FDIC chief puts blame on Fed for crisis

FDIC chief puts blame on Fed for crisis
By Tom Braithwaite in Washington
Copyright The Financial Times Limited 2010
Published: January 14 2010 14:59 | Last updated: January 14 2010 14:59
http://www.ft.com/cms/s/0/0a3b97c8-0114-11df-a4cb-00144feabdc0.html


The Federal Deposit Insurance Corporation laid much of the blame for the financial crisis at the door of the Federal Reserve at an inquiry that causes fresh problems for the US central bank.

Sheila Bair, chairman of the FDIC, which insures depositors against bank failures, said on Thursday that the Fed waited seven years to use fully its powers to regulate subprime lending.

“If HOEPA (Home Ownership and Equity Protection Act) regulations had been amended in 2001, instead of in 2008, a large number of the toxic mortgage loans could not have been originated and much of the crisis may have been prevented,” she said.

The typically forthright written testimony from Ms Bair to the second day of the hearings from the new Financial Crisis Inquiry Commission pits one of the most politically powerful regulators against one of the weakest. The Fed is under attack on multiple fronts in Congress with attempts to conduct sweeping audits of the central bank and remove much of its regulatory role.

The FCIC, which on Wednesday heard from four Wall Street executives, also heard from Mary Schapiro, the Securities and Exchange Commission and Eric Holder, the attorney-general.

Ms Bair acknowledged that many regulators had failed in the crisis in a thorough 54-page analysis of the events leading up to the 2008 shocks across the credit and equity markets.

“Regulators were wholly unprepared and ill-equipped for a systemic event that initially destroyed liquidity in the shadow banking system and subsequently spread to the largest firms throughout the financial system,” she said.

Ms Bair has opposed giving the Fed a principal role in regulating systemic risk.

She also reiterated her belief, which goes against the wishes of Tim Geithner, Treasury secretary, that a new “resolution” fund, used to wind up a failing systemically important fund, should be built up before a crisis with a new assessment on the industry.

Banks are already reeling from the news that they will have to pay about $90bn over 10 years in a levy to recoup the government’s costs of bailing out the system.

Finally, Ms Bair concluded with a call for the financial sector to be constrained from outsized growth. “Longer term, we must develop a more strategic approach that utilises all available policy tools — fiscal, monetary, and regulatory — to lead us toward a longer-term, more stable, and more widely shared prosperity,” she said.