Inside Financial Services

Sheila Bair Needs to Learn Arithmetic

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Is it July yet? That’s when Sheila Bair is scheduled to step down as head of the FDIC and, based on her idiotic comments yesterday to the Wall Street Journal, the moment can’t come fast enough.

Bair seems to persist in believing a mathematical impossibility: that the higher capital requirements she says are in order for the SiFis wouldn’t crimp their lending. Which is, in a word, nuts. The arithmetic’s not hard. At a 7% capital ratio (which is what the Basel agreement would require), a bank with $10 billion in capital could support roughly $140 billion in assets (that is, lending). At the 10% ratio Bair has in mind, that same bank could support just $100 billion in assets, or 28% less.*

As I say, this isn’t hard. A 40% constriction in lending capacity by the big banks would constitute a huge decline, and would almost surely have a material effect on the rate of overall credit creation and economic growth. What’s more, the lucky borrowers that would be able to get loans would be forced to pay a higher interest rate for them. This week, U.S. Bancorp. CFO Andy Cecere told an investor conference that if the bank has to raise its Tier 1 Common Capital Ratio to 10% from 8.5%, it would have to increase the interest rate it charges on loans by 25 basis points.

Sheila Bair has been a disaster as a regulator. As my pal Dick Bove recently pointed out, she was asleep at the switch during the early part of her term, in 2006, when the excesses in the housing market were still building and when her agency could have done something to prevent the subsequent disaster. Then after the crackup, her agency overreacted (via its bizarre devotion to forced loan mods, for instance) and delayed the market-clearing process needed to get the housing market back to normal. Now she seems to want to impose a regulatory regime that would have the effect of institutionalizing subpar economic growth. A disaster. As I say, July can’t come fast enough.

What do you think? Let me know!

* Because of an editing error, the original post said “40% less,” which had the arithmetic upside down.

22 Responses to “Sheila Bair Needs to Learn Arithmetic”

  1. Math Major

    Damn, Mark. You beat me to the punch. Come on Tom, you can’t criticize someone for not knowing their arithmetic and then screw it up yourself! We expect better of you!

  2. Math Major

    Damn, Mark. You beat me to the punch. Come on Tom, you can’t criticize someone for not knowing their arithmetic and then screw it up yourself! We expect better of you!

  3. Math Major

    Mark, you beat me to the punch! Tom, you have to be careful about when you criticize someone for not knowing arithmetic and then making the same mistake yourself!

  4. Math Major

    Mark, you beat me to the punch! Tom, you have to be careful about when you criticize someone for not knowing arithmetic and then making the same mistake yourself!

  5. math guy

    @mark lynch: totally appreciating your smart ass remark and the fact you can use a calculator. but since lending “the verb” is either happening at one point in time or prospectively. tom is correct in that the capacity for lending (which by the way is the

  6. mopedman

    Well Tom…she’s a Democrat. The main thing we need to do here is make sure someone like Rap-Daddy is around to see that nearly qualified minorities are not deprived of a chance at a loan for those new cars, nice houses, or that business they’ve always wanted and just let everything else work itself out.. Why did I say NEARLY qualified? What bank would deny ANYONE a loan if they were qualified? Unless of course they didn’t have the money.

  7. Brian H

    The problem is they have no incentive to care about the pernicious side effects.

  8. Mark Lynch

    Actually, going from $140 to $100, is a 29% drop.

  9. Shree


    I have been following your comments/picks regularly for several years. I respect your views, and analysis – some I agree and some I disagree. But, I can not agree with you more on this “arithmetic.” I do not understand what is so difficult for them to see. May be, you should write to the regulators with a copy to the administration highlighting your “arithmetic.”

    If what Sheila Bair has said irks you, I guess you will be furious with what Steven Mallaby said in the Financial Times a couple of days ago – he wants banks to have 20% capital. I say why stop with 10% or 20%? if you want safety, either nationalize them or make them have 100% – sure fire way to feel safe and at the same time kill a sector!

    Do I feel irritated? Sorry!

  10. Sam

    it will revert back in 5-6 years as political pressure to grow overwhelms the perceived need to guard against a 20% decline in the economy. regulator regimes go in cycles with the markets, a few years behind.

  11. John Tschohl

    Thomas I love the way you call a spade a spade. Keep up the good work.

  12. jsc173

    Does anyone else see that the system we have created is self-destructive? Does anyone honestly believe that, without substantial reinvention, our regulatory apparatus has doomed our banking system to long-term mediocrity? And Tom, Ms. Bair’s replacement won’t be able to fix this, either. All they will do is pretend to have some level of control over the number and organization of the deck chairs on the ship. Nobody seems to be awake to the fact the ship is still taking on water. I’ve been in banking for most of my 40+ year business career and I have never felt more negative about the long-term outlook for the industry. Bair is an ice cube. We are still surrounded by icebergs.

  13. Al Davis

    As Chairman and CEO of a a community bank in Portland, Oregon, I understand the problem very well, and completely agree with you. The objective here, by the FDIC, is clearly to get rid of small banks, giving them fewer banks to regulate so that they can manage the economy according to their liking. The average citizen has not idea how much money the large banks that received TARP made off those TARP monies, which meant they didn’t have to go out and lend to small businesses.

  14. Bair is right

    i think what Bair is getting at is that she wants only good credits being issued by the banks. The 40% reductions you cite are most likely the bad credits the banks have been making the last few years. And those should stop with the higher requirements. Higher bank credit rates also should lead to more equity financing thus more share issuance…which should be a good thing

  15. Oy

    A reduction in lending capacity wouldn’t be all bad. A lot of that prior lending capacity was used chasing idiot loans that have gone bad. I would feel a lot more comfortable with your arithematic if it wasn’t going to be used by those who want to go right back to the way things were done prior to the crash as if nothing had happened. I’m hoping there is some middle ground.

  16. NorthLeftCoast

    The entire group of regulators in the financial world are disasters. These people are living examples of the Peter Principle in action. I would bet that Sheila Bair has never had to run the Asset/Liability Committee for a bank and has no idea what raising the capital requirement actually means in real dollar terms for the industry, let alone a single institution. Further, she may think that shrinking the balance sheets of the large banks is a good thing, without any idea that $1.5 Trillion in lending capacity (Dick Bove’s estimate) would be eliminated to meet this requirement, or, shareholders would be diluted by 30-50%. Either way, this is a de facto anti-capitalist move. It also would mean that economic recovery is five years or more down the road. A prime example of engaging the mouth before the brain…

  17. Czhv18a

    Tom Sheila is about to speak @ a conference I’m @ with a q&a. What 1 question would you ask her if you had a shot?

  18. Anonymous

    From the beginning it was apparent Ms. Baird was a terrible choice. From the beginning she used this bully pulpit for her own political benefit. One comment after another showed her total lack of understanding of banking and her lack of skills to do the job.
    Thank you for speaking out.

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