FDIC Head Sheila Bair Answers Questions on CNBC About Deposit Insurance, Mortgages, and John Thain's Bonuses

FDIC Chairwoman Sheila Bair was on CNBC tonight answering questions from Erin Burnet, crazy Jim Cramer, and an audience. For the most part she danced around the questions. She can't comment on banks that are still in operation, so that eliminated some of the most interesting questions. Still, Burnett and Cramer were able to get a few interesting answers out of Chairwoman Bair. Here are my notes. My personal comments are in italics.

The first question revolved around bank nationalization. Will banks be nationalized? She said that nationalization is already happening for smaller banks. Banks like Indymac have been in receivership and are being run under FDIC direction. Larger banks (banks with bigger lobbies) will receive assistance via the Treasury and the government does not wish to take an operating role.

She then introduced a term they use at the FDIC to describe the action taken to close a bank - Prompt Corrective Action. 98% of banks representing 98% of assets are rated by the FDIC as having an adequate capital bugger. If this is the case, then why is the Treasury stress testing most of the major banks? It seems that officials and markets are not comfortable with how the FDIC and other regulators are determining the capital needs of banks.

A question was then asked about whether the principle on homes needs to be cut to prevent foreclosures. Bair said that research has shown that it's the amount of the monthly payment that makes the biggest difference, not cutting the principle. It's also hard to adjust principle because of restrictions in mortgage agreements that prevent this from happening.

A member of the audience asked why taxpayer $$ should be spent to bail out others who were irresponsible. She responded that the impact of foreclosures impacts the entire economy and that we need to achknowledge that someone is going to get bailed out and that it's for the overall good. The bailout will be an indirect positive for everyone. This is the rationale that has been used for the bailout but I don't buy it. If I have plenty of cash then I want things to get cheap. Subsidizing those that made poor decisions only penalizes those that haven't by removing investment opportunities. The market should self-correct.

There was then a whole section on taking advantage of President Obama's $75 billion in housing relief. The best way to learn about whether you can benefit is to go to FinancialStability.gov.

Chairwoman Bair went to great pains to explain the stability of the FDIC. Here are some facts:

• In operation for over 75 years - established during the first Great Depression.
• Since its establishment, no depositor has lost a penny.
• The FDIC is funded by the banks (not taxpayer), who pay into the fund. But the fund is also backed by the full faith of the Federal government. So if needed, the FDIC can call upon government funds.
• If a bank fails, the FDIC will provide virtually uninterrupted access to deposit funds. We've seen this to be true with bank closures over the last 2 years, including the relatively large failure of Indymac.

The most interesting exchange had to do with ex-Merrill CEO John Thain and his bonus binge. She admitted to being angry about John Thain and the cash bonus he paid out to his employees in advance of the Bank of America acquisition. She believes that bonuses are okay but not a cash bonus. She also believes that "compensation is at the core of a lot that went wrong." What is being done to address that problem remains to be seen.