Former FDIC Chairman Sheila Bair was the subject of C-SPAN’s Q&A program on Jan. 20, during which she talked about her self-laudatory book “Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street From Itself.” (Perhaps there should be a federal law limiting the titles of books to 10 words. All sorts of titles have somehow gotten longer, perhaps due to the Federal Reserve’s policy of maintaining accommodative monetary policy for an indefinite period of time, or QE-n.)
Bair, who used to have herself introduced at FDIC events as “the second most powerful woman in the world after Angela Merkel” (according to Forbes — eat your heart out Christine Lagarde, who comes in at number eight), was interviewed by C-SPAN founder Brian Lamb. Lamb began by asking why she wrote the book. She responded that she wanted to provide the FDIC’s perspective and to correct other accounts of the financial crisis, especially as to what she and the FDIC did. She added that in order for such a crisis not to happen again, the public needs to get involved in financial reform and consider her recommendations.
Lamb led Bair through the narrative of coming from Independence, Kan., going to the University Kansas and its law school and spending about 25 years in government, beginning as a civil rights lawyer at the Department of Health and Human Services and going to work for former Sen. Bob Dole, R-Kan., as a civil rights lawyer for the Senate Judiciary Committee.
She called herself a progressive, populist capitalist who believes in markets, but that markets need to be regulated to protect the little guy. She praised Dole’s work on the 1986 tax act and the 1983 Social Security restructuring, calling both “the kind of bipartisan leadership that we needed,” typical of the World War II generation that put the country ahead of one’s personal interest.
In response to Lamb, she told about the circumstances of her appointment after Diana Taylor, the New York State banking supervisor, had been tapped, but ran into confirmation problems, apparently due to opposition from the National Rifle Association to her views on gun control. Lamb interjected that Taylor is the girlfriend of New York Mayor Michael Bloomberg.
The Republican administration wanted someone who could be confirmed, and Bair had the support of Dole. When the administration changed, she called then-White House Chief of Staff Rahm Emanuel and offered to leave, but, she said, Emanuel reassured her and said it was alright with former Treasury Secretary Larry Summers and then-Treasury Secretary Tim Geithner, as well.
There followed a leak from Bloomberg that Geithner was opposed to Bair because she was not a “team player.” She described the relationship with Geithner as difficult, but said they both did what they had to do and that she would have favored less in terms of bailouts and more support for homeowners facing foreclosure.
Lamb posted an excerpt from the epilogue of the book, which Lamb called “indicting,” for further discussion: “What does all this say about our financial system and our regulators? It says that a culture of greed and shortsightedness continues to permeate our financial system, a culture that has infected even the best-managed institutions and goes undetected by their executives and boards as well as their regulators. It is a culture that reflects a craven desire for personal profit that overrides any understanding or care about harm to others. Indeed, it is a culture that celebrates exploitation of an unwitting public for the sake of a fast buck.”
Bair remarked that she was referring to the trading operations of the largest institutions, viewing counterparties and customers as people to take advantage of rather than to serve, and she proceeded to endorse the Volcker rule, which calls for restrictions on proprietary trading. She explained that the largest banks are organized as bank holding companies, built around an insured bank, but with hundreds or even thousands of legal entities. The FDIC insures the banks but is not their “primary regulator.” It has only “backup” regulatory authority, and Bair allowed that the FDIC should have made more use of that authority.
Lamb and Bair reviewed the handling of AIG, Lehman Brothers and Washington Mutual (WAMU), and Bair criticized the bailout of AIG as too kind to shareholders and creditors, whereas Lehman went through a disorderly bankruptcy and WAMU was resolved by the FDIC in a manner that wiped out shareholders and imposed costs on creditors. She characterized the “London whale” episode, in which JPMorgan Chase lost about $6 billion, as a risky bet that counterparties identified as excessive exposure, so they started trading against the whale, a transaction no one should believe “for a minute” was actually a hedge.
One would be well-advised to scrutinize claims that a government agency has made money in a bailout deal. Geithner does this all the time. Even where it is true, which would require independent confirmation from an agency such as the Government Accountability Office, such a result creates moral hazard that could lead both agencies and client companies to repeat the behavior, and certainly the number of institutions nurtured by federal subsidies has grown dramatically since the 2008 episode.
This concludes today’s episode. In tomorrow’s article, Lamb takes up more issues concerning the way the FDIC and the industry are organized and run, leading to multiple bailouts of megabanks CitiGroup and Bank of America.
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