WASHINGTON – Sheila Bair anticipated the mortgage crisis long before most other regulators. But she never dreamed it would wreak so much havoc on so many banks.
More than a year after the credit crisis first flared, Bair, the chairwoman of the Federal Deposit Insurance Corp., warned yesterday that the outlook for the ailing banking industry was bad – and getting worse.
The swelling tide of toxic home loans is proving to be even more worrisome than initially feared, Bair said. She is struggling to clean up the mess and forestall home foreclosures with a plan to ease loan terms for hard-pressed homeowners.
“It is going to be a slog to work though this, but there is no easy way to do it,” Bair said. “We haven't seen the trough of the credit cycle yet.”
Her downbeat outlook was underscored yesterday by the FDIC's latest quarterly assessment of the industry. The agency said the number of bad loans at banks ballooned to its highest level in 15 years during the second quarter.
Industrywide, bank earnings plunged 86 percent from April to June, to $4.96 billion, from $36.8 billion a year earlier, the agency said.
The FDIC, which guarantees savings and checking deposits, also raised the number of banks on its list of problem lenders to 117, the most since mid-2003.
That is up from 90 at the end of the first quarter. The agency does not disclose which banks are on the list, but it said the troubled lenders had combined assets of about $78 billion.
For all the bad news, American banks are in far better shape than they were in the late 1980s and early '90s, when the savings and loan crisis claimed hundreds of lenders across the nation.
But some worry that the FDIC has fewer people – and less money – than it needs to cope with the industry's latest travails, particularly if several large institutions were to collapse. Nine lenders, most of them small, have failed so far this year. Analysts expect dozens more to run into trouble.
Bair's agency is stretched. Dozens of staff members who had been through the banking crises of the early 1990s retired in recent years. Despite her efforts to bring some seasoned examiners back, her small army of examiners is largely untested.
Meanwhile, there are growing questions about the adequacy of the FDIC's insurance fund, which guarantees repayment on deposit accounts of up to $100,000 when banks collapse. The fund dwindled to $45.2 billion during the second quarter, from $53 billion in the first quarter.
To replenish its fund, the agency probably will have to raise the fees it charges banks by at least 14 cents for every $100 of deposits, according to estimates by analysts. Bair declined to comment on the likely amount of any increase but said the agency was proposing to revamp its fees so that institutions engaging in high-risk practices would pay higher rates.
“It only seems fair,” Bair said. Such a move is expected to draw criticism from banks.
How Bair navigates the financial and political land mines ahead will help determine the course of the banking industry and, by extension, the broader economy.
The centerpiece of Bair's plan is to modify loans so that people can stay in their houses. “It is something we should put a priority on,” she said.
From her position at the FDIC, Bair has become one of the industry's most influential policymakers and outspoken critics. She issued some of the earliest warnings on the housing market and prodded the Treasury Department to back a comprehensive approach toward freezing low teaser rates on certain adjustable mortgages, a stance that many investors have opposed. She has also walked a fine line between pressuring banks to raise capital and urging depositors to remain calm.
Bair said she became aware of the breakdown in lending standards after hearing several consumer complaints during her tenure at the Treasury, which began in 2001. But when she arrived at the FDIC in mid-2006, the staff began raising broader concerns, and the agency bought a database to study the industry's loan performance.
“By the fall and winter 2006, we were looking at this market pretty hard,” she said. There were very low down payments, loans that never verified the borrower's income, poor disclosure and huge payment shocks. “It was pretty eye-popping, some of the stuff we were seeing. We couldn't believe it.”
Bair was an early advocate of using special bonds to jump-start Wall Street's business of repackaging loans into securities. And she has championed the idea that a sweeping program to modify loans is the best alternative for the industry, even using the agency's takeover of IndyMac as a test case.
Not everyone agrees with her. “I think this will turn into a very expensive failure, and the banking industry will pay a price for it,” said Bert Ely, a longtime financial industry consultant in Alexandria, Va. “It could turn out to be a big black eye for the FDIC.”
Bair brushes aside the criticism. Still, she is clearly disappointed that her program has struggled to gain widespread traction. “Not everything is coming together as fast as I would like,” Bair said.
