Regulatory Capture Defined: Sheila Bair (FDIC)


Regulatory Capture Defined: Sheila Bair

Posted by Karl Denninger

Pretty amazing stuff, really:

WASHINGTON—Federal Deposit Insurance Corp. Chairman Sheila Bair has urged lawmakers to scrap a controversial Senate plan that would force banks to spin off their derivatives businesses, saying it could destabilize banks and drive risk into unregulated parts of the financial sector.

How could this “destabilize” large banks?

Let’s remember that the now-common credit-default swap was invented after the Exxon-Valdez oil spill in 1989.  JP Morgan wrote a line of credit to Exxon, and then created the world’s first “modern” credit default swap to protect itself against a possible default on that credit line.

Ms. Bair’s FDIC has had every opportunity to regulate whatever risk exists out of the system.  Indeed, the stellar performance of her FDIC is demonstrated every week when we see 20, 30, 40 or even 50% overvaluations exposed by bank failures where the FDIC steps in to take over the firm.

At this point we find that there are alleged $100 million in assets (loans and paper), and $100 million in liabilities (deposits), but magically there is a $40 million loss to the deposit insurance fund! 

How is this possible?  Simple: The alleged $100 million in “assets” are really only worth $60 million, and yet nobody goes to jail for lying about asset values, nor has the FDIC come in and closed the institution before it went $40 million into the hole!

Banks with access to federal backstops, including The Fed window and FDIC insurance, should not be issuing or trading derivatives.   The reason for this is simple – if they do, they don’t care if they make good loans or terrible, guaranteed-to-blow-up loans, as they can make plenty of money writing loans they know will and intend to blow up!

“Banks are not perfect, but we do believe that insured banks as a whole performed better during this crisis because they are subject to higher capital requirements in both the amount and quality of capital,” she wrote.


What’s in the off-balance sheet box over at Wells Fargo Sheila?  What’s it worth? 

If you closed Wells tomorrow, how much would the deposit insurance fund lose?

I’m willing to bet the answer would be “far more than we have – or have access to through Treasury.”

That’s the problem.

It is time for Ms. Bair to resign.