Sheila Bair and America ' s view of the housing crisis

This is the question Americans keep asking, and perhaps you've said it yourself, about federal plans to help out the banking system and loosen credit. "Why are we bailing out the banks? Why don't we bail out home0wners?" The interesting thing about this question is that most people in Washington, D.C., when they try to answer this question, use arguments against bailout out homeowners that could also be applied to the banks that they are trying to help. I'm referring to fairness issues -- how do you help someone in trouble without hurting someone else who was more prudent? Apply the same thing to lenders and it becomes -- how do you fix the system without unfairly benefitting the ones who screwed it up? And the answer we have heard is that we have to fix the system even if we do benefit the screw-ups. And if that's the case, then as a practical matter the principal difference between helping big bank screw-ups and unwise or greedy individual home mortgage borrowers that the former are big and the latter are little. Which brings me to Sheila Bair. She's the current head of the Federal Deposit Insurance Corp., which insures bank deposits. Remember when bank commercials always ended with this line? "Member, FDIC." Bank of Hawaii Vice Chairman Donna Tanouye was head of the FDIC in a quieter time. Bair appeared this week on CNBC and indicated that if a financial services company is in trouble, she or some other regulator ought to be able to come in and actually take control, the way a judge takes control when a company requires protection from creditors under Chapter 11 of federal bankruptcy law. "Replace the management," she said. "Get rid of the boards [of directors and] doing an orderly unwinding of the entity." Bair and the FDIC have already done this in dozens of takeovers of failing banks, so what she is really saying is that this same procedure should be applied to the big, rich, screw-up companies, and also to AIG, where a perfectly good insurance company is in corporate peril because of one risky division. (Your policy is safe.) Bair sounds like she has her head on straighter than some other leaders of various rescue proposals. It's the American system, though you haven't heard it so much in the past year or two, that if a company can't maintain its own stability and needs government help, its management loses the right to remain in place. One thing that may help Bair play a strong role in this is that she will not be attacked by Republicans. She is one. She was named to the post during the previous administration. I also suspect that while big banks are scared of her, many conservative local banks may see her as the one regulator who won't write a blank check for a reckless rival.