Rock and Brock are twins. Brock is a saver. Rock is a spendthrift.
When their grandfather hires them to do chores, promising to match every penny they save, Brock accumulates hundreds of dollars, while his brother goes on a buying spree.
Brock eventually shares his fortune with his twin, who learns his lesson. The story ends with the brothers as adults, both millionaires and both understanding compound interest.
The author of this children’s book, called Rock, Brock, And the Savings Shock, is Sheila Bair, who no doubt hopes that the current financial crisis will have a similar happy ending.
Bair is chair of the FDIC, which seized Washington Mutual, the nation’s largest S&L, on Thursday. The agency is likely to have to bail out more banks in coming months, straining FDIC finances in a way that hasn’t occurred since its inception in 1934, in the midst of the Depression.
The FDIC backs all all accounts up to $100,000 at member banks, and it has never failed to pay up.
In the current climate, banks will billions of dollars in assets are at risk. Thirteen banks have failed thus far in 2008 and the agency maintains a list of more than 100 other endangered institutions.
As of June 30, the FDIC’s insurance fund totalled $45.2 billion for claims - not enough to cover the collapse of several major banks. Even if the proposed bailout plan receives congressional approval, it won’t address FDIC’s need for cash.
Bair has said the FDIC is preparing for a likely succession of bank failures, and plans to raise insurance premiums paid by the banks.
More importantly, she says, there are plenty of buyers interested in buying up the distressed institutions. As she told CNBC:
I have people calling us every day, interested in investing in banks. There is a lot of market interest out there and that’s good, because that is good to try to move these banks. You don’t want to close them, but if they have to be closed, move them back into the private sector as quickly as possible, with minimal cost to us. And if we have multiple bidders that helps us get the price we need.
Bair was appointed to a 5-year term as FDIC chair in June 2006. Before joining the agency, she taught at the Isenberg School of Management at the University of Massachusetts-Amherst. She previously served as assistant treasury secretary, senior VP at the New York Stock Exchange, and counsel to Bob Dole.
Her husband, Scott P. Cooper, is the lobbyist for the American National Standards Institute.
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