Monday, September 24, 2012

Sheila Bair: Former FDIC Chair on the Bank Bailouts

Sheila Bair, chairman of the FDIC throughout the financial crisis, has a new book with the following title:

Bull by the Horns: Fighting to Save Main Street From Wall Street and Wall Street From Itself

She led the FDIC from June 2006 through July 2011 and has a uniquely close up view of what actually happened. Fortune recently published an excerpt from the new book. There's some rather interesting and blunt insights in the excerpt. Well worth reading in its entirety.

In the excerpt, Bair describes the meeting with bankers that occurred at the Treasury Department back in October of 2008. In that meeting, Treasury Secretary Hank Paulson convinced a roomful of bank CEOs to go along with the TARP bailout.

Here's some examples of Sheila Bair's insights about the meeting:

On Richard Kovacevich, Chairman*, at the time, of Wells Fargo (WFC)
He [Kovacevich] was eager to give me an update on his bank's acquisition of Wachovia, which...I had helped facilitate. Kovacevich could be rude and abrupt, but he and his bank were very good at managing their business and executing on deals. I had no doubt that their acquisition of Wachovia would be completed smoothly and without disruption...

At the time, Wells Fargo had recently come in with a deal for Wachovia that derailed Citigroup's (C) plans to buy the troubled bank. Citigroup needed help from the FDIC to pull it off. Wells Fargo did not. Citigroup's CEO Vikram Pandit naturally didn't appreciate what Wells had done and was not happy with the fact that Bair had been supportive of their deal over Citigroup's.**

Bair says she didn't have much choice.

Wells was a much stronger, better-managed bank and could buy Wachovia without help from us.

Basically, the FDIC didn't need two troubled banks to merge when a relatively healthy and well run bank like Wells Fargo was more than capable of doing it, and could handle the job on its own.

On Vikram Pandit, CEO of Citigroup
Pandit looked nervous, and no wonder. More than any other institution represented in that room, his bank was in trouble. Frankly, I doubted that he was up to the job.

On Kenneth Lewis, CEO (at the time) of Bank of America (BAC)
He was viewed somewhat as a country bumpkin by the CEOs of the big New York banks, and not completely without justification. He was a decent traditional banker, but as a dealmaker his skills were clearly wanting...

By doing expensive dumb deals for two very sick financial institutions, Merrill Lynch and Countrywide, he took BofA, a bank that was healthy going into the crisis, and turned it into one that was very much less so.

Bair goes on to say that the actions of others were smarter with the smartest being Jamie Dimon...

On Jamie Dimon, CEO of J.P. Morgan Chase (JPM)
Dimon was a towering figure in height as well as leadership ability.

She says that Dimon had warned of troubles in subprime early on and protected his bank via preemptive actions prior to the crisis:

As a consequence, while other institutions were reeling, mighty J.P. Morgan Chase had scooped up weaker institutions at bargain prices.

The purpose of this meeting at the Treasury Department was for Paulson to tell this group of bankers they had to, at least temporarily, accept government capital. In addition to the capital injection, the FDIC was asked to temporarily guarantee the debt of these institutions, while the Fed would be opening up special lending programs measured in trillions of dollars.

Here's some other noteworthy insights of what occurred during the meeting:

- John Thain, the CEO of Merrill Lynch (who Bair earlier in the excerpt described as insolvent), apparently was concerned about executive compensation.

Sheila Bair: I couldn't believe it. Where were the guy's priorities?

- BofA's Kenneth Lewis agreed to participate in the program and thought talking about compensation wasn't appropriate.

- Vikram Pandit apparently scribbled some numbers down then said "This is cheap capital".
(Treasury was only asking for a 5 percent dividend on the capital. Citi would likely not have been able to get anything like that kind of cheap funding elsewhere.)

Sheila Bair: I wondered what kind of calculations he needed to make to figure that out.

- Richard Kovacevich complained, rightfully in Bair's view, that Wells Fargo didn't need the capital.

Sheila Bair: I was astonished when Hank shot back that his regulator might have something to say about whether Wells' capital was adequate if he didn't take the money.

- Jamie Dimon also said J.P. Morgan Chase didn't need the money but accepted it for the sake of system stability. Other CEOs apparently followed with similar sentiments.

By the end of the day each bank had agreed to accept the money.

Sheila Bair says that Citigroup probably needed the government assistance. Otherwise, she seems to think that the capital levels at the other large commercial banks were adequate. So the capital injections into those firms, at least according to her, were largely unnecessary.

The investment banks were in trouble but she also questions whether they needed the capital injections.

Yet, since Merrill was to be acquired by Bank of America (who paid a generous price to say the least), while Goldman and Morgan had been able to raise capital privately (and she thinks were capable of raising more as needed), she also questions whether the capital was actually needed.

It was, of course, a chaotic environment during the crisis.

Decisions without all the necessary information had to be made.

Bair admits that these actions collectively were a success in the sense that the system didn't fall apart, but wonders what the real costs of not imposing more discipline on the worst actors might be down the road.

Check out the entire excerpt in Fortune.

Adam

* John Stumpf became Chairman of Well Fargo in January of 2010.
** Nor did Timothy Geithner who was the head of the New York Federal Reserve Bank and Citigroup's primary regulator. Bair says that both Pandit and Geithner were angry with her for not objecting to the Wells acquisition.
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