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Sunday, August 03, 2008

Bloomberg Interview of FDIC's Bair

by Calculated Risk on 8/03/2008 05:03:00 PM

Here is the transcript of Judy Woodruff's interview of the FDIC's Sheila Bair: FDIC's Bair Says IndyMac `Unattractive' to Buyers (hat tip Gerald)

Ms. Bair comments on IndyMac, more bank failures, and the warnings about lax lending in 2001 and 2002.

On more bank failures:

MS. WOODRUFF: In these perilous financial times, the question everybody wants to know the answer to is how sound are commercial banks, the banks where we keep our checking accounts and our savings accounts.

MS. BAIR: Right. Overall, banks are very safe and very sound. As of the end of the first quarter, 99 percent of banks met or exceeded our definition for well-capitalized, and that represented over 99 percent of bank assets. So overall, banks are safe and sound. There are a small group of banks that are having some difficulties these days.
On IndyMac:
MS. WOODRUFF: Why couldn't a buyer be found to pick up the assets and the deposits at IndyMac?

MS. BAIR: Well, this is a very large institution, and it did do a lot of high-risk lending. It has - you know, it had already stopped at the loan origination platform because its mortgage origination had just become not viable and was losing money. ... It also did not have a strong what we call a core deposit base. A lot of the deposits were brokered, meaning securities brokers just placed deposits and the institutions - as opposed to the institution having a relationship with the customer directly. And even the deposits were not brokered that were in the branches were above market rates. So there are a number of things about this institution that, to be honest with you, make it unattractive to a potential purchaser.
emphasis added
And on an early warning about lax lending standards:
MS. WOODRUFF: [Y]ou've said that you had a hint years ago that this was coming.

MS. BAIR: Well, we did. When I was at the Treasury Department in 2001 and 2002, we worked on - I worked with Ned Gramlich, the late Ned Gramlich, on subprime mortgage issues, because we were looking at it from more of a consumer perspective at that time. And we saw some very troubling aspects of how loans were being originated, the features of the loans, the abusive pre-payment penalties, a lot of flipping, you know, these serial refinancings.
There is much more ...

On bank failures, I've seen estimates of 100 to 200 failures over the next few years. There have been eight so far this year. I think Bair is a little over optimistic when she says more than 99% of banks are "safe and sound". There are over 8,000 FDIC insured institution, so 1% would be 80 - and that sounds like the low end of the potential failures.