In yesterday’s article
, I wrote about how C-SPAN founder Brian Lamb led former FDIC Chairman Sheila Bair through the story of how she came to run the FDIC. In today’s article, Lamb, who like Bair is a former Senate staffer, displays a remarkable understanding of the extent to which the banking lobby influences regulatory policy, as the interview moves to the relationships among the regulators and the effect these had on the bailouts of the largest banks.
Speaking of the cycle of ramping up the FDIC during the savings and loan and banking crises and then downsizing it, then adding staff to go from 4,500 to 8,000 employees while she was there, Bair described a “self-regulatory mantra that had taken over Washington, that ‘we’re in the golden age of banking, we aren’t going to have cycles anymore, banks are going to be profitable forever, the housing market’s going to go gangbusters forever, we’re not going to have any more bank failures, we don’t need regulators, we don’t really need the FDIC.’”
Asked by Lamb who pays the bill, Bair asserted that the banks pay the bill, and she called borrowing from the Treasury “an option.” (She conveniently ignored the fact that the FDIC is chronically below the mandated coverage ratio of deposits, and assessments to bring the fund back to the required level don’t even take effect until 2018.)
Bair further asserted that the FDIC does not insure holding companies, but then she quickly added that for a time it did, but that she “dialed it back” at the end of 2012 and the government made $10 billion from the program.
A picture from her book “Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street From Itself” book shows Bair as the only woman among the financial regulators, and she told Lamb that often she would go to meetings and find that decisions had already been made in bilateral meetings of other regulators, perhaps because the FDIC regulates only the smallest banks, although it insures all banks. Lamb then noted that the Treasury Secretary-designate Jack Lew had run a hedge fund for Citigroup that bet against the housing market, the outgoing Secretary Tim Geithner had run the Federal Reserve Bank of New York and his predecessor had run Goldman Sachs.
Lamb asked how taxpayers have a chance against such an array, as seen in the difficulty the agencies are having implementing Dodd-Frank. Bair acknowledged that only a third of the regulations have been adopted, due in part to the phenomena of “cognitive capture,” the tendency of regulators to think like the bankers they regulate, and political pressure from Capitol Hill. But she concluded that the regulators need to stand up and say, “This is what we’re going to do, and we’re not going to give you a hundred different exceptions. You’re going to have to change your behavior and operate with less risk and less leverage.”
Lamb asked Bair what made her maddest, and she responded that she still gets angry when she thinks about the multiple bailouts of Citi and Bank of America, and that these banks were allowed to repay Troubled Asset Relief Program (TARP) loans in 2009 and to return to paying large bonuses to executives. She added that other banks less troubled than Citi and BofA were reluctant to accept TARP funds, but were dragged into the program in order to disguise the true extent of Citi’s and BofA’s weakness.
Lamb referred to the role Robert Rubin, Treasury Secretary in the Clinton administration, played in promoting Geithner, and Bair agreed that Citi was better off for having Geithner in place. Rubin had left the Treasury immediately after the enactment of legislation to repeal the Glass-Steagall Act and taken a job in the executive suite at Citi, and Bair lamented that he has never taken any responsibility for his role in the 2008 episode. She stated that it is her policy not to work for or take speaking fees from institutions that received government assistance, but at the same time, she does not judge those who have made other choices.
I believe that Bair has not come fully to terms with the contradictions between her stated principles and the actions the FDIC took or refrained from taking at critical times. For example, she still insists on claiming that Dodd-Frank puts an end to the policy of “Too Big To Fail” and, as noted above, that the industry funds deposit insurance, when the facts are that the weakly capitalized megabanks have become, in effect, government-sponsored enterprises that are backed by an endless array of subsidies known collectively as the “federal safety net.”
Meanwhile, these banks continue to operate with thin capital, while paying their executives salaries and bonuses appropriate only for entrepreneurs who bring capital to the market and are held financially accountable for their failures.
Clearly Lamb’s message, if not Bair’s, is that after all of the crises and bailouts, the megabanks are still in charge of policy in Washington, and they know it.
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