The FDIC’s Boss: Sheila Bair, America’s Passbook Protector

If the widely trusted but mostly mysterious agency known as the Federal Deposit Insurance Corporation has ever had a public face, it was probably that of Lydia Lobsiger, the happy and relieved East Peoria, Ill., widow who in 1934 was the first American to get her little pile of savings back from the feds after a terrifying run on her local Fon du Lac State Bank. Now, almost 75 years later, the FDIC has been busy projecting a newer face, and it belongs to Sheila Bair, a 54-year-old lawyer from Kansas.

As the U.S. banking system undergoes its most wrenching overhaul in 70 years, Bair, chairwoman of the FDIC, has become the voice of ordinary passbook holders. Bair was front and center with Treasury Secretary Hank Paulson and Fed boss Ben Bernanke when they announced plans to recapitalize the U.S. banking industry. But the three aren’t always in perfect alignment. As guarantor of Americans’ $4.5 trillion in deposits spread around in some 8,500 U.S. banks, Bair is trying to balance both the needs of depositors like the storied Mrs. Lobsiger and those of big-name players like Citigroup who help generate much of the economy’s torque.

On Oct. 12, for example, Bair was locked in meetings with Paulson and Tim Geithner, head of the New York Federal Reserve, trying to cut a deal that would get the money flowing to the big banks but would also generate enough in insurance premiums to protect the FDIC and thus the individual deposits that millions of Americans think of as safe. Paulson had asked the FDIC to stand behind loans between banks. To Bair, that meant a whole new category of risks on her ledger and the prospect of greater FDIC payouts if the big banks cratered. In the end, Paulson and Geithner agreed to Bair’s demand for higher insurance fees from banks getting federal bailout money; Bair agreed to guarantee the interbank lending.

The weekend tug-of-war was a reminder that Washington has all sorts of agencies that hum along unnoticed in good times but can become pivotal in a crisis. When that happens, the real fighting begins. In this case, the war between small depositors who have managed their money carefully and large, institutional banks that have gambled and lost is playing out across the American economy. So far, Bair has worried about Main Street while working overtime to limit the damage on Wall Street. In the past month, she’s overseen the “resolution” (meaning, in a banker’s lexicon, the “failure and sale”) of the country’s sixth largest bank, Washington Mutual, and helped negotiate the forced sale of superregional Wachovia bank to Citi (only to see the deal, in an embarrassing turn, break down when Wells Fargo snatched up Wachovia instead). She got Congress to boost the ceiling on deposit insurance temporarily from $100,000 to $250,000. And in a move to bolster the FDIC’s finances, she wants to double the average premium that banks pay to have FDIC insurance.

Bair, a former aide to Bob Dole, had little idea what was in store when she took over the FDIC back in sleepy 2006. “They said this was going to be 9 to 5 and just an easy portfolio of issues,” she said. But she quickly learned how far underwriting standards had fallen. A year ago, she rang the alarm with mortgage lenders and said they were not doing enough to help borrowers meet their house payments. “I thought,” she recalled, “they were going to throw tomatoes.”

As the crisis has deepened, Bair has insisted that the FDIC’s coffers need support. Currently the agency has $45 billion in reserves. That may not seem like much next to the $700 billion Paulson just got from Congress, but Bair notes that in the past, the FDIC hasn’t needed much. Even at the peak of the savings-and-loan crisis in the late 1980s, when thrifts were closing at the rate of one a day, the FDIC maintained its perfect record of returning every penny of every insured depositor’s money, and Bair has preserved that record through 15 bank failures this year. That’s partly because the FDIC by law gets to tap a failed bank’s assets before any other creditors get a crack at the safe.

But her demands for more money suggest that, as Bair told TIME, “more banks will fail.” The FDIC’s list of troubled banks jumped from 90 to 117 in the second quarter and will surely grow again. Bair is worried about all the new responsibilities her agency is taking on. The new rescue plan requires the FDIC to guarantee not just the new lending by banks but also unlimited deposits in special accounts used primarily by small businesses for things like payroll. Little wonder Bair is cautious: the new program is expected to cover $1.9 trillion, a stunning 42% increase in total FDIC guarantees. In a worst case, widespread losses under the new program would be covered by a special assessment on participating banks.

Some familiar with the internal battles say Bair is too focused on the security of her own agency. “When the President says we’re facing a systemic problem, should you really worry that you’re not going to get your fund topped up by Congress?” asks one. But Bair knows that her chief role is to reassure everyday investors. “Your money is safe in the bank if it’s FDIC-insured,” she says. That’s good. Because in the coming months, there may be many more modern-day Lydia Lobsigers.