Tags: Sheila Bair | FDIC | S&P | crisis

Sheila Bair Talks Some More About Financial Policy

Thursday, 07 Feb 2013 02:45 PM

By Robert Feinberg

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Former FDIC Chairman Sheila Bair, who is now with the Pew Charitable Trusts in Washington, is known for occasionally being willing to express her views to the media. Her views provide insight into the controversies that may be brewing at any given time, and they sometimes provoke reactions from other actors and commentators.

On Feb. 6, she was interviewed by CNBC’s Maria Bartiromo, who along with the rest of the cast at CNBC, is usually a reliable booster of financial stocks and has sometimes been a controversial figure in her own right.

Bartiromo’s first question concerned the recent civil suit brought by the Department of Justice (DOJ) against Standard & Poor’s, a unit of McGraw-Hill, for its actions and alleged errors in rating securities that played a prominent role in the 2008 crisis. Bair responded that it took a long time for the suit to be brought, and the authorities have been criticized for that.

She quipped that S&P has a big target attached to it. Asked why S&P is the only rating agency sued so far and whether this could be connected to the fact that S&P has downgraded U.S. debt, she responded simply, “I hope not,” then added that the case will be tough to prove, since it is based on Financial Institutions Reform, Recovery, and Enforcement Act, a 1989 law that was a response to the savings and loan (S&L) crisis and based on the theory that banks and S&Ls were harmed by S&P’s actions.

Bair observed that S&P clearly made mistakes. Bartiromo suggested that the public on Main Street blames the banks for the crisis, but the suit presents the banks as victims. Bair opined that it would be difficult to meet the burden of proof of a criminal case, so the DOJ took this course, but the banks, too, contributed to the crisis.

Bartiromo asked whether the $600 million settlement by Barclays in the London interbank offered rate (Libor) case indicates that the banking game is “rigged.” Bair referred to reforms that are “in progress,” that the Libor formula might be changed to base it on actual transactions, but it won’t actually go in that direction, and that there will be private litigation. She mentioned UBS traders and said, “Some people should go to jail.”

The next topic was the policy adopted in Europe that would break up the biggest banks, which Sens. Sherrod Brown, D-Ohio, and Elizabeth Warren, D-Mass, like for the United States. Bair declared that she favors a “market-led” solution and that there will be pressure to take action, because the biggest banks are selling at a discount to tangible book value, but given inadequate disclosures as to the allocation of capital among bank holding company activities, it is difficult.

Bartiromo followed up by asking whether there should be a single standard across the world. Bair contrasted the policy in the European Union of firewalling bank, hedge fund and brokerage activities within a group with the more lenient policy in the United States. She opposed the use of insured deposits to support activities like the trade of JPMorgan’s London whale, and she asserted that the FDIC and Federal Reserve have the necessary authority to regulate these activities.

Asked further about the prospects for “structural change” in the banking system, Bair described reform as a “work in progress,” then predicted flatly, “Nothing will happen.” She then repeated her hope that there would be market-based solutions.

Bartiromo asked what the effect of these developments might be on the degree of public confidence in the wake of the Libor scandal. Bair waxed eloquent in admitting that “Not a lot has changed.” She warned that the Dodd-Frank reforms have not been implemented and the public is losing faith in regulators. She asserted that it is in the banks’ interest “to be seen as regulated by people of integrity.” Further, she hopes that the industry will work collaboratively with regulators rather than lobby against reform.

Finally, Bartiromo sought Bair’s view as to whether it is appropriate for the Fed “to force money into hard assets.” Bair credited the Fed with “the best of motives,” because fiscal policy has left the Fed as “the only game in town,” but she has concluded that “The risks have been greater than the benefits for a long time,” and that now the Fed is pushing on the proverbial string.

She expressed regret that while the large banks have many alternatives to lending as a strategy, the Fed’s policy has put community banks at a disadvantage, because their business is based primarily on lending.

Whenever Bair provides grist, she invites comment in response to her remarks. Regarding the use of a novel legal theory to sue S&P, an observer might wonder why the authorities have not been more creative at devising more creative theories for suing the vast array of entities that share responsibility for the crisis.

The answer probably lies in a lack of motivation, because so many regulators worked for financial institutions before they became regulators, and they hope to work for them again when their stints in government are over. This might even explain why the authorities are picking on S&P and adopting the strategy of the banking lobby of presenting banks as fellow victims of the crisis who only want to promote economic growth.

Bair sounds either naïve or a bit complicit when she avers that it is in the banks’ interest for regulators to be seen as having integrity. A cynic would ask why the banks should bother to collaborate with regulators except to manipulate them, which the banks are manifestly able to do quite easily. So when Bair notes that the FDIC and Fed have the necessary authority to regulate the activities of banking groups, one wonders why she rarely used it when she was at the FDIC.

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