"Why Sheila Bair Must Resign"

John Hempton is still unhappy with Sheila Bair:

Why Sheila Bair must resign, Bronte Capital: Sheila Bair is doing a fine job at one thing – modifying mortgage terms in the mortgages she has taken over – particularly those at Indy Mac. As a liberal I would be expected to applaud – but I am profoundly glad that Obama did not do as Robert Kuttner suggested and nominate Sheila Bair for the Treasury Secretary post.

Sheila Bair is simply wrong when she implies that the problem started with mortgages and therefore it will end with mortgages. The problem with mortgages is no more than a trillion dollars (say 20 percent of the mortgages in the US defaulting with a 50% loss). Indeed it is much less than a trillion. If the financial crisis were about mortgages it would be over now – what with 500 billion of capital raising, a few hundred billion chipped in elsewhere (either by the Government into AIG or Maiden Lane or by Lehman and Washington Mutual bond holders and all the Fannie and Freddie losses that will be picked up by the Feds). The financial crisis is not about mortgages – it is about trust.

The people who provide finance to financial institutions (inter-bank and otherwise) no longer believe they will get their money back – and so are no longer willing to provide finance. The unwillingness to lend to financial institutions dooms them regardless of their solvency. The crisis is about trust.

It is alarming enough that the head of the FDIC in so self serving a manner misdiagnoses the nature of the financial crisis – self serving because her institution is building up enviable expertise in modifying mortgage terms. ... But if misdiagnosis of the crisis were the end of it then there would be no pressing need for Sheila Bair to resign. It is not the end of it. Sheila Bair is an obstacle – indeed one of the principal obstacles in the way of reinstalling trust to American financial institutions.

It comes about as follows: if you accept that the problem is that people will no longer lend to financial institutions then the core thing that is required is the perception that the US Government will not arbitrarily confiscate your rights if you lend to financial institutions. On Friday I suggested that Sheila Bair might confiscate Citigroup wiping out in excess of 100 billion dollars in parent company debt. I am just a humble blogger in Australia – and my suggestion would be outrageous except that Sheila Bair through her actions on Washington Mutual and Wachovia made my suggestion plausible. She has form. She has done it before. ... Her judgment is unsound (proven) and her willingness to use powers to wipe out or compromise people who lend to financial institutions make her unsound judgment dangerous.

She just might confiscate Citigroup – because that sort of rash action is up her ally. She shoots from the hip – and Wachovia proves her aim is not true.

Anyway – this crisis will be over when people are willing to lend to American financial institutions unsecured again. And they will not lend to financial institutions when Sheila Bair is around. Her presence makes it dangerous.

A policy statement saying she will not do it again would be nice – but is implausible. Debt holders make a small amount of money when they are right – and lose a large amount when they are wrong. Sheila Bair – even if she promised not to be so rash again would not be believed.

There remains a small chance that she will again exercise her unsound judgment to compromise debt holders – and that alone is enough reason not to lend to American financial institutions.

I do not know what a complete solution to the financial crisis (other than full nationalization as per the Citigroup post) would look like – but if full nationalization is not on the agenda (and as far as I can tell it is not) then any solution to the financial crisis involves removing Sheila Bair. She is an obstacle to trust.

It is simple Sheila. Resign now. You owe it to your country.

I don't agree with his diagnosis of the fundamental problem, but the real intent here is probably policy advice - a statement of what not to do this time - as much as anything else (or can be taken in that light). [Update: Follow-up from John Hempton.]

Felix Salmon says bondholders shouldn't worry:

Who Will Take Over Citi?: ...Possibly more likely is the idea that Citigroup will be nationalized this weekend, with shareholders being wiped out. John Hempton today sketches out what might happen if bondholders got wiped out at the same time; I'm reasonably confident that in the wake of the Lehman debacle there's no way that Hank Paulson would let that happen.

In any case, with Citi shares trading at less than $4 apiece, something needs to be done. ... The market is essentially forcing the board's hand here -- not to mention that of policymakers. Citi's managed to muddle through this week. But my guess is that there will be some kind of major announcement over the weekend.

Robert Reich wonders why we are thinking of bailing out Citigroup at all given that we are, apparently, letting General Motors go under:

Why CitiGroup is About to Be Bailed Out and Not General Motors, by Robert Reich: Citigroup was once the biggest U.S. bank. General Motors was once the biggest automaker in the world. Now, both are on the brink. Yet Citigroup is likely to be rescued within days. General Motors may not be rescued at all.

Why the difference? Viewed from Wall Street, Citi is too big and important to be allowed to fail while GM is simply a big, clunky old manufacturing company that can go into chapter 11 and reorganize itself. The newly conventional wisdom on the Street is that the failure of the Treasury and the Fed to save Lehman Brothers was a grave mistake because Lehman's demise caused creditors and investors to panic, which turned the sub-prime loan mess into a financial catastrophe -- a mistake that must not occur again. But GM? GM is only jobs and communities. Citi is money....

Citigroup had a market value of $274 billion at the end of 2006. Now its value is about $21 billion. That's awful news for Citi, its executives and traders, and its investors and creditors. But it's not necessarily awful news for the economy as a whole. Even if Citigroup were to go belly up, the real economy would not be seriously harmed. The mutual funds, pension funds, and deposits overseen by Citi would be safe; fund managers would find their way to other banks.

In other words, Citigroup is not much different from General Motors. It's a company that once made lots of money but, through a series of management blunders, is now losing money hand over fist. Just like the shareholders and creditors of GM, Citi's shareholders and creditors are taking a beating.

So why save Citi and not GM? It's not clear. In fact, there may be more reason to do the reverse. GM has a far greater impact on jobs and communities. Add parts suppliers and their employees, and the number of middle-class and blue-collar jobs dependent on GM is many multiples that of Citi. And the potential social costs of GM's demise, or even major shrinkage, is much larger than Citi's -- including everything from unemployment insurance to lost tax revenues to families suddenly without health insurance to entire communities whose infrastructure and housing may become nearly worthless. I'm not arguing that GM should be bailed out; as I've noted elsewhere, GM's creditors, shareholders, executives, and workers should have to make substantial sacrifices before taxpayers should be expected to sacrifice as well.

Nonetheless, Citi is about to be bailed out while GM is allowed to languish. That's because Wall Street's self-serving view of the unique role of financial institutions is mirrored in the two agencies that run the American economy -- the Treasury and the Fed. Their job, as they see it, is to keep the financial economy "sound,"...

Because the public doesn't understand the intricacies of finance, it's easily persuaded that this is the same thing as keeping credit flowing to Main Street. That's why the public and its representatives have committed $700 billion of taxpayer money to Wall Street and another $500 to $600 billion of subsidized loans to the Street from the Fed -- bailing out the investors and creditors of every major bank, including , momentarily, Citi -- only to discover, at the end of this frantic and unbelievably expensive exercise, that American jobs and communities are more endangered than they were at the start.

Comments

[Beezer]

Taking out a bank and shooting it sure does get one's attention doesn't it?

If that destroys trust, then it is probably a net negative. I don't think it's done as much damage as this post suggests. However, keeping a bad company, a bankrupt company, on life support may well be a misallocation of resources.

Reich is right about Citi/GM. There is a small village between Wall Street and Washington D.C. They are myopic and have little real commitment to working and middle class jobs.

After 8 years of "tinkle down" economics, it's way past time to start pulling for the ordinary citizen.

[Dickeylee]

But Citi's already got their $25,000,000,000.00 from TARP! Now we're going to "nationalize" them tomorrow? Just another $100,000,000,000.00 or so, right? Why, that's not even up to AIG's standards yet.
Oh, but let's phuc GM and especially phuc the UAW. Let all those old retired GM employees eat Alpo!

[Bruce Wilder]

John Hempton lost $$$ when Sheila Bair decided to take down Washington Mutual, and he does not forgive.

Personally, I thought she acted brilliantly. WaMu could easily have wiped out the FDIC. Easily. And, it did not cost the FDIC a penny -- the largest bank failure in history by close to an order of magnitude! Amazing.

And, when she gave the deathblow to Wachovia -- which was also big enough to devastate the FDIC -- she came up with another brilliant stroke, which would also have saved Citibank.

The woman is no deer in the headlights. She acts. I like it.

If the occasional bondholder gets burned, that's fair warning in a capitalist system to watch out who you are lending your money to. Federal deposit insurance doesn't exist to insure the bondholders.

And, the right question to ask here is why does Hank Paulson think he should guarantee bondholders everywhere?

[Bruce Wilder]

I saw somebody on television say that rescuing GM would be like the rescue of AIG "writ large", and I was wondering if he'd looked at the numbers.

[RW]

Sheila Bair's FDIC is one of the best run bureaucracies in DC, superb in analysis and execution even when provided inadequate guidance as is the case under the feckless Bush administration; under an Obama administration in the current financial crisis I would expect FDIC to be as critical as a well functioning FEMA would be in a natural crisis and Hempton needs to reconsider the assumptions underlying his critique.

[calmo]

Thank you Bruce for demanding who the hell Johnny Hempton is. Of course, I will tolerate Buffet because he's been around ...even before July 2008.
I fail to see how this pipsqueek even gets a mention...suggesting that we are prone to any quack (you see how I cannot let go) esp with "financial" or "investment" somehow embedded in their self-described line of work.
Felix indicates we are this desperate: quote any financial analyst who makes a couple of predictions a couple of weeks ahead of those with lesser information.

I prefer to listen to my dog howling at the moon.

[bob mcmanus]

And, the right question to ask here is why does Hank Paulson think he should guarantee bondholders everywhere?

Because the bondholders are Chinese and Saudi who might view a default by Citibank as a US gov't default.

[Worker]

Remember watching some commentator on CNBC saying that if the government wiped out Fannie and Freddie equity holders, it would create a cascade of failures at other institutions. Any South American country knows it becomes very difficult, then impossible, to raise private equity if there is a pattern of nationalization.

At the time, the idea of solidifying the equity value of Fannie to remove systemic risk seemed repugnant. Now there is some truth.

Have enough of the weakest institutions been taken over that the system is solvent? AIG was systemically equivalent to a $150bn write down (the book value prior to liquidation). Lehman $50bn. Have we washed out the dumb debt holders? Is what we are facing now systemic deflation? If we we can answer yes to these questions, maybe we should consider a new approach in the face of a run on a "too big to fail" institution, an approach that explicitly maintains the equity holders.

Saving equity holders DOES NOT mean the US government necessarily incurs cost. In fact, at some point, it is the most profitable course for the gov't. The reward creating confidence is huge. If the institutions have already written down their assets, the risk is also low. Why not let the US buy a boatload of Citi stock/ CDS prior to announcing a deal? This would be "insider trading" in the private sphere. We could sell a lot of the stock back to the shorts 1 week later at 100%+ profit.

The hedge fund traders are sheep. They keep doing what works until it doesn't and then exit in mass. What works now is trading with US policy enforcing right downs and nationalizatons. Saving Citi's equity would send a message to that the pile-on bank-run trade- shorting the stock, buying CDS, maybe going long the debt as a hedge is playing with fire.

Given that Citi's problem here is likely liquidity rather than solvency (at least after the $25bn in recent preferred from the TARP), now might be the time to signal that the wave of nationalizations is over by effectively supporting the equity of a solvent institution.

Or let Citi fail. BofA and MS won't be far behind. And reconsider this solution next month.

[me]

> I don't agree with his diagnosis ...

That's a link to an October 1st opinion.

How sure are you it's still accurate after 7 weeks?

Much has changed.

[Mark Thoma]

He makes the same point about trust in this post, but the link has more detail.

[esb]

Bush should have discharged Bair the day she first began to speak in contravention of his administration's positions regarding housing. I will promise you this, any Obama subordinate who behaves in such a manner will find her/his desk gone upon returning to the office later that day.

With respect to C, I frankly do not give a care how it is handled just as long as the preferreds go down with the common (so that Bill Gross can feel another tear or two or three run down his face.)

[Blissex]

«The reward creating confidence is huge. If the institutions have already written down their assets, the risk is also low. Why not let the US buy a boatload of Citi stock/ CDS prior to announcing a deal? This would be "insider trading" in the private sphere. We could sell a lot of the stock back to the shorts 1 week later at 100%+ profit. »

The problem is that stock prices are not just a confidence trick -- if Citigroup is bankrupt (and it is), playing confidence games and squeezing the shorts on its stock price is a short term way to give people like you a liquidation opportunity, just delays the inevitable.

The Citigroup stock price does not reflect a lack of confidence alone, it also reflects a very real lack of solvency.

And amazingly it is still higher than in 1996, the year of "irrational exuberance".

[Blissex]

«"And, the right question to ask here is why does Hank Paulson think he should guarantee bondholders everywhere?"
Because the bondholders are Chinese and Saudi who might view a default by Citibank as a US gov't default.»

Well, not quite but close -- the USA gov. is absolutely desperate to keep the inflow of foreign funds going, and USA gov. guaranteeing just about everybody is the only way, as foreign creditors are currently only willing to lend on the full faith and credit of the USA gov.; such are the consequences of creating an economic system based on importing capital and exporting jobs.

And it is not only China and the Saudis, it is Japan too.

[Blissex]

«the consequences of creating an economic system based on importing capital and exporting jobs.»

Oops, "importing capital" should be "importing loans", because the USA have been exporting capital and jobs (and importing loans and labor).

[Denis Drew]

Guarantee that GM can repay its loans by guaranteeing that GM will survive foreign brand competition -- the way other modern OECD countries (German, France) guarantee their high paying auto companies cannot be undercut by lower paying competition right inside their own borders: sector-wide labor agreements.

Mandate that Honda, Toyota, BMW, etc., pay the same wages as Detroit within our borders. They would have to pay more than they pay the un-unionized American south (our East Germany?) to their workers within their own borders -- and then they would have to ship them here. Cheaper to pay Detroit wages here than to pay them there and then have to ship heavy cars and trucks here. IF YOU BELIEVE THEY MAKE BETTER CARS THEY SHOULD HAVE NO TROUBLE MAKING A LIVING PAYING THEIR EMPLOYEES THE SAME.

Japan of course goes TO MUCH MORE BRAZEN EXTREMES to bar competition within her borders. Japan makes a deal to allow American cell phone service in -- Japan splits in two and American service is confined to hill country with no population while Japanese service takes the urban. Japan agrees to buy more American beef -- Japan buys American ranches to sell beef to itself. As a cab driver my Japanese riders from the airports without exception went to Japanese chain hotels. Japan even carries on the charade of being unable to expand Tokyo airport for decades now because of the crazy carrying on opposition of a few local farmers -- conveniently limiting foreign travel of domestic Yen.

Can't imagine Japan or German or Italy allowing American auto manufacturing to undercut and put their whole industry out of business the way Wal-Mart undercuts the opposition: by paying employees much less (Wal-Mart closed 88 big boxes in the German land of same pay and benefits for same job descriptions -- as are the majority of first world lands). Why is the American intelligentsia the only people in the world who blithely acquiesce in the loss of their flagship industries -- to sever wage undercutting yet -- is this their version of American exceptionalism (I know they wouldn't like to think that).

[RueTheDay]

Hempton is correct that the problem is not mortgages. He is incorrect in diagnosing the problem as "lack of trust". The problem is that financial institutions (and non-financial ones) made highly leveraged bets in a number of areas (mortgages being only one of them) based upon a certain set of expectations around the prospective yields of those bets. Those bets, like all, were made under conditions of uncertainty. The future is now here and it has become clear that the bets will not pay off as anticipated. Yet the leverage is still there, the debts must be serviced. This is classic Minsky in action.

[Zipf]

Given that Citi's problem here is likely liquidity rather than solvency (at least after the $25bn in recent preferred from the TARP), now might be the time to signal that the wave of nationalizations is over by effectively supporting the equity of a solvent institution.

I don't see how insolvency due to illiquidity is any different than insolvency. The idea that liquidity will eventually return and that lending is therefore justified seems to be about as speculative as a bet on the future popularity of the pet rock. See, for example, LTCM.

I tend to think that while the crisis is about trust, the state of the general economy -- the recession -- is about a housing asset bubble and mortgages.

I also think that engineering solutions to the (trust) crisis amounts to bailing out white-collar jobs. While, bailing out mortgages (which would have the effect of reducing defaults) amounts to helping homeowners. (This assumes that the homeowner actually wants to live in the home -- as opposed to simple speculation.)

Why are banks in trouble? Illiquid, toxic, untradable assets. That is what we were told initially. At that time, the crisis was about liquidity. Once Lehman fell, the crisis was about trust, because banks would not lend to each because of counter-party risk. The idea that these institutions will be saved with a loan until someone figures out how to price toxic assets -- and then everything will be magically better -- seems like a gamble. What if the market is pricing the SIVs correctly given the risk of default? In that case, it isn't a liquidity crisis at all. The banks are correctly assessing counter-party risk. In that case, it is a mortgage problem and the banks are in deep trouble.

So what to do? Stem the tide of foreclosures. There are short term and long term ways to do this, and the ultimate course depends on the economy over the next few years.

In the meantime, providing bridge loans to credit-starved industries seems like a good path as well. Putting large numbers of people out of work seems like a recipe for creating more defaults.

Why are we in a hurry to protect bondholders of private companies? Bob McManus said, "Because the bondholders are Chinese and Saudi who might view a default by Citibank as a US gov't default." This point seriously complicates matters because the more that the government is involved with any bank that eventually defaults -- the greater harm to the Federal Government's credit standing. This single point seems to necessitate a hands-off approach to national financial restructuring. Maybe the best way is to let the banks twist in the wind? Is it too late for that? Or maybe, as Bernanke wrote in the 1980s, it is worth retaining our lending talent to avoid a depression.

[insolvent]

Well, the recapitalization worked great. The problem is still insolvency. The value of assets on the balance sheets of financial institutions is still low. The leverage is still the killer. Deleveraging kills. Or does it?

It is way way past time to quit propping up zombie financial institutions with government money. It is high time to truly mark to market and to force failed, malfunctioning, insolvent financial institutions to die. Until that happens, the financial disaster will perpetuate. Day of the dead is in full effect. Blair has not been active enough.

[robertdfeinman]

One has only to listen to the talking head on Fox and elsewhere, who don't know how to finesse a point, to get to the core conservative aims.

The big three need to be thrown into bankruptcy so that what remains of UAW contracts can be abrogated and the union's base eliminated forever.

Citi is non-unionized, no need to punish its (overpaid) workers.

I'm surprised that Robert Reich didn't draw this obvious conclusion. Even Stephen Colbert got it the other night when he mocked a critic for calling the UAW a barnacle.

His comment "when a ship goes aground you always blame the barnacles."

[calmo]

So, robert, are you ah, a sailor? and a fan of Colbert? [calmo busy erasin preconceptions]

The beauty of failing eyesight is you can easily mistake this:Well, the recapitalization worked great. for this:Well, the recapitulation worked great. or this:Blair has not been active enough. for this:Bair has not been active enough. resurrecting me quite a bit, yes, it feels like a good Sunday coming up for me, you?

[baileyman]

Hempton gets his numbers from where? $22T US housing stock peak value, and it'll decline 40%, making $8.8T value loss. Lots of that will be equity loss. Hopefully this guy doesn't think lost equity has no effect. But most will be loan loss, perhaps $5-6 trillion. He should go back with a sharper pencil.

Put your money in Hempton's fund! There's an idea!

[Bruce Wilder]

Half the houses in the country don't even have a mortgage, baileyman. Loan losses are likely to be amplified, and I can readily believe figures up to $2 trillion (with $1.2 trillion a conservative midpoint). But, then there's also the stock market's losses, which add another $6 or $7 trillion to the loss of wealth, so, if you are looking for behavioral effects, say, on household spending, well . . . the numbers, they is big.

[steve from virginia]

Funny thing about insolvency; it means you're broke! I recall lending some dude fifty cents on the street some years ago and he never paid me back ... after all this time!

Lending money to various kinds of banks is sorta the same thing. Hey, it's only money, right?

Since the US government is taking over all lending and borrowing in this country and overseas, when do we all together march over to some government building and sing the 'Internationale'?

Where is the money for all this coming from? I like Bair because she's cheap! WaMu v. AIG; IndyMac v. Bear; you make the calls; which takeovers cost the Treasury the least?

Where is the money for all this coming from? Treasury borrowing rates are near(est) zero. Why? Because all other lending opportunities in the entire world suck. So ... the Treasury borrows for free because the rest of the credit world is dying. Explain how this is going to lead to a good lending environment?

Where is the money for all this coming from? Saudi Arabia? China? Lessee, we buy stuff from them. The cash we send them in exchange is lent back to us. We turn around and buy even more stuff. They lend that back to us. Is this economy or insanity? Is this the 'free trade' we've been hearing so much about? I thought trade was where we make stuff and they make stuff and we exchange our different stuffs.

What happens when China and Saudi Arabia come up short on cash? We aren't buying as much stuff from them - even at lower cost - and their reserves are vaporizing as their economies stall. Ditto Russia and Japan. What happens when the Treasury can't get its $2 billion a day borrowing fix? If we can't borrow, how can we pay for all that oil we import? 8 million barrels a day?

What happens to the economy when 66% of its energy supply is cut off?

[Worker]

"I don't see how insolvency due to illiquidity is any different than insolvency."

This is a difficult distinction, but one with policy implications. We want truly insolvent institutions to fail/ be worked out.

We don't want runs on the bank that create illiquidity to cause insolvency. This is why we created the central bank- the Fed and the discount window.

However we developed the shadow banking system, reliant on constant capital market access. The corrolary to the discount window in the shadow system is a TARP.

My point is that right now, we have the bad decision of 1) creating another Lehman or 2) bailing out bondholders at 100%. The hedge funds know this, the undesirability of another Lehman.

The government's actions in AIG and the presumption that letting Lehman fail was a bad idea supports this "pile-on" trade. As repugnant as bailing out banks is, it is less repugnant than paying hedge funds to make a run on the banking system. This is what current policy will do.

My point was that letting the Fed/TARP take an opposite position in the open markets would quash this source of instability once and for all. And if we are going to shut down solvent institutions, let's put the decision in the hands of regulators operating deliberately rather than an inbred group of hedge fund lemmings.

For the short run, the treasury would make a significant profit at the shorts/ rumor mongers expense.

I remember the days when the economic justification for huge hedge fund profits was that they were providing liquidity. What a joke. They are gaming the system here at everyone's expense.

[calmo]

You B such a fresh breeze steve from virginia...steady diet of Steve Roach does it, yes? [I quit reading Roach after people got on my case for walking heeled over.]
Ok, lovely prose and more...leaving us with that civil interogative leaves me powerless to do anything but return one:
What of the importance of the Buiter piece that important (and he is too!) bob directs us to?
Ok, monetize the debt...our immediate salvation depends on it...anso all that actionowbejesus stuff is important guidance...so long as we are not in quicksand where thrashing about is not encouraged IIRC.

[Worker]

Robert Feinman,

I think you are missing an even more obvious point.

When Citi screws up, 55,000 of its employees lose their jobs.

When GM screws up, the workers get 95% of their former salary to play cards in a "jobs bank" until they retire at full pension.

[ron]

John Hempton lost $$$ when Sheila Bair decided to take down Washington Mutual, and he does not forgive.

Clearly it was significant dollars..LOL he has been ranting about here since..

[Bruce Wilder]

steve: "the Treasury borrows for free because the rest of the credit world is dying. Explain how this is going to lead to a good lending environment? . . . What happens when the Treasury can't get its $2 billion a day borrowing fix?"

You really should not get yourself so worked up. At the moment, the U.S. Treasury is a rockstar, getting money for nothing. Why worry that that is bad, and that it will also be bad, when, at some future time, the U.S. Treasury can no longer get money for nothing?

If the lending environment now is so bad that no one wants to borrow, let the U.S. Treasury borrow and borrow and borrow. It's an opportunity. And, when private loan demand is such that the U.S. Treasury has to compete for funds, let it stop borrowing. Press on accelerator. Lift foot from accelerator. Press brake. How hard should this be?

[calmo]

worker, but not workman, as in "workman-like' fashion, a legal description of competence by a profession that would not know one end of a shovel from the other...renders its decision nonetheless.
An me too worker, good stuff...so a non-union man (and also: the sun sets in the west).
Competent...beyond "worker", beyond "journeyman", clearly "administrative...possibly executive"
Shows promise....but needs constant supervision...and rdf hardly needs me who hazit infor anybody it seems.

Don't mind me, I'll be off soon. Way off. Gone.

Ok, the fun isova:When Citi screws up, 55,000 of its employees lose their jobs.[jobs that make the building of nuclear warheads look productive and not merely servicing in the worst sense of the word; so no transferable skills --is that your message? tidings of great joy?]

When GM screws up,[not the workers, but the management...izat what you want to say?] the workers get 95% of their former salary to play cards [this tells us you come from the "Welfare Queens" school of Ronnie buggery ] in a "jobs bank" until they retire at full pension. [do review what the pensions are like for Citi management and know that GM worker pensions/benefits have been scrapped down repeatedly on a dwindling membership. Generally read anything from paine and esp anything from paine about GM/union/gov to stay on top of this shemozzle ]

[BJ Feng]

Shelia Bair has been a disaster. The consensus before all this started was that we would not make the same mistakes as Japan. We would not attempt to bury bad loans and keep them on the books for years. Yet Bair's policy of modifying mortgages does just that. Those properties will still remain underwater, and I doubt that they will break even in less than a decade, most need to double for that to happen. There is no way that any one of the defaulters can refinance on their own. So Bair wants to force banks to modify and lock in their bad loans for 15-30 years by giving the defaulters new 15-30 year loans. Most Americans only own their homes for around 5 years. Bair is also locking up the defaulters, there is no way they can buy a new home or sell their current home since it is underwater. So they cannot move, even for a better paying job, they are locked into those homes for at least a decade, probably more unless they choose to default later, which I suspect many will.

As the author said, Bair's policy is senseless and stupid. What's the purpose of prolonging these bad debts? The banks cannot escape the losses they've incurred, they can hide them with help from Bair, but then investors aren't going to trust any of the banks.

[baileyman]

Bruce Wilder said:

"Half the houses in the country don't even have a mortgage, baileyman."

Ok, $15T in mortgages, at 90% LTV gives $16.7T market value. After the fall, 60% remains, $10T. That's $5T direct loss against the loans, but at 20% of loan value for foreclosure, so that's $6.5T lost in someone's portfolio. The rest of the value loss is unreported.

It's not clear to me the equity loss should count as a wealth effect since it seemed derived from the housing loss. CRE maybe though.

[ygmichaels]

I agree. FDIC Chairman Bair should resign. FDIC created and caused the Banking crises. FDIC mandate is to oversee, investigate, audit banks, audit financial statements of banks, call reports of banks; and ensure the safety and soundness of Banks. FDIC corrupt officials created the banking crises. Evidence is located at www.lulu.com book entitled: Caught in a web of Bureaucracy written by FDIC Whistleblower.

[Jared Sherwood]

I beg of you to ignore the national media's opinion of what Sheila Bair is doing. If you are here, visiting this site, doing actual research...that puts you one peg over most of America. If you want the real facts and accounts of how many times Sheila Bair's foot had been caught in her mouth got to www.sheilabair.com there are some great links to her contradicting herself...