Geithner Seeks to Push FDIC’s Bair Out After Clashes (Update1)

By Robert Schmidt

Dec. 4 (Bloomberg) -- Timothy Geithner, President-elect Barack Obama’s choice for U.S. Treasury Secretary, is seeking to push Federal Deposit Insurance Corp. Chairman Sheila Bair out of office.

Geithner, president of the Federal Reserve Bank of New York, has argued Bair isn’t a team player and is too focused on protecting her agency rather than the financial system as a whole, according to two congressional officials and a person familiar with his thinking. Bair has battled with Geithner and fellow regulators over aid to Citigroup Inc. and other emergency actions, making her enemies in the Bush administration.

“The idea of having an independent actor on the stage with you who might not be singing the same tune can make you nervous,” said Wayne Abernathy, a former Treasury official who is now executive vice president with the American Bankers Association in Washington. “They recognize that she’s a very independent person.”

It isn’t clear that Obama would ask Bair to step down. Such a move would be fraught with political risk for the new administration, especially on Capitol Hill, where Bair’s campaign to rework mortgages for struggling homeowners has won respect from top lawmakers, including Senate Banking Committee Chairman Christopher Dodd and Barney Frank, his counterpart in the House.

Bair’s spokesman Andrew Gray said the chairman supports the Geithner nomination and is continuing to focus on the work of the FDIC. Obama’s transition spokeswoman Stephanie Cutter had no comment.

Obama Plan

Even if Bair remains at the FDIC, the Obama economic team has decided that she won’t play a central role in policy, the people said. While Bair, like Obama, has favored aid for Main Street as well as Wall Street, the new administration will have its own plan to help the millions of people facing eviction from their homes. It will also have its own team to run the government’s $700 billion bailout program, they added.

Pushing out the head of the FDIC, which oversees more than 5,000 banks and savings institutions, would clash with the pledges made by Obama’s own transition team. Bair has become the most prominent Republican regulator, and the incoming administration has promised to give Republicans important jobs.

“You’ll see Republicans again, in his administration, not just a token member in the Cabinet, but you’ll see them spread throughout the administration,” transition director John Podesta said in an interview with Bloomberg Television last week.

Frank Proposal

Bair, who was appointed by President George W. Bush to a term as chairman that ends in 2011, has been lobbying behind the scenes for a stepped-up role in the Obama administration. Frank, a Massachusetts Democrat, has suggested that she be named to a special post to oversee government-wide programs to stop foreclosures.

Bair “brings a lot of credibility” on crafting ideas to ease the mortgage crisis, said Kevin Petrasic, a former Office of Thrift Supervision official who now works at law firm Paul, Hastings, Janofsky & Walker in Washington.

In public comments, Bair, 54, has indicated she’d like to stay on, while she’d be prepared to depart if Obama wants someone else to take the helm at the FDIC.

She said at a press conference in Washington Nov. 25 she’d work “in whatever role they want me in this institution to play.” The month before, Bair said in an interview on “Political Capital with Al Hunt” on Bloomberg Television that “I’m happy to go back to academia too. So I want to be flexible for the next president.”

Protecting Fund

Geithner became increasingly wary of Bair as she worked with the other regulatory agencies on emergency bailouts of banks in recent months. The New York fed chief has been concerned that Bair was more worried about keeping the FDIC’s insurance program protected than she was about the entire financial system, one person said.

Bair twice sparred with her colleagues at the Fed and Treasury over efforts involving Citigroup. In October, she acquiesced to Wachovia Corp.’s agreement to a takeover by Wells Fargo & Co. days after agreeing to back an initial deal with Citigroup. Geithner was concerned that allowing the Citigroup transaction to fail would inhibit other lenders from working with the FDIC on any subsequent rescues, the people said.

Wells Fargo offered about $15 billion for Wachovia, compared with Citigroup’s $2.2 billion deal to acquire Wachovia’s banking operations, and didn’t need any FDIC aid.

Citigroup Crisis

Citigroup’s position weakened, with its shares losing as much as 65 percent after the failed Wachovia deal amid a collapse in investor confidence -- precipitating another rescue attempt.

Again, Bair held out for concessions as the Fed and Treasury sought to shield Citigroup from losses in its holdings of toxic assets. Bair insisted on getting preferred shares for the FDIC in the New York-based bank. She also demanded that Citigroup agree to implement mortgage modifications according to a model developed by her agency.

At one point during a Nov. 23 Fed board meeting about the Citigroup rescue, Chairman Ben S. Bernanke stepped out to take a call from Treasury Secretary Henry Paulson. Returning a few moments later, Bernanke told his colleagues that the secretary was still locked in negotiations with Bair, whose demands were delaying the deal.

The political peril of ousting a popular regulator who has sided with struggling homeowners and sought tougher conditions on financial firms could fuel charges that Geithner and other Obama appointees are too closely connected to Wall Street.

‘No Girls Allowed’

“I think part of the problem now, to be honest, is Sheila Bair has annoyed the ‘old boys’ club,’” Frank said today. “To some extent, bank regulation and mortgage foreclosure have made a situation where we have several regulators up in the tree house with a ‘no girls allowed’ sign -- and it’s aimed at Sheila Bair - - who’s been really good.”

On other issues, too, Bair has stepped out in front of her Bush administration colleagues.

As the mortgage bust deepened, Bair repeatedly pushed Fed and Treasury officials to boost aid for homeowners.

In 2007, Bair told lawmakers the Fed should use its authority over home-loan standards to tighten oversight and crack down on the practices that contributed to the subprime mortgage mess.

This year, Bair has proposed using taxpayer funds to help refinance loans for struggling homeowners. She told legislators at an Oct. 23 hearing that the Treasury could use its $700 billion financial-rescue fund to set terms for mortgage modifications and offer guarantees for loans that meet the standards.

Senators pressed Neel Kashkari, the Treasury official overseeing the Troubled Asset Relief Program, on his department’s reaction. “We are looking very hard” on the proposal, he said.

The White House later that month sought to scale back Bair’s idea to use as much as $50 billion from the program. Yesterday, an official said Paulson instead is considering a proposal to drive down home-loan rates through purchases of mortgage-backed securities.

To contact the reporter on this story: Robert Schmidt in Washington at rschmidt5@bloomberg.net .

Last Updated: December 4, 2008 16:02 EST

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