Friday, May 15, 2009

Bank Chiefs Will Be Replaced in Next Few Months, Bair Predicts

Bank chief executives will be replaced in the next couple of months as the U.S. scrutinizes financially troubled lenders, Federal Deposit Insurance Corp. Chairman Sheila Bair predicted.

“Management needs to be evaluated,” Bair said today on Bloomberg Television’s “Political Capital with Al Hunt,” to be broadcast this weekend. “Have they been doing a good job? Are there people who can do a better job?”

U.S. regulators last week released stress-test results on 19 banks and ordered 10 including Citigroup Inc., Bank of America Corp. and Wells Fargo & Co. to raise $74.6 billion in capital to withstand a “deeper and more protracted” slump than forecast. CEOs of Citigroup and Bank of America, which got a total of $90 billion in U.S. aid, remain on the job, while top executives at Fannie Mae, Freddie Mac and General Motors Corp. were ousted after getting U.S. aid.

The FDIC released a statement after the interview characterizing Bair’s comments. Bair said management changes “could happen” based on capital-raising plans submitted to the government. “She did not refer to CEOs specifically,” the agency said in an e-mailed statement. “Bair also did not suggest the federal government will remove the bank CEOs,” the statement said.

Wagoner’s Exit

Asked in the interview, “Why are some of these other banks’ CEOs still there?” Bair, 55, replied, “I think the review needs to go with both the management and the board as well, absolutely.”

She was then asked, “Do you think some will be replaced in the next couple of months?” Bair replied, “Yeah, I think there will be an evaluation process. We’re requesting it as part of the capital plan and yes.”

Chief executive officers at American International Group Inc., Fannie Mae and Freddie Mac were ousted by the Bush administration after the U.S. took control in September. General Motors CEO Rick Wagoner was forced out in March after the Obama administration rejected GM’s recovery plan.

Regulators have a “continuing obligation” to steer banks that need government aid to a point where they can eventually operate without it.

“So to the extent that it means oversight of adequacy of management and boards, I think that’s absolutely appropriate for regulators to do,” Bair said.

Lewis ‘Heard Message’

The evaluation may include a review of a bank’s board, which may result in replacing some of the directors “in some instances,” Bair said. “I think it needs to be on an individualized basis.”

Bank of American CEO Kenneth Lewis “heard the shareholders’ message that they wanted a different course” after the April 29 vote stripping him of his title as chairman, bank spokesman Robert Stickler said in a telephone interview today. Walter Massey, a retired college president who was elected chairman, on May 7 announced a committee to suggest changes to the board.

All corporate managers, not just those receiving federal assistance, should base compensation decisions on “long-term performance,” Bair said.

“I don’t think prescriptive rules or dollar limits are appropriate,” Bair said. “Principles about long-term performance and not rewarding risky behavior with short-term profits -- I think those types of principles should be embraced by bank management as well as other corporate management.”

Guarantee Extension Shelved

White House spokesman Robert Gibbs said bank regulators who review the capital plans of financial institutions stemming from the stress tests will focus on management.

“Those regulators also will make determinations about not just the suitability of those plans going forward, but whether or not the corporate leadership of those institutions is right in instituting what has to happen in those plans,” Gibbs said today in a briefing. “But I think that’s a process that has got to play out for a few weeks.”

Separately, the FDIC has shelved plans to extend its program to guarantee bank bonds to 10 years from the current three-year term after the Obama administration opposed the move, Bair said today in an interview before the television interview.

“That’s on hold,” Bair said. “The Treasury is not completely comfortable with that.”

The FDIC announced the plan in January while unveiling a government aid package for Bank of America. At the time, the agency said it would be extending its guarantees to covered bonds and other types of secured debt that supports consumer lending. Treasury spokesman Andrew Williams declined to comment on Bair’s remarks.

Liquidity Crisis ‘Over’

Regulators have stabilized the banking system, Bair said in the broadcast interview.

“The liquidity crisis that we were seeing last year is over for good, I hope,” Bair said.

Bair said she’s most concerned about maintaining public confidence.

“If we lose public confidence, we might get into another liquidity situation,” Bair said. “That would be bad for everyone. Liquidity, keeping the funding in the banks so they can lend, that’s very important right now.”

The FDIC is setting up the Legacy Loans Program to help banks unload pools of soured loans to investors through auctions held by the agency.

Fed ‘Logical’ Choice

Some lenders “need to be told that they need to deal with their troubled assets,” Bair said. “The troubled assets are still there and the need is still there to clean that up.”

As Congress prepares to overhaul financial rules, Bair is seeking power to shut bank and thrift holding companies. She also recommended that Congress set up a council to monitor large firms for activity that poses threats to the system. The FDIC, Fed, Treasury and Securities and Exchange Commission should be on the panel, she said. Treasury Secretary Timothy Geithner has signaled he prefers giving the Fed the authority.

The Fed would be a “logical” choice because it already oversees bank-holding companies, Bair said. There is “risk that spans the system” posed by companies without federal oversight, including insurance firms and hedge funds, Bair said.

“For the system-wide issues, it would be better to get the major regulatory agencies together in a legally formed council that would be charged and given responsibility for making sure that systemic risks are identified early and addressed,” Bair said.