Q&A with Sheila C. Bair, Chairwoman of the Federal Deposit Insurance Corporation

Her fans and critics would agree on at least one thing — Sheila Bair has been no conventional Federal Deposit Insurance Corporation chairwoman. A Republican appointed to a five-year term in 2006, she has moved to tighten consumer protections and blasted lenders for not working fast enough to relax loan terms for troubled borrowers. No other bank regulator has called louder for a bold federal response to the housing mess.

All this has won her the affection of Democrats and consumer advocates but the suspicion of Wall Street. Now, with the collapse of IndyMac Bancorp, which the FDIC took over last month after depositors withdrew more than $1 billion, she will have the chance to put her proposals into practice.

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Q: You’ve emphasized consumer protection more than any FDIC chairman in memory. How do you balance your concern for consumers with your primary role in ensuring the safety and soundness of the banking system?

I think they’re really two sides of the same coin. I really do. I think that is really underscored with the sub-prime debacle, because these were loans that were not in the long-term best interest of the consumer. And generally, a product that does not serve the customer’s interest ultimately will lose money for the institution. They work together hand in hand; they are compatible; they are not inconsistent. Frequently, the red flags will come up on the consumer side before you start seeing the impact on the safety and soundness side.

Q: The FDIC had 90 banks on its list of problem institutions at the end of the first quarter. How concerned are you about the banking system right now?

Banks in this country are overwhelmingly safe and sound. They are overwhelmingly well-capitalized. We do have challenges; I won’t say we don’t, because we do. But banks went into this with very strong capital and many, many quarters of record earnings. So they’re going into this in a strong position.

Q: Did the run on IndyMac cause you to worry that the public might not be as informed as it should be about how the FDIC’s deposit insurance fund works?

I am concerned. My staff told me that there were a lot of people in line to take out their insured deposits. That was just not necessary. I was very saddened because it was a big inconvenience for people to be in those lines. The irony was that the run occurred after the bank closed.

We’ve really redoubled our efforts to get out there with a public education campaign. We want people to understand that if they are below our insured deposit limits [which are generally $100,000 per depositor per institution], they really don’t have anything to worry about. Even if your bank closes — and it’s a very remote chance that your bank will close — your insured deposits are absolutely safe.

Q: Critics, including some other bank regulators, were blaming Sen. Charles Schumer (D-N.Y.) for helping to cause IndyMac’s downfall when he publicized his concerns about the bank. What do you think?

We just haven’t commented on that. I think we’re just working hard on developing a good package to sell the assets of the institution so that we can maximize the recovery to our own deposit insurance fund and try to get some additional return for uninsured depositors.

Q: Should a politician — or any other prominent person — air his or her concerns about a bank’s solvency?

I try not to tell other people what to do. I never, ever comment on an open, operating institution. Frankly, for my own protection and for the institution’s protection, if you comment on an open, operating institution, you do need to worry about casting a public spotlight on that institution that could contribute to a bank run. And also, the criticism can come back to you on that. So for government officials, it’s something we have to think very carefully about. I can just tell you what my own policy is. I don’t judge other people.

Q: Since the FDIC took control of IndyMac, you’ve put a freeze on foreclosures and said that you would begin to modify the loans to make them more affordable. Is there a tension between doing that and your obligation to maximize the return to the deposit insurance fund and fulfill obligations to investors in the mortgages?

I really don’t think there is. First of all, we’ve segmented our efforts into the loans that we own — about $15 billion of loans that are not investor-owned — so I think we have significant latitude there. We will pursue a loss-mitigation strategy that does maximize value to the deposit insurance fund, but we think that means a very aggressive loan modification program. In some of the neighborhoods where these homes are located, foreclosure sales are producing very, very steep discounts — up to 50 to 60 cents on the dollar. We think it’s going to be better for us to modify that loan, and keep the borrower in their home, as opposed to going into foreclosure.

For the investor-owned mortgages that IndyMac serves, we are consulting with some of the investor groups. We will also propose to them systematic aggressive loan modifications, but those will also be within the framework of the pooling and servicing agreements. We hope investors will be supportive of a systematic loan modification program, because we think that’s in their best economic interest.

Q: How much will you make use of the new FHA refinancing program that was just signed into law at IndyMac?

We’re looking at that. I think we will use that as an option. Again, our obligation to our own deposit insurance fund is to maximize value. So I think where an FHA refinancing will maximize value, we will do it. Where a loan modification will maximize value, we will do it. Now we have multiple tools, though. We welcome the FHA program as an additional tool that we will have.