FDIC sues banks over Libor manipulation and fraud

Bank of America, Citigroup and Credit Suisse Group AG were among 16 of the world’s biggest banks sued by the U.S. Federal Deposit Insurance Corp. for allegedly manipulating the London interbank offered rate from 2007 to 2011.

The FDIC, acting as receiver for 38 failed banks…claimed that institutions sitting on the U.S. dollar Libor panel “fraudulently and collusively suppressed” the rate. Also named in the suit, filed yesterday in Manhattan federal court, is the British Bankers Association, an industry group that oversaw Libor.

Regulators around the world have been probing whether firms colluded to manipulate interest-rate benchmarks including Libor, which affects more than $300 trillion of securities worldwide. Financial institutions have paid about $6 billion so far to resolve criminal and civil claims in the U.S. and Europe that they manipulated benchmark interest rates.

The cost for global investment banks could climb to $46 billion, analysts at KBW, a unit of Stifel Financial Corp., said in a report last year…

The failed banks “reasonably expected that accurate representations of competitive market forces, and not fraudulent conduct or collusion,” would determine the benchmark, the FDIC said in its complaint…

Investigators claim the banks altered submissions used to set the benchmark to profit from bets on interest-rate derivatives or to make the lenders’ finances appear healthier…

The FDIC alleges the banks committed fraud and violated U.S. antitrust laws in fixing the U.S. dollar Libor benchmark. It’s seeking unspecified damages on behalf of the failed banks, including punitive damages and triple damages for price-fixing.

The FDIC still echos the standards of Sheila Bair. It’s been a little while since she left; but, she set critical standards. Required reading for anyone interested in earning a living in finance and still maintaining the odd principle or two her book: Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself.

Within the FDIC and the American banking community she always stands for small banks, community banks vs Wall Street’s version of Gargantua. She sat down and negotiated with the biggest bank presidents as equals and she tried like hell to be more equal than they – even with Congress ready and willing to give away the farm, the treasury and every taxpayer’s contribution to some of the worst examples of American capitalism.

She left the FDIC to work for a spell for the Pew Charitable Trusts; but, banking is what she knows best and she chose to leave the United States to work for a Spanish bank with a cleaner reputation than most of our own. She still asks out loud why no big American bank has ever offered a directorship to a bank reformer like Simon Johnson – or, I’d say, Sheila Bair.

And when she gives a talk to the staff of a bank she used to oversee as regulator – her fee goes to charity. A practice I don’t expect to witness every day from any of our former Congress-critters.

It is time to break up the “too big to fail” banks

Daylife/Reuters Pictures used by permission

America is downsizing. Whether it’s the food we eat, the cars we drive, or the houses we live in, Americans are concluding that smaller is better. Even U.S. corporations are starting to see the benefit of more Lilliputian institutions; the impending — and widely hailed — breakups of McGraw-Hill and Kraft are two examples.

So what about banks? It would surely be in the government’s interest to downsize megabanks. Sen. Sherrod Brown (D-Ohio) continues to push his bill to split apart the largest institutions. Regulators have new authority to order divestitures under the Dodd-Frank financial reform law. From a shareholder standpoint, government breakups have a pretty good outcome. It worked out well for John D. Rockefeller, whose shares in Standard Oil doubled after it was ordered to break up. Ditto for those who owned stock in AT&T.

Yet with gridlock in Washington, don’t count on politicians for a solution. Shareholders, however, have an interest in demanding that big banks split apart. Comparing the valuation for the supersize banks – Citigroup, Bank of America, and J.P. Morgan Chase with their simpler, leaner competitors isn’t pretty. Price/earnings per share for the supersizers averages 5.8, compared with 8.1 for smaller, more focused Wells Fargo and 8.1 for the bigger regional banks like U.S. Bancorp and PNC. More telling is the ratio of share price to tangible book value. For the supersizers, the average is 72% of book, compared with 165% for Wells and 142% for the big regionals. Chase’s strong performance holds up the average for the supersizers, but even its price to book is only 110%…

Supersizers argue that their scale is necessary to meet the financial needs of multinational corporations. But it’s not clear that multinationals find it advantageous to do business with a handful of financial titans. Dealing with smaller, more focused institutions provides specialized expertise and less risk of conflicts. If there were really that much value in supersizer services, presumably it would show up in shareholder returns. But it doesn’t…

So, shareholders, get ye to the boards that represent you and ask them loudly about whether your company would be worth more in easier-to-understand pieces. The public-policy benefits of smaller, simpler banks are clear. It may be in the enlightened self-interest of shareholders as well.

Regular readers know that I would vote for Sheila Bair for President of the United States – even if she ran as a Republican. I don’t have to worry about that because [1] she doesn’t want the job and [2] the Republican Party is led by idiots who would never support her. She might take the job as Secretary of the Treasury, someday – and the Kool Aid Party would oppose that, too.

Don’t confuse her criticism of “too big to fail” with two other aspects of national financial policy. When push came to shove – even where we might not agree on which financial institutions should be offered aid or not – what was offered was loans which have mostly been repaid with interest. A profit to US taxpayers. The same is even more true for the auto industry. The motivation had more to do with structural importance to the US economy. The result has been more dynamic, a healthier marketplace and, again, we’re being paid back at a profit.

Exit interview with Sheila Bair as she prepares to leave the FDIC

‘They should have let Bear Stearns fail,” Sheila Bair said.

It was midmorning on a crisp June day, and Bair, the 57-year-old outgoing chairwoman of the Federal Deposit Insurance Corporation — the federal agency that insures bank deposits and winds down failing banks — was sitting on a couch, sipping a Starbucks latte. We were in the first hour of several lengthy on-the-record interviews. She seemed ever-so-slightly nervous.

Long viewed as a bureaucratic backwater, the F.D.I.C. has had a tumultuous five years while being transformed under Bair’s stewardship. Not long after she took charge in June 2006, Bair began sounding the alarm about the dangers posed by the explosive growth of subprime mortgages, which she feared would not only ravage neighborhoods when homeowners began to default — as they inevitably did — but also wreak havoc on the banking system. The F.D.I.C. was the only bank regulator in Washington to do so.

During the financial crisis of 2008, Bair insisted that she and her agency have a seat at the table, where she worked — and fought — with Henry Paulson, then the treasury secretary, and Timothy Geithner, the president of the New York Federal Reserve, as they tried to cobble together solutions that would keep the financial system from going over a cliff. She and the F.D.I.C. managed a number of huge failing institutions during the crisis, including IndyMac, Wachovia and Washington Mutual. She was a key player in shaping the Dodd-Frank reform law, especially the part that seeks to forestall future bailouts.

Since the law passed, she has made an immense effort to convince Wall Street and the country that the nation’s giant banks — the same ones that required bailouts in 2008 and became known as “too big to fail” institutions — will never again be bailed out, thanks in part to new powers at the F.D.I.C.

Just a few months ago, she went so far as to send a letter to Standard & Poor’s, the credit-ratings agency, suggesting that its ratings of the big banks were too high because they reflected an expectation of government support. If a too-big-to-fail bank got into trouble, she wrote, the F.D.I.C. would wind it down, not bail it out…

She didn’t spend a lot of time fretting over bank profitability; if banks had to become less profitable, postcrisis, in order to reduce the threat they posed to the system, so be it. (“Our job is to protect bank customers, not banks,” she told me.) And she was a fierce, and often lonely, proponent of widespread mortgage modification, for reasons both compassionate (to help struggling homeowners stay in their homes) and economic (fewer foreclosures would help the troubled housing market recover more quickly).

I’m just giving you a taste of the beginning of this interview. It’s quite long, detailed, and near as I can tell an accurate picture of the individual who acted throughout the crisis of the Great Recession to defend local community banks, the historic integrity of banking regulation – how this was corrupted and almost destroyed along with our national economy – and as an aside, a reminder to younger folks who know only the deceit and corruption of Bush, Cheney, the racism of Nixonian Republicans, the nutballs of the Kool Aid Party – what a traditional American conservative used to sound like.

Sheila Bair pushes Senate to remove backdoor bailouts

Daylife/Reuters Pictures used by permission

The U.S. Senate Banking Committee will remove a provision from the financial reform bill that bank regulator Sheila Bair said could allow for “backdoor bailouts,” a panel spokeswoman said on Friday.

Sheila Bair, chairman of the Federal Deposit Insurance Corp, told a conference of community bankers earlier on Friday that the agency had “serious concerns” about a provision in the bill that seems to allow the Federal Reserve to rescue Wall Street firms if their functions were critical to the markets.

That provision will be removed in an amendment as the Senate Banking Committee debates the draft bill, committee spokeswoman Kirstin Brost told Reuters.

“If the Congress accomplishes anything this year, it should be to clearly and completely end ‘too big to fail,'” Bair said at a conference of the Independent Community Bankers of America.

Bair said small banks deserve an even playing field and that larger institutions are still enjoying benefits from an implicit government guarantee. “These signs all point to a presumption in the marketplace that the largest banks are, indeed, too big to fail,” Bair said.

The FDIC chief, a critic of some of the government’s massive rescues of Wall Street firms, has been one of the strongest advocates of creating a “resolution mechanism” that would allow the government to dismantle a failing financial firm…

It’s time that the big players understand that they sink or swim on their own,” she said.

Sheila Bair appears to be on the side of working folks and community banks. Unlike creeps like Chris Dodd who I wouldn’t trust any further than I could throw him uphill into a heavy wind, left-handed.

If she wasn’t there pointing out some of the crap living inside Dodd’s “regulatory” bill – well, what would we get? What criticisms have you heard from your favorite Congress-critter?

Republicans whine about any regulation over their Wall Street buddies. Come to think of it, the caviling may be phrased differently by some of the Dems; but, most of them are as useless as Dodd.

Regulators were an abject failure – leading to financial crisis!

Daylife/Reuters Pictures used by permission

Financial regulators, lulled into inaction by soaring bank and Wall Street profits, failed to protect Americans from the 2008 financial crisis, senior U.S. officials told an investigative panel today.

In testimony that urged stricter oversight in future while admitting past errors, FDIC Sheila Bair headlined a second day of public hearings by Congress. “Not only did market discipline fail to prevent the excesses of the last few years, but the regulatory system also failed in its responsibilities,” she said.

“Record profitability within the financial services industry also served to shield it from some forms of regulatory second-guessing,” Bair told the commission. When financial firms are making money, even amid questions about how they are doing it, it can be difficult for regulators “to take away the punch bowl,” she said…

The bankers acknowledged taking on too much risk and having choked on their own financial cooking in the subprime mortgage market, but they defended their pay packages and the huge size of their businesses in the face of proposals to break them up…

President Barack Obama said on Thursday he was determined to impose a fee on big banks to ensure all taxpayer money used to bail them out was recovered…

The bought-and-paid for lapdogs in the Senate are lining up to prevent that recovery if they can.

Bair made waves this week with an FDIC proposal calling for banks with risky compensation schemes to pay higher deposit insurance premiums. It reflects Bair’s readiness to experiment with using the FDIC’s policy levers to influence bank behavior.

She was an early critic of subprime mortgage market excesses that helped inflate a historic housing price bubble well into 2007. When it broke, the aftershocks paralyzed capital markets and panicked the Bush administration.

Multibillion-dollar taxpayer bailouts and the deepest recession since the 1930s followed, saddling President Barack Obama with profound economic challenges and a political backlash that is still far from over.

Yes, I’m a committee of one calling for Sheila Bair to be the next Secretary of the Treasury. Geithner ain’t bad; but, she knows where all the bodies are buried. And who provided the shovels.

Head of FDIC says ‘open bank’ assistance should be prohibited

Daylife/AP Photo used by permission

“So-called ‘open bank’ assistance for large complex firms should be prohibited,” Bair said at an event at Georgetown University… “This assistance puts the interest of shareholders and creditors before that of the public.”

Bair wants Congress to set up a resolution mechanism for large financial institutions so that an institution’s failure doesn’t create chaos in the markets. Bair argues that such a system would eliminate the need to use tax dollars to prop up institutions that otherwise would pose a risk to the financial system.

Lawmakers are debating whether legislation to create a resolution authority would have that collection take place up front, periodically, as Bair has proposed, or after a collapse to cover a taxpayer-funded infusion, as the White House is seeking.

Bair wants Congress to set up a system so the FDIC could collect fees from broker-dealer investment banks, insurance companies, private-equity firms and large, systemically significant hedge funds. Those fees would go to creating a systemic risk-insurance fund that would exist separately from the deposit-insurance fund the FDIC already has for retail banks.

In the event of a collapsing financial firm, fees from the fund would be used to partially pay off the insolvent institution’s counterparts so that its failure wouldn’t cause a domino effect of other failures.

I think when Sheila Bair finishes up at the FDIC, Obama should consider appointing her Treasury Secretary.

Geithner ain’t bad. She’s just better.

Bank regulator by day, children’s writer by night – Sheila Bair

Daylife/Getty Images

Sheila Bair, chairman of the Federal Deposit Insurance Corporation, is one of the few women in the generals’ tent of the nation’s economic war.

Forbes magazine calls her the second most powerful woman in the world, after German Chancellor Angela Merkel but well ahead of both Oprah Winfrey and Hillary Clinton…

By day Bair keeps the nations banks stable. But by night she wears a second hat — writing children’s stories about saving and investing money. She’s regularly published in the children’s magazine Highlights and has written two books: “Isabel’s Car Wash” and “Rock, Brock and the Savings Shock…”

Her once staid agency is now in the middle of the Obama administration’s gambit to bail out the banks and sell troubled assets. The latest move is agreeing to guarantee some of the Treasury Department’s toxic asset sales. Critics say she’s putting the agency’s solvency and taxpayer dollars at risk.

Bair says “the challenge of the program is finding that magic price where banks would be willing to sell and buyers would be willing to buy.”

But she believes the plan will work, explaining, “the prices you’re seeing in the market right now are far below what the actual cash flow is being produced by these assets. So we think by providing some credit … we can get the price up a little better and get to the point where you have a more realistic market value and banks would actually be willing to sell.”

If TARP and the Bailout was forced to match FDIC standards and regulation, there would have been no golden parachutes, incompetent adminstrators would have been fired on the spot, lousy banks would have been folded – and we’d be further along towards resolving the results of a decade or so of sleazy, neocon, deregulated theft.

If Geithner is ever pushed out the door of Treasury, she should take his spot.

F.D.I.C. Chief urges qualitative changes in financial oversight

Daylife/Getty Images

The head of the Federal Deposit Insurance Corporation says that the government’s strategy in the financial crisis of bailing out huge institutions deemed “too big to fail” must be replaced by a new model.

The official, Sheila C. Bair, told Congress that a new system of supervision was needed to prevent institutions from taking on excessive risk and becoming so large that their failure would threaten the financial system. Such a mechanism would be similar to what the F.D.I.C. does with federally insured banks and thrifts, she added.

Testifying at a packed Senate Banking Committee hearing, Ms. Bair said that simply creating a so-called systemic risk regulator — a central idea in the discussion of overhauling the government financial rules — “is not a panacea.”

Senator Dodd suggested it could make more sense to give the F.D.I.C., which has the expertise in that area, authority over big failing institutions.

But Representative Barney Frank, Democrat of Massachusetts., chairman of the House Financial Services Committee, and other lawmakers have proposed that the Federal Reserve assume the role of systemic regulator to monitor against the kinds of risks that plunged markets worldwide into distress last year.

Yes, I really need a better article – or a video of the brief interview Ali Velshie did with Sheila Bair over the weekend. This will have to do for now. Get yourself thinking, eh?

The oversight and regulatory power the FDIC has over banks is exactly what is needed for financial institutions and their close kin like AIG. Just as an example, FDIC has the legal authority when taking over a bank to determine who is worth keeping or firing, who is worth giving a retention bonus to – obviously, if at all, the guys you’re keeping – and the legal right to dissolve contracts for bonuses for the managers you’re kicking out the door.

Go, Sheila!