A Wall Street Sheriff with Fewer Bullets

As lawmakers crafted the financial regulatory reform bill, a lot of bureaucratic power in Washington was suddenly up for grabs. A couple of months ago, Sheila C. Bair, chairman of the Federal Deposit Insurance Corp., seemed likely to get expanded responsibilities at the expense of Federal Reserve Chairman Ben Bernanke. It didn't turn out that way.

Bair certainly continues to play a high-profile role within the Obama Administration. A recent Time cover story designated her as one of the "New Sheriffs of Wall Street," along with Securities & Exchange Commission Chairman Mary L. Schapiro and Elizabeth Warren, who oversees a panel tracking the Troubled Asset Relief Program bank bailout.

Yet Bair has been losing some of the ground she gained earlier in the year. She failed to win Senate approval (though it passed in the House) to set up a $50 billion industry-paid fund to cover the costs of winding down failed banks in the future. Other Bair priorities have fallen short, including an attempt to keep the Treasury Dept. from running a special council of regulators to monitor systemic risk. A Republican effort to place the consumer watchdog agency within the FDIC went nowhere. The agency will be housed within the Fed.

Meanwhile, as senators put the final touches on the financial regulatory reform legislation, the Fed is poised to keep oversight of the largest U.S. financial firms. The Fed will also retain its supervision of 5,000 smaller banks, a responsibility the Senate initially proposed giving to the FDIC. Bair has "a lot of credibility, but the Fed is still the central bank," says John L. Douglas, a former FDIC general counsel now a partner with Davis Polk & Wardwell.

The FDIC is pleased with a "credible and effective" Senate bill, says spokesman Andrew Gray. The agency is expected to get new powers that will allow it to quickly shut down big Wall Street firms like Bear Stearns and Lehman Brothers that run into trouble and threaten the U.S. financial system. Bair is also continuing to press for an amendment to the pending legislation that would enable the FDIC chair to launch enforcement actions without the approval of the agency's board.

Still, the FDIC's setbacks are noticeable, especially since Bair has been a ubiquitous presence on Capitol Hill, testifying numerous times in 2009 and conferring regularly in closed-door briefings with staff and lawmakers. Bair won over Democratic majorities in Congress with her campaign to use part of the $700 billion in bailout funds to help struggling homeowners renegotiate their mortgage payments. Bernanke, in contrast, took heat for the Fed's role in bailouts like American International Group's (AIG) and lax enforcement of mortgage rules that fueled the subprime crisis.

However, the White House continued to back Bernanke and the Fed's role as a regulator of the U.S. banking system in the face of Senate efforts to strip the central bank of that power. The presidents of the Fed's 12 district banks also lobbied furiously (and successfully) to continue regulating smaller banks.

The $50 billion fund that Bair had wanted for the FDIC was lost in the Senate as Republicans singled it out as a slush fund for future government rescues. "That was just too easy a target for Republicans, and Democrats realized that," says Wayne Abernathy, an executive vice-president at the American Bankers Assn. "Even the Administration recognized that if you have a big pot of money sitting around, the markets are going to assume you're going to use it."

The bottom line: In the new regulatory framework the FDIC may not gain as much new power as the agency had hoped.

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