19 - Federal Deposit Insurance Corporation

Chairman: Sheila C. Bair

In 1983, the Federal Deposit Insurance Corporation celebrated its 50th anniversary by issuing a history that began with this passage:
" 'On March 3 banking operations in the United States ceased. To review at this time the causes of this failure of our banking system is unnecessary. Suffice it to say that the government has been compelled to step in for the protection of depositors and the business of the nation.'
"As President Franklin D. Roosevelt spoke these words to Congress on March 9, 1933, the nation's troubled banking system lay dormant. More than 9,000 banks had ceased operations between the stock market crash in October 1929 and the banking holiday in March 1933. The economy was in the midst of the worst economic depression in modern history.

"Out of the ruins, birth was given to the FDIC three months later when the President signed the Banking Act of 1933. Opposition to the measure had earlier been voiced by the President, the Chairman of the Senate Banking Committee and the American Bankers Association. They believed a system of deposit insurance would be unduly expensive and would unfairly subsidize poorly managed banks. Public opinion, however, was squarely behind a federal depositor protection plan.
"By any standard, deposit insurance was an immediate success in restoring stability to the system. The bank failure rate dropped precipitously, with only nine insured banks failing during 1934. During the 30-year period beginning with World War II,the workings of the economy and the conservative behavior of bank regulators and the banking industry created a situation that posed few risks to the financial system, and the importance of deposit insurance in maintaining stability declined. Indeed, Wright Patman, the then-Chairman of the House banking committee, argued in a speech in 1963 that there were too few bank failures - that we had moved too far in the direction of bank safety. ''
In 1997, a follow up volume had a very different focus -- "the extraordinary number of bank failures in the 1980s and early 1990s.'' The wave of failures that came to be know as the savings and loan crisis and led to a reshaping of the F.D.I.C. and new attention to the importance of tight regulation of banks holding federally insured deposits.
Changes in the marketplace and in the legal landscape kept banking in turmoil, but few banks were failing. The collapse of the housing market and the credit crunch that followed in 2007 raised new worries, however, and by the spring of 2008 the F.D.I.C. was warning that the banking sector was facing alarming new strains. In July 2008 Indymac, a California-based bank, was seized by the agency as its mortgage-related losses mounted. Suddenly, the notices posted in financial institutions that they are "F.D.I.C. insured'' -- meaning that deposits are covered up to $100,000 -- were of interest again. – nytimes.com

FDIC was set up mainly to manage commercial bank failures. Deposit insurance legislation itself arose out of the bank failures of the early 1930s.


Why Sheila Bair wants to bail out consumers
The FDIC chief is the consistent voice of reason in her focus on homeowners as the key to saving the economy
By Betsy Morris, senior DECEMBER 12
For months, her agenda was a non-starter. Her proposals to try to turn distressed mortgages into performing loans through a loan modification program were getting absolutely no traction with either Federal Reserve chairman Ben Bernanke or Treasury Secretary Hank Paulson

As its list of problem banks swelled to 171 by the end of third quarter, up from 90 in the first quarter, its deposit-insurance fund fell to $34.6 billion, down from $52.8 billion. The agency has lines of credit with Treasury that it can tap if it ever came to that.

Congress has introduced proposed legislation to launch a loan-modification program, similar to her proposal, to be paid for with money from Hank Paulson's Troubled Asset Relief Program (TARP).

This wasn't the only recent show of support for Bair. In a speech last week to a Fed conference on housing and mortgage markets, Bernanke vindicated her position when he called for more aggressive action to stop foreclosures. One of his recommendations: the very loan-refinancing program instituted by Bair at IndyMac, the failed California bank, in which government will share some risk if a lender refinances to reduce monthly payments and keep the loan performing.
1.6 million mortgages are more than 60 days delinquent and the FDIC expects an additional 3.8 million of those next year. Home prices have fallen nationally by an average of 21% since peaking in the first quarter of 2006, according to the S&P/Case Schiller Home Price Index.
She's a pragmatist, aiming to prevent a deflationary spiral in housing prices that, along with accelerating job losses, will further devastate consumers, who are just as critical to a healthy economy as strong banks. Ironically, she's a Republican who has taken on the role of populist to restore confidence in the system. "I'm a capitalist. I believe in markets," she told an American Banker awards gathering last week.
The key difference to Fed Treasury
From the beginning of the crisis, she has been more focused on consumers than have Paulson, Bernanke or Geithner.

When Citi required a capital infusion last month, she stood firm about limiting the FDIC's exposure, according to a person knowledgeable with the negotiations, and attached some conditions, for example requiring Citi to modify troubled mortgages along the lines of IndyMac's program.

Her vigilance is less about ego than it is about protecting the FDIC and all that it stands for. Created by Congress in 1933 to restore public confidence in the nation's banking system, the agency is funded not by the government but by fees from the bank whose deposits it insures. So it's not a bottomless pit.
As its list of problem banks swelled to 171 by the end of third quarter, up from 90 in the first quarter, its deposit-insurance fund fell to $34.6 billion, down from $52.8 billion. The agency has lines of credit with Treasury that it can tap if it ever came to that.