Sheila Bair - World's Worst Regulator

So Sheila Bair will hang around as head of the FDIC in the Obama administration. Ugh. I know, I know, Bair is hugely popular in certain circles in Washington, and never fails to get adoring press (most recently, as it happens, in the New Republic). But her let’s-stick-up-for-the-little-guy schtick doesn’t figure to do much to bolster the banking system she’s supposed to be protecting. Nor will it likely speed the healing of the financial system. More broadly, Bair isn’t exactly the profile in courage she’s often made out to be.

1. What’s with her obsession with loan modifications? From what I can tell, Sheila Bair’s plan to revive the housing and financial markets begins and ends with easing the loan terms of every delinquent subprime mortgage borrower she can find. Forget about the rights of the bondholders that actually own the loans Bair is seeking to modify. And forget, too, about the signal that borrowers still current on their mortgages will get when they see delinquent borrowers’ loans modified en masse. Bair seems to believe that loan modifications are a good thing in and of themselves, regardless of their broader economic ramifications.

That’s nuts. I’ve said it before and I’ll say it again: a lender should agree to modify a loan only if it expects that the net present value of the modified loan would be higher than it would be if it were not modified. If the lender agrees to modify the loan under any other circumstance, it is simply engaging in a free giveaway to the borrower. That is something one would think a guardian of the soundness of the banking system would disapprove of. Not Bair. She seems to believe that if banks sprinkle their capital on delinquent subprime borrowers, the housing crunch will go away. She’s kidding herself.

Don’t forget, a lot of delinquent borrowers Bair wants to “help” are speculators who don’t even live in the properties (despite what they might have said on their loan applications). They are deeply underwater and just want out. Those people won’t accept a loan mod, no matter what the terms. As for the borrowers who do live in the properties—and I’m going to sound hard-hearted here, but am not—what’s so bad about renting rather than owning? It’s not the unnatural state of affairs that Bair and her prevent-foreclosures-at-all-costs pals seem to think: according to the census bureau, fully 32% of American homes are occupied by people who don’t own them.

2. Bair hasn’t exactly been a picture of independent judgment on other issues either. A judicious regulator? Please. Remember, for instance, what happened in 2006 when Wal-Mart (WMT) wanted to start an industrial loan company? It was an instance of pure cravenness on Bair’s part--and was a good indication of her basic M.O. Naturally, a broad range of Wal-Mart’s traditional foes, from labor unions to community banks, loudly opposed the company’s move. But the guidelines for approving ILC applications are straightforward, and Wal-Mart met all of them. This was clearly a moment when a disinterested regulator (which is what Bair is supposed to be) should ignore the political winds and follow the rules. What did Bair do? She dithered, imposing one moratorium on ILC applications after another, for no reason other than to duck the heat she was feeling. In the end, Wal-Mart withdrew its application after it saw it wasn’t getting anywhere in the face of Bair’s stonewalling. This was not the fearless independent-mindedness that has the press so gushing.

3. Bair’s agency hasn’t done such a great job preventing what’s shaping up to be the next lending train wreck. That would be commercial real estate. The FDIC was basically asleep while the banks it regulates pumped up commercial loan volumes after the housing market cracked. Now—surprise!—delinquencies on those loans are starting to surge, and kick off a second leg to the credit crackup that threatens to prolong the recession. What did FDIC do to restrain the excesses in the CRE market? From what I can tell, nothing. Nobody expects the woman to be clairvoyant, but I don’t know of anything Bair’s agency did to rein in crazy CRE lending.

4. Bair doesn’t seem to play well with others. The financial markets are currently in the midst of their greatest crisis in memory. I for one would appreciate it if the government’s key financial regulators were singing from the same hymnal, and would cut out the sniping, as they tried to fix the problem. But no one seems to snipe more (and try to undercut stated policies more) than Sheila Bair does. I don’t see how that helps anything.

Nobody says the head of the FDIC has the easiest job in the world. But with her pseudo-populism and her eye for the camera, Sheila Bair has perfected the art of getting great headlines, not of making great policy. By the end, the Bush people seemed to regret Bair was on their team. I suspect in not very long, the Obama people will feel the same way. In the meantime, with Bair still at the FDIC, the government will likely be all the more hamstrung as it tries to sort out the mess.

November 14, 2008 Bair released details of her much more ambitious plan — a $24.4-billion program aimed at preventing 1.5 million foreclosures.

>> That’s nuts. I’ve said it before and I’ll say it again: a lender should agree to modify a loan only if it expects that the net present value of the modified loan would be higher than it would be if it were not modified...

Yes, in a perfect world where the borrower can service the loan. But what if the borrower is going to be in a position of default if the loan is not modified? Is there not a case to be made for the lender to take another really careful look at the loan to see if the NPV of the new proposal returns a better NPV than if the loan is permitted to default, taking into account all of the costs and potentially unrecoverable losses that letting the loan default could encompass?

DieHard thinks so.

She’s a far sight better than Don Powell was. He gutted the agency. He wanted to get the regulators ‘off the backs of the banks’. She didn’t have a lot left to work with when she got there.

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