakes that have been made. But I do think it's important for people to understand the difference between an insured depository institution and other types of financial institutions. And a lot of this bad lending has occurred outside depository institutions.</s>HARRIS: OK. I'm going to go a little longer with you...</s>BAIR: OK. That's fine.</s>HARRIS: ... because I'm not sure when I'll get to talk to you again. A little more from Secretary Paulson on the idea that banks may actually be hoarding cash right now.</s>BAIR: Right.</s>PAULSON: At a time when the banks naturally make even the most daring investors risk averse, the needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it.</s>HARRIS: Isn't that exactly what the banks have been doing to this point, hoarding the cash?</s>BAIR: Well, I think everybody has been holding back because we do have this lack of confidence, this lack of certainty about the credit quality of business counterparties. So, absolutely, we are trying to unlock this liquidity. And with these steps, by providing government guarantees, which, by the way, we are charging for -- we're charging very stiff premiums for the guarantees that we announced this morning -- we are hoping to unlock the liquidity so banks will start lending again to consumers and business businesses, because that is what we need to sustain our economic growth.</s>HARRIS: Can I stop you there...</s>BAIR: Sure.</s>HARRIS: ... and ask you, is there any evidence that the credit markets are loosening today?</s>BAIR: I think -- well, the last I checked, yes, the LIBOR spreads were coming down. And the United States is not acting alone here. Europe and Asia had taken similar moves, both to recapitalize banks, as well as to provide short-term temporary liquidity guarantees, as has the FDIC. So, yes, we are seeing spreads come down already.</s>HARRIS: What's LIBOR?</s>BAIR: What is LIBOR now? I don't know. I think it was around 400 basis points this morning. I haven't checked it recently.</s>HARRIS: You know, the idea of confidence, part of it comes from the idea that the folks in charge, people like you, are leveling with the American people. So when you say that the bulk of the American banking system is strong, tell me why we should believe that, and where we can go, independent of your words, to see evidence of that.</s>BAIR: Well, we have something called the quarterly financial reports that all banks must file with. And those are public information. You can see the capital levels and the loan loss reserve levels of individual banks, as well as the industry collectively, by going to those call reports. There's obviously -- there are independent financial analysts who spend a lot of time analyzing bank balance sheets as well. I think though that for the average depositor, a better way to spend time is to make sure you're below our deposit insurance limits. Congress has increased the basic limit to $250,000 until the end of 2009. For small business transaction accounts now, for the non- interest-bearing business transaction accounts, we're providing full coverage. There are different ways of account restructuring. You can get even more than $250,000 of coverage. We have a Web site, myfdicinsurance.gov, that I would encourage consumers to go to, to make sure they're below our insured deposit limits. That's really where I hope that the retail public would focus their efforts, make sure they're below our deposit insurance limits. If you are, you're safe. The chances your bank is going to fail is remote, but even if it does, the FDIC has a very strong record. No one has ever lost a penny of insured deposits in our 75-year history.</s>HARRIS: Two hundred fifty billion dollars to buy bank shares, offering new loan guarantees, a $700 billion bailout plan right now, dumping illiquid assets, these banks are in the process of doing that or will shortly. Do you believe this will work, and how will we know that it's working?</s>BAIR: Well, hopefully there will be very soon impact and more broader availability of credit. Again, we were hoping the credit spreads will start coming down. It looked like that us was already happening this morning. So I think there will be some indicators that we can look at, tangible indicators, to see if it's taking effect. And I think that at the end of the day, we all have to have confidence in our system, in our economy, in our banking system, and our economic future. That's one of the reasons the FDIC, along with the Fed and the Treasury, have taken these very dramatic to show that we do have confidence in the system, we can get through this. And really right now it is a confidence game in making sure the public and other banks and those who lend to the public and lend to banks have the confidence to know that their money is going to be safe, that the system is functioning and is well capitalized overall. And I think the steps we're taking this morning to help instill that confidence.</s>HARRIS: She is the very top of the flow chart at the FDIC. Sheila Bair, thank you so much for your time.</s>BAIR: Sure. Happy to be here. Thanks.</s>HARRIS: You're very patient with your time with us this morning. Thank you.</s>BAIR: Thank you.</s>HARRIS: Let's go to Wall Street now for more details on the federal government's extraordinary and historic move. It is all part of the $700 billion bailout. CNN's Susan Lisovicz joins us now from the New York Stock Exchange with that and investors' reaction today. I tell you what, Sheila Bair was generous with her time. And we asked her a lot of questions. And we're taking a look at the markets today. And we certainly hope that these extraordinary steps start to loosen the credit markets.</s>SUSAN LISOVICZ, CNN BUSINESS CORRESPONDENT: Well, you know, Tony, it's not the Dow anymore that everybody is watching. I think that Chair Bair was talking about the LIBOR, which is this other index that has investors obsessing for weeks now because it's an indication of how tight and how expensive credit is. It's a global index. And it did show that there was -- it was starting to narrow a little bit. And that is a good sign. We have a ways to go, but that was a good sign. In the meantime here, well, we have a volatile session. And a lot of news to digest. I mean, there was a lot of expectation that we'd get details today on the biggest bet ever made with taxpayer dollars. It's got the support of President Bush, the Treasury, the Fed and, yes, the FDIC. Treasury Secretary Henry Paulson said today the government will spend $250 billion to purchase stock in nine leading banks, a similar plan announced yesterday by European governments. Washington will also temporarily guarantee bank-to-bank lending and insure all non- interest-bearing accounts, which are typically used by small businesses. The goal, as Chair Bair was saying, to get banks lending again and give the economy a boost. The move sparked an early rally on Wall Street, but it's -- well, it's kind of moving all over the place. The Dow up, but just a fraction of its gains at its peak. The Dow is up 65 points. The Nasdaq is down 27. Intel's a big drag on the Nasdaq. Its shares are down 5 percent. It reports after the bell, the closing bell. And Tony, we're in earnings season, too...</s>HARRIS: That's right.</s>LISOVICZ: ... just to add a little more fuel to the fire, make things a little bit more interesting and volatile.</s>HARRIS: Well, are you kidding me? It can't stand it. High blood pressure here. You know, there's a fair amount of controversy about the government taking really investor stakes in these private companies. But I guess the question is, is there any real alternative?</s>LISOVICZ: Well, it's certainly radical. There's no question about it. And the free market, you know, isn't so free when the government is nationalizing companies. But the president was saying just this morning that the intent here is to preserve the system. It's what the greater good is. And Treasury Secretary Paulson says the alternative -- the alternative is to leave businesses and Americans without access to financing, which is unconscionable. Also notable, the government isn't just investing in troubled banks, it's also taking a proactive approach by buying stakes in healthy banks to get them lending before another failure occurs. We certainly don't want that, Tony. Back to you.</s>HARRIS: Susan, appreciate it. Thank you. See you next hour. As the most serious credit crisis in decades rocks your finances, CNNMoney.com has some advice, answers. Check out our special report while you're there, "America's Money Crisis." That's at CNNMoney.com. A wall of fire is forcing thousands of people from their homes. Live to Los Angeles, next.