FDIC Chief Sheila Bair

The head of the Federal Deposit Insurance Corporation (FDIC) says the Bush Administration's bailout plan may help stabilize financial markets and prop up banks but it doesn't do enough to help consumers who are threatened with foreclosure.

Sheila Bair became the first high-ranking Bush appointee to lash out against the massive bailout, although GOP Presidential candidate John McCain has also proposed more help for troubled homeowners. In an interview with The Wall Street Journal, Bair said the plan "has been a frustration for me."

"Why there's been such a political focus on making sure we're not unduly helping borrowers but then we're providing all this massive assistance at the institution level, I don't understand," she told the Journal.

Consumer advocates and political candidates from both parties have criticized the bailout for being too harsh on troubled homeowners, and at least 20 states (including California, Colorado, New York and Nevada) have launched formal foreclosure intervention or prevention initiatives.

In last night's Presidential debate, Republican John McCain proposed using $300 billion of the $750 billion bailout fund to "go in and buy those home loan mortgages and negotiate with those people in their homes, 11 million homes or more, so that they can afford to pay the mortgage, stay in their home."

"Now, I know the criticism of this," McCain said. "What about the citizen that stayed in their homes? That paid their mortgage payments?' It doesn't help that person in their home if the next door neighbor's house is abandoned. And so we've got to reverse this. We ought to put the homeowners first. And I am disappointed that Secretary Paulson and others have not made that their first priority."

Democrat Barack Obama said the financial bailout package already contains a provision that is supposed to get homeowners into a position where they can renegotiate their mortgages.

"I disagree with Senator McCain in how to do it, because the way Senator McCain has designed his plan, it could be a giveaway to banks if we're buying full price for mortgages that now are worth a lot less. And we don't want to waste taxpayer money. And we've got to get the financial package working much quicker than it has been working," Obama said.

Painstaking efforts

Bair did not criticize anyone by name but noted that both Bush Administration officials and Congressional leaders took "painstaking measures" to ensure that the Hope for Homeowners program would limit resale profits for homeowners who receive assistance under the plan.

Bair said she supports the bailout plan but criticized it for attacking the economic meltdown "at the institution level as opposed to the borrower level, and it's the borrowers defaulting," the Journal said. "So why not tackle the borrower problem?"

Her comments are likely to spark another round of criticism of the bailout plan largely crafted by Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke.

Bair, who was nominated by President Bush to head the FDIC and confirmed by the Senate in 2006 has emphasized the FDIC's consumer protection role during her tenure. Paulson, Bernanke and other supporters of the bailout plan say that returning liquidity and investor confidence to the marketplace -- rather than protecting individual consumers -- is government's primary responsbility.

Paulson and Bernanke have been modifying their flight plan en route. When Congress debated the $700 billion bailout, the objective was for the government to buy up unmarketable debt securities, thereby establishing a market value for them, and returning liquidity to the marketplace.

Money for banks

Not a word was mentioned about Uncle Sam buying stock in major banks. But in response to actions in Europe, Treasury Secretary Hank Paulson told banking leaders Monday that the government will use $350 billion of the bailout package to purchase preferred stock in their institutions. Oh, and it's an offer they can't refuse.

The objective, administration sources say, is to quickly pump the emergency money into the U.S. financial system. Events are moving too quickly, they say, to wait on setting up the cumbersome system for analyzing and buying bank's bad debt.

Administration officials say the first $350 billion of the $700 billion bailout package will be spent before the end of this year, and will all go for bank stock, which can be resold later, hopefully at a profit. The remaining $350 billion will be spent by the new president, who will take office in January.