“Our Bair Necessity” By Larry Kudlow





Who is Sheila Bair? Forbes just ranked her the second-most powerful woman in the world, behind German chancellor Angela Merkel. Before coming to the FDIC, Ms. Bair was a professor at the University of Massachusetts. She has served at the Treasury Department, the New York Stock Exchange, and the Commodity Futures Trading Commission, and was chief counsel to former Senate majority leader Robert Dole. Just as important, she has written two children’s books, showing the kids good examples of money management.

And now she’s showing the whole nation good examples of money management on a grand scale.

… if there is no Paulson plan, the FDIC can carry the ball alone — certainly through year end and until a new government comes into power.

Incidentally, as the FDIC crafts its preemptive takeovers of distressed banks, doing so before the banks crash, it is in effect injecting public capital to bolster sagging private bank capital. Former Reagan FDIC commissioner William Isaac suggests the agency can put even more capital into banks through a net-worth certificate program used in the 1980s for the troubled savings bank industry.

In addition, both presidential candidates are supporting at least a doubling of the FDIC’s deposit insurance program for banks. And this provision will likely be added to a new Paulson plan coming up in a day or two.

Hopefully, if there is a plan-B vote on the Paulson program, it will include a suspension of the so-called mark-to-market “fair value” accounting of assets, and replace that either with a net-operating-loss (NOL) carry-back or carry-forward, or at least a five-to-seven year amortization of loan losses incurred by banks that are selling their distressed assets.

NOL is used in many heavy industries where current losses can be offset by past or future profits for both tax and accounting purposes in order to smooth the profit cycle. Without this accounting relief, banks selling loans to the Treasury at a deep discount will further impair their already weak capital positions if they have to immediately post the losses. Congressman Paul Ryan had this provision in the House version of the first Paulson plan, but it was apparently taken out by Barney Frank. Former FDIC man Bill Isaac also supports this.

Tuesday’s stock market comeback — with the Dow up nearly 500 points following Monday’s unbelievable plunge — suggests that investors believe the politicians will deliver some relief. But my message to the investor class is this: If Mr. Paulson strikes out again, Ms. Sheila Bair is the ultimate backstop.

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