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FDIC moves in on banks

Vikram Pandit and Ken Lewis worry about what Hank Paulson and Ben Bernanke will do next. It's Sheila Bair they should fear.

By Katie Benner, writer-reporter
November 25, 2008: 6:25 AM ET

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Fighter: Bair wants more oversight of banks' books.

(Fortune Magazine) -- FDIC chief Sheila Bair has already drawn attention for turning her agency from a regulatory backwater to a force in the reshaping of the financial industry. Now a little-noticed proposal that is close to passing would expand her influence further - and could spell trouble for the sprawling banks that Hank Paulson and Ben Bernanke have said are too big, too connected, and too important to fail.

In July, Bair proposed a narrow record-keeping rule that, simply speaking, allows the FDIC to ask any troubled institution it regulates to turn over details of all its qualified financial contracts, or QFCs. QFCs are contracts between a bank and a counterparty, and they include everything from securities and repurchase contracts to currency and credit default swap agreements - some of the same murky derivatives behind Wall Street's biggest blowups.

Many banks still don't know their exposure to these products or details about the counterparties, which they are also required to provide by the new ruling. The way Bair sees it, they don't know because no one has ever forced them to know.

"This may be the single most important piece of rule-making to come out of the financial service regulatory world in a decade," says Josh Rosner, an analyst at research firm Graham-Fisher.

The FDIC regulates any entity that has federally insured deposits. Most banks that fall under its purview don't have such complicated contracts, but huge institutions like Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500), and J.P. Morgan Chase (JPM, Fortune 500) do; so do lenders like GMAC Bank and GE's consumer bank unit.

It would be hard to impossible for many of these banks to comply with such a rule right now, says Oppenheimer & Co. analyst Meredith Whitney, citing Lehman's recent difficulty accounting for its contracts in bankruptcy. "It took weeks for [Lehman] to accurately list its derivatives counterparties and exposures," she says.

Under the rule, institutions that can't provide a list would face the consequences for violating any FDIC rule. The agency typically gives banks time to take corrective action, but in extreme cases it could limit growth or even replace management.

The rule, expected to pass this month, would also be a triumph of Bair's pro-regulatory tilt over Paulson and Bernanke's restraint. Says Rosner: "This rule represents the victory of Sheila's view over Hank's on moral hazard." As a Bush appointee, Bair could be out on Jan. 20. But her staffers will remain in place - and are eager to continue her crusade. Bank CEOs, be forewarned.

Bair Bait

If the FDIC rule passes, banks will have to be able to account for their exotic securities. These banks might have trouble.

Citigroup

Antiquated computer systems may make it even harder for Citi to know the full scope of its obligations.

Bank of America

It has to integrate Countrywide and Merrill Lynch, which may have more potential problems.

GMAC

The former GM unit would have to chronicle the contracts of its troubled mortgage lender, ResCap. To top of page

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