Pixel Tracker

Tuesday, January 22 , 2019, 9:27 pm | Fair 46º


Larry Kudlow: Our Bair Necessity

Through roiled waters, the FDIC's Sheila Bair has kept a steady hand on the tiller.

You know what? Treasury Secretary Henry Paulson may not be the most powerful financial person in the country right now. That honor goes to Sheila Bair, chairwoman of the FDIC.

Larry Kudlow
Larry Kudlow
In recent weeks, Bair has held the banking system together, coordinating smooth takeovers of distressed banks in deals run and controlled by her agency. I wouldn’t exactly say she’s flying under the radar screen since these bank takeovers are all over the news. But without holding the center-stage attention that Paulson has, she has seamlessly closed and reopened IndyMac, Washington Mutual and Wachovia.

IndyMac was in fact taken over by the FDIC, becoming the IndyMac Federal Bank, while WaMu was acquired by JPMorgan Chase and Wachovia by Citigroup. So far as I know, not a single depositor at these banks has lost money. This is huge. And it suggests to me that if the Congress is unable to craft a deal for Treasury purchases of toxic assets, the nation is still in good hands as a result of the good offices of the highly professional, credible and trustworthy Federal Deposit Insurance Corp., run very well by Bair.

Who is Sheila Bair? Forbes just ranked her the second-most powerful woman in the world, behind German Chancellor Angela Merkel. Before coming to the FDIC, Bair was a professor at the University of Massachusetts. She has served at the Treasury Department, the New York Stock Exchange and the Commodity Futures Trading Commission, and was chief counsel to former Senate Majority Leader Bob Dole, R-Kan. Just as important, she has written two children’s books, showing the kids good examples of money management.

And now she’s showing the whole nation good examples of money management on a grand scale.

Last week, a Wall Street Journal editorial called “Pre-emptive Plumbing,” walked through the details of the Wachovia takeover by Citigroup. The FDIC will backstop nearly $300 billion of Wachovia assets, while Citigroup is on the hook for the first $42 billion in potential portfolio losses from Wachovia. And Citi will give the FDIC $12 billion in ownership of preferred stock and warrants. This open-bank transaction flows from the emergency powers written into the FDIC Improvement Act of 1991. Systemic risk to the financial system provides that authority.

But each of these takeovers reveals the real FDIC glue that’s holding our banking system together, even in the absence of Paulson’s big-bang, toxic-asset purchase plan.

I think the Paulson plan is still essential. It will unclog the banking system and reopen the door to Main Street loans that are necessary to grow the economy. And taxpayers will wind up turning a profit since they will own the assets purchased by the Treasury, the roughly 10 percent yield on those assets and the profits from the eventual Treasury sale of the bonds. And all these revenues will be used to pay down the national debt. But if there is no Paulson plan, the FDIC can carry the ball alone — certainly through year end and until a new government comes into power.

Incidentally, as the FDIC crafts its pre-emptive takeovers of distressed banks, doing so before the banks crash, it is in effect injecting public capital to bolster sagging private bank capital. Former Reagan FDIC commissioner William Isaac suggests the agency can put even more capital into banks through a net-worth certificate program used in the 1980s for the troubled savings bank industry.

In addition, both presidential candidates are supporting at least a doubling of the FDIC’s deposit insurance program for banks. And this provision will likely be added to a new Paulson plan coming up in a day or two.

Hopefully, if there is a plan-B vote on the Paulson program, it will include a suspension of the so-called mark-to-market “fair value” accounting of assets, and replace that either with a net-operating-loss (NOL) carry-back or carry-forward, or at least a five- to seven-year amortization of loan losses incurred by banks that are selling their distressed assets.

NOL is used in many heavy industries where current losses can be offset by past or future profits for both tax and accounting purposes in order to smooth the profit cycle. Without this accounting relief, banks selling loans to the Treasury at a deep discount will further impair their already weak capital positions if they have to immediately post the losses. Rep. Paul Ryan, R-Wis., had this provision in the House version of the first Paulson plan, but it was apparently taken out by Rep. Barney Frank, D-Mass. Isaac also supports this.

Last week’s stock market comeback — with the Dow up nearly 500 points following an unbelievable plunge — suggests that investors believe the politicians will deliver some relief. But my message to the investor class is this: If Paulson strikes out again, Sheila Bair is the ultimate backstop.

Larry Kudlow is the founder and CEO of Kudlow & Co. LLC, an economic research and consulting firm in New York City, and host of CNBC’s Kudlow & Company. Click here for more information, or click here to contact him.

Support Noozhawk Today

You are an important ally in our mission to deliver clear, objective, high-quality professional news reporting for Santa Barbara, Goleta and the rest of Santa Barbara County. Join the Hawks Club today to help keep Noozhawk soaring.

We offer four membership levels: $5 a month, $10 a month, $25 a month or $1 a week. Payments can be made using a credit card, Apple Pay or Google Pay, or click here for information on recurring credit-card payments and a mailing address for checks.

Thank you for your vital support.

Become a Noozhawk Supporter

First name
Last name
Select your monthly membership
Or choose an annual membership

Payment Information

Membership Subscription

You are enrolling in . Thank you for joining the Hawks Club.

Payment Method

Pay by Credit Card:

Mastercard, Visa, American Express, Discover
One click only, please!

Pay with Apple Pay or Google Pay:

Noozhawk partners with Stripe to provide secure invoicing and payments processing.
You may cancel your membership at any time by sending an email to .(JavaScript must be enabled to view this email address).

  • Ask
  • Vote
  • Investigate
  • Answer

Noozhawk Asks: What’s Your Question?

Welcome to Noozhawk Asks, a new feature in which you ask the questions, you help decide what Noozhawk investigates, and you work with us to find the answers.

Here’s how it works: You share your questions with us in the nearby box. In some cases, we may work with you to find the answers. In others, we may ask you to vote on your top choices to help us narrow the scope. And we’ll be regularly asking you for your feedback on a specific issue or topic.

We also expect to work together with the reader who asked the winning questions to find the answer together. Noozhawk’s objective is to come at questions from a place of curiosity and openness, and we believe a transparent collaboration is the key to achieve it.

The results of our investigation will be published here in this Noozhawk Asks section. Once or twice a month, we plan to do a review of what was asked and answered.

Thanks for asking!

Click Here to Get Started >

Reader Comments

Noozhawk is no longer accepting reader comments on our articles. Click here for the announcement. Readers are instead invited to submit letters to the editor by emailing them to [email protected]. Please provide your full name and community, as well as contact information for verification purposes only.