Exclusive: Interview With FDIC's Sheila Bair

With Wall Street trying to gauge the potential effectiveness of the Obama administration's plans to stabilize the financial sector and the economy, FDIC Chairman Sheila Bair sat down with to discuss issues ranging from the newly-introduced bank stress tests to nationalization concerns and foreclosure prevention.

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Here are some highlights.

Bank Stress Test

The Treasury Department Wednesday began stress tests on the nation's biggest banks, saying the results would be known no later than the end of April. The concept has caused some concern and confusion within the banking sector because it is unclear what metrics will be used to determine the capital needs of institutions.

"The main difference is that it will go out for two years and stress different economic scenarios," Bair said, adding that some longer-term thinking was needed in the current environment. "From a supervisory situation, what you're really looking for is embedded credit losses."

Toxic Assets/Bad Banks (Watch video)

Though some on Wall street were disappointed the Treasury's plan did not call for the creation of a stand-alone, government entity, known as a bad bank, to buy bad assets from the banks, Bair said the public-private partnership fund unveiled serves the same purpose.

"I don't think it was ruled out. It kind of morphed into the public-private investment fund...We view the PPIF as a form of bad bank."

Indy Mac/Nationalization

For all the concerns about the government nationalizing big banks, Bair's FDIC had to do that with IndyMac Bank summer, when regulators couldn't find a buyer to take control. (A deal to sell the bank to private investors will soon close.) Other than to launch an experimental mortgage foreclosure prevention plan, the government did not make any dramatic moves.

"It has been difficult to try to run it and enhance its value to market it back to the private sector, but we have been able to do that."

"There's debate as to whether the very large institutions would be susceptible to that sort of market resolution mechanism. You can see with Fannie [Mae] and Freddie [Mac] we've gotten mixed results...I think they do underscore some of the difficulties of the government trying to run even for a temporary period a large, complex institution."

Failures/Takeovers (Watch video)

As more and more capital is injected into troubled banks, there's a growing chorus for the government to cut its losses and start closing institutions. Is it beginning to become an option for the government?

"I don't think so. Not at this time. It is really a tough judgement call to make, because you really do need to make a decision for an institutions if whether they are healthy enough, viable enough to contribute to the economy. It really doesn't make sense to invest taxpayer money if they are not contributing to the economy....At this point, our strategy is a good one and if other, more dramatic steps need to be taken later we'll see how that plays out.


There's a wealth of plans and proposals meant to deal with the foreclosure problem. Are there too many? Is it confusing?

"Its terribly confusing to borrowers [and loan servicers] but I do think that is one of the advantages of the President's plan that we now have a standard protocol...It's always what has been necessary."

Mark To Market Accounting (Watch video)

Some analysts say a temporary suspension of this central accounting principle would make valuing the toxic assets much easier, but both the Bush and Obama administrations are opposed. Should something be done?

"I don't think so...There are complications in trying to suspend mark-to-market accounting and a whole other host of separate issues about market confusion about asset valuation....If you don't like fair value accounting, what else do you use?