Farrell: Should We Be Scared Of Sheila Bair?

Sheila Bair
Sheila Bair

The Chairman of the Federal Deposit Insurance Corporation, Sheila Bair, said she thinks the FDIC should have the authority to close "systemically important" financial institutions. At a speech at the New York Economic Club, she said the FDIC should be able to take over and shut bank holding companies, insurers, and other large financial institutions and not just failed commercial banks. Congress is supposed to address this issue sometime later this year, and it has been presumed the Federal Reserve would be in charge. John Dugan, head of the Office of the Comptroller of the Currency, an agency that oversees national banks, has said that the Federal Reserve was the logical choice to handle such matters. Bloomberg News reported that the American Bankers Association feels the FDIC is not suited for the job and that much power should not be in their hands. I think that when someone wants that much power and influence, almost by definition they shouldn't get it. But ambition knows little, if any, bounds and Ben Bernanke had better watch his back.

This looks like just the first knife to be brandished on this issue.

The two-year auction of Treasury bonds on Monday was a success as almost three times the amount offered was bid for (2.72 times to be exact.) This was followed by Tuesday's equally successful $35 billion 5-year note auction, with a 2.22 bid overage. Wednesday will see a $26 billion seven-year offering, but the big one will be next week when the Feds will offer 3/10/30 year bonds adding up to $75 billion (I think.) The 10 and 30 are crucial. When Bernanke announced the Fed would buy bonds, the 10-year was at 3% and promptly fell to 2.5% yield. It has since worked its way back to the 3% mark, and I wonder if that is where Ben would step in to support the market. Last I checked, the Feds had bought about $50 billion of the $300 billion they said they were initially prepared to buy.

Libor fell to 1.04% and the three-month T-bill rose ever so slightly to 0.13%, so the TED spread is at 91 basis points and continues to offer us hope. 90-day asset-backed commercial paper is now priced below 1%, says Tony Crescenzi of Miller Tabak and Realmoney.com. This has improved enormously since last September when Lehman failed and this type of paper had trouble finding buyers at 6%.

Not so settling is the continued struggle over GM. The latest plan, or at least the latest I heard of, is for the bondholders to turn in their debt and get 10% equity back. The government would own almost half and the union about 39%. The way I see it is that distressed debt buyers know what they have and know their way around bankruptcy court and usually come out of it with control of the company. I can't see this plan flying, and GM is soon heading for bankruptcy. Maybe we should let the government take it over and their attention would be diverted.

Diversion might be needed since Arlen Specter is switching to the Democraticside of the aisle. Soleil's Greg Valliere wonders if it's not because Specter probably wouldn't win a GOP primary in Pennsylvania. The possibility exists if Al Franken is seated from Minnesota than there will, theoretically, be a filibuster-proof majority in the Senate. But if Specter is as big a thorn in the Democrats' side as he was in the Republicans', then the ball is still in play. I would recommend you read A.J. Rice's summary out today on the possible effects on the health care stocks of such a political situation.

The Conference Board's survey of consumer confidencetook a surprise jump from 26.9 to 39.2 this past month. It is still a far cry from the 62.8 at this time last year. The Case-Shiller housing index came in ever so slightly better at -18.6% against -19% last month. The last three months have shown a month-over-month decline (versus the same month a year ago) of 2.55% in December 2008 vs. December 2007, 2.8% 2009 and 2.17%. Still bad but showing signs of bottoming-out and stabilizing.

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