FDIC's Sheila Bair on 'bad bank' plan
Talk about the Federal Reserve creating a "bad bank" to buy toxic assets from financial institutions has been floating around. Kai Ryssdal discusses with FDIC Chairwoman Sheila Bair how the plan would work.
FDIC Chairwoman Sheila Bair (www.fdic.gov)
More on America's Financial Crisis
TEXT OF INTERVIEW
Kai Ryssdal: Fed Chairman Ben Bernake said it again earlier this week -- that he thinks the financial system has to be fixed before anything else in this economy can really get better. That was the idea behind the original TARP back in September, which has gone through a couple of changes since then. The latest of which is something known on the street as good bank, bad bank. Government and private investors buying up shares of some of those problem mortgage-backed securities and shifting them into some kind of aggregator bank. That would leave only the good stuff and a functioning lending bank behind.
Sheila Bair is the chairwoman of the Federal Deposit Insurance Corporation, one of the agencies that is in charge of regulating banks in this country. Good to have you with us.
SHEILA BAIR: Sure.
Ryssdal: Let me see if I can clarify this just a little bit. What's going to happen here, no matter what you call it -- bad bank or an aggregator or whatever -- is that at least initially there is going to have to be more government money involved.
BAIR: That's right, initially there will be. So the government will provide financing to make these purchases. So they will make loans into the aggregator bank. And this is important to provide some degree of leverage to get the pricing at a more realistic level. Right now, because of the credit crisis, it's hard to get financing to purchase assets. And without financing the prices offered are very low. So, by providing the financing you can get the prices at a more realistic level.
Ryssdal: So the government puts some skin in the game. That convinces private investors to get in there. Although we don't really know yet, do we, if it'll work?
BAIR: Well, I think we've done a lot of research and analysis. We've talked to a lot of banks. We've talked to a lot of investors. We're working closely with Treasury -- and I should say this will be a Treasury program. It will be facilitated under TARP, but we're all working closely together. And based on all of our indications, we think it will work. We think there is significant interest by many of the banks to have a facility where they can sell these assets. And we think there is significant interest among investors to buy these assets at a reasonable price, so that there's good upside potential.
Ryssdal: There is a supposition here, isn't there, that the toxic assets will eventually become non-toxic (for want of a better word) at some point, right?
BAIR: Well, I think they will certainly be worth more than the current valuations. I think that is the assumption. And I think that's true. I mean, at the FDIC we sell troubled bank assets all the time. You know, when banks have to be closed, we take over as a receiver, so we're pretty familiar with the market right now. So we think that that is absolutely true that the assets are worth more than the current market conditions assign to them. And so that, yes, over time there will be significant profits from these.
Ryssdal: When might we see some kind of progress on this? Because there has been talk of this for weeks now. The TARP has been in place for six months.
BAIR: I think very soon. I think Secretary Geithner said within the next few weeks he hopes to announce this. So, I think very soon.
Ryssdal: Who is going to run this program. And how are we, the taxpayer, going to know whether it's working?
BAIR: Well, I think that's still being discussed with Treasury. I think we all agree, though, that it should be very transparent, there should be full disclosure of who the investors are, what the prices are. And I think that will be part of the benefit because we are trying to create a market for these assets. You want transparency, you want the pricing out there, so others can see what it is. So for it to work the best I think you do need a high level of transparency and taxpayers need to know, and I'm hopeful that those reports will show that taxpayers are making a healthy profit off this endeavor, and I think they will.
Ryssdal: Sheila Bair, the chairwoman of the FDIC. Ms. Bair, thanks a lot for your time.
BAIR: You're welcome. Thank you.
Comments
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03/14/2009
Sheila Bair is slipping. The 'bad bank' proposal is just another plan to make bank creditors and bankers whole at taxpayer's expense, just as Paulson wanted to do. This is only indirectly about boosting the flow of credit. Government financing of private pruchases of "toxic assets" is not creating a market for them, it's simply the government assuming the lion's share of their probable risk. So much is obvious. As Stiglitz, Willem Buiter, Soros, Romer and other have pointed out the 'good bank' is the fairer and more expeditious course of action.
http://blogs.ft.com/maverecon/2009/02/good-banknew-bank-vs-bad-bank-a-rare-example-of-a-no-brainer/#more-452
From Pleasanton, CA, 03/11/2009
I admire Ms Bair and think she has been the voice of reason in the last few months.
Her comments about the value of the toxic assets surprised me.
Like it or not, the bank's assets are worth exactly what they can be sold for. This is the basis of our economic system. Bankers need to play by the same rules as owners of homes, cars, 401k's, and equity positions. Just because you could have sold it for a higher price when the demand was high doesn't mean that's what it's worth today. The toxic assets are called toxic because the bankers falsely claim that they are worth more than buyers are willing to pay.
From Winston-Salem, NC, 03/11/2009
Perhaps she should be president.
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