A Run on Your Money?

While the FDIC has weathered its first 75 years quite well, it still faces some issues. By law, it maintains a rainy-day fund equal to 1.25 percent of the level of insured deposits. The result: today, some $52.8 billion—all of it in ultra-safe Treasuries—stands behind $4.2 trillion in insured deposits. That's not much of a margin for error. The failure of IndyMac will sap from $4 billion to $8 billion from the fund, or up to 9.5 percent of its total.

Bair has a five-year term. So unlike most of today's policymakers, she'll be around to clean up the mess. Which may explain why she's been calling for lenders to absorb pain now to avoid systemic pain in the future. Last fall, she strayed from Administration talking points when she urged lenders to convert loans with teaser rates into permanent fixed rates at low levels. Doing so, she believed, would stave off a spiral of foreclosures and fire sales, which depress prices further—leading to more foreclosures. This spring she said the Treasury Department should make available some $50 billion in interest-free direct loans. Borrowers stuck in adjustable rate mortgages could use the cash to pay down 20 percent of the principal on adjustable rate mortgages, and lenders would restructure the remaining debt into fixed-rate loans. "We're making loans to everybody else," she said, referring to the credit taxpayers have extended to Bear Stearns and to Fannie Mae and Freddie Mac.

Bair hasn't had much luck convincing the industry or her colleagues in government. But taking over banks does give the FDIC some power to act unilaterally. When the FDIC assumed control of IndyMac, one of Bair's first actions was to temporarily freeze foreclosures on $15 billion in loans it owns while it seeks to modify them.

The solutions she lays out are relatively simple: an ounce of prevention to avoid pounds of trouble. But these are complicated questions, even (especially?) for bankers. When she's done with the tour, perhaps Bair can invite the CEOs of banks for story time, and regale them with the richly illustrated tale of two reckless fraternal twins who lend promiscuously and have to get bailed out by their friend Joe Taxpayer. Working title: Freddie and Fannie and the Housing Shock.

© 2008