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I am not fond of the FDIC Chairwoman believing her to be acutely political, marginally competent and completely over her head in the present banking crisis.

But Ms. Bair appears to be coming to her senses regarding the damaging effect of Government bailouts on the banking industry.  I suspect that her change of heart originates from the reality that she oversees the FDIC during that entity’s worst failure since the Savings-and-Loan crisis and possibly since the organization’s founding.

Ms. Bair now recognizes that the Government’s “Too Big to Fail” policy and affinity for bailouts has had a disastrous effect on banks not receiving Federal handouts or deemed too small to prop up.  Large banks with explicit Government guarantees now enjoy material advantages in accessing capital and financing costs as there is no chance that these entities defaulting on borrowings.  The arrangement is similar to that enjoyed by Fannie Mae in accessing capital.  Small banks, especially community banks and thrifts, can not compete with companies chosen by the Government to receive the “Too Big to Fail” moniker.   

A hundred banks have failed thus far this year. 

• The ARM plague will continue into 2012
• Option-ARMs have only recently begun to explode
• Rising unemployment has ignited a new source of foreclosures
• The dollar value of properties entering foreclosure is rising steadily increasing the collateral damage caused by each default
• Inevitable foreclosures delayed by misguided Government intervention will begin to creep back into the market
• The Commercial Real Estate collapse has only just begun 

Hundreds more banks will fail due to deteriorating economic conditions.  Ms Bair has belatedly decided that the Federal Government contributing to the failure of a few hundred more is probably not a good idea. 

I wonder whether policy makers even considered that their solution to “Too Big to Fail” was to intensify the problem by granting an unfair, Government-subsidized, competitive advantage to the bad actors deemed to be systemic risks.  How is a solution which makes those entities even larger at the expense of small banks a good idea? 

Based on her track record, Ms. Bair’s awakening is likely more politically expedient than actual enlightenment.  Earlier this year, after navigating the FDIC into insolvency, the Chairwoman proposed a $25 billion assessment on the banking industry.  This action overtly punished small and responsible banks, which she now seems interested in protecting, in order to prop up the failed ones. (Sheila Bair is Incompetent) 

Now that Ms. Bair has recognized the disaster of Government interference in private market failures, I wonder if she will also change her disastrous position on home foreclosures.  The FDIC chairman has been an activist in bailing-out individuals in foreclosure regardless of cost or circumstance.  A year ago she attempted to arbitrarily delay millions foreclosures and has inappropriately manipulated mitigation efforts within failed banks. (I note that her efforts preceded the spike in unemployment and as such were directed primarily at housing speculators and irresponsible borrowers) (Brock, Rock and Sheila's Bailout Shock)

If bailing out irresponsible banks is a bad idea in that it unfairly favors the failed entities over competitors, it stands to reason that rewarding failed home borrowers is an equally damaging proposition to individuals who did not engage in housing self-immolation. 

I doubt that the pandering Sheila Bair, who has gained so much political capital acting as “Champion to the Downtrodden” will make this obvious leap of logic.  It would be a pleasant surprise, but I am doubtful.  She is under intense pressure from the small banks wronged by the FDIC/Government bailouts.  There are no influence-wielding entities holding her accountable for bailing out failed homeowners.  Furthermore, her political aspirations appear to exceed her genuine interest in sustainable economic prosperity.