I sing now my praises of Sheila Bair. A strange icon indeed, this former
chairwoman of the Federal Deposit Insurance Corporation. Why an essay of adulation about a
bureaucrat, not about some great artist or scientist? Not only because of her accomplishments, but also because she's just the type of woman I looked
forward to in a previous
posting, one who has reached the top of the ladder while bearing with her a
distinctly feminine worldview. As she herself points out, her thinking includes
substantially more risk aversion than men have, a trait we sorely need in our
still hyper-charged financial sector.
That risk aversion served the nation well as the testosterone-fueled
Great Recession rampaged over us.
My appreciation of Bair comes in part from watching interviews of
her on TV, but most especially from reading her new book, Bull
by the Horns: Fighting to Save Main Street from Wall Street and Wall Street
from Itself. It tells a fascinating story of our financial system and its
regulatory apparatus during the Recession, from the perspective of a government
insider. Although Bair was just
one protagonist in that sad tale, and others may tell a different story, her
narrative rings quite true to me.
It is clearly, passionately and consistently written, and jibes
completely with what I gleaned from the news during the crisis and to this
date.
Regulation
of banks in the U.S. is extraordinarily complicated, for it is shared first
between state and national governments and is splintered further within the
federal bureaucracy among the FDIC; the Office of the Comptroller of the
Currency (OCC); the Office of Thrift Supervision (OTS), now merged with OCC; the
Federal Reserve System (FRS or Fed); and the Secretary of the Treasury, to whom
OCC and OTS report. The FDIC, in
addition to directly regulating about 5000 state-chartered banks, insures the
deposits in all banks, even those regulated by another agency; and it can step
in as backup regulator of any bank it believes to be at risk. Such a complex and interdependent
regulatory system inevitably leads to interagency battles.
Bair gives a behind-the-scenes look at such battles as
government officials struggled to cope with the Recession and make plans to
prevent its recurrence. She was
usually the odd woman out, indeed the only woman at all, having to fight for
principles that she thought were being ignored in the heat and fog of events by
her fellow regulators as well as by members of Congress and White House
officials.
When Bair started her five-year term in 2006, the country's
decade-long flirtation with banking deregulation had reached its peak. The emphasis had become self-regulation
by the industry—so-called "letting the market work." The FDIC had been downsized by over 60%
and its audits of banks it regulated were derisively called "drive-by
exams" by the remaining staff.
Premiums charged for FDIC insurance had been eliminated for more than
90% of banks and were not risk-based for the rest. Mandatory capital reserves held by banks against the
possibility of loan losses had been reduced to dangerously low levels, and
further reductions were being proposed in accordance with a new international
standard called Basel II.
Bair was appalled by what she found, greatly fearing its
effects should there be a systemic crisis. Her initial battles with the OCC, OTS, Treasury and FRS were
over such issues as resuming and risk-adjusting premium payments from all
banks, and increasing and risk-adjusting capital-reserve requirements. Her opponents pretty much followed the
financial industry's party line: each dollar paid to the FDIC in insurance
premiums or set aside as capital reserve was a dollar not available for lending,
and therefore was bad for the economy.
Contrarily, Bair insisted that those dollars were essential to prepare
for and ameliorate crises—it was, after all, her agency alone that would be on
the hook to protect the public's deposits in banks should a crisis erupt. She had already begun to see the
sub-prime crisis reflected in FDIC audits in 2006-07, and was among the first
to issue warnings to her fellow regulators, which were largely dismissed out of
hand. Due to her initial efforts,
though, the FDIC's Deposit Insurance Fund was able to withstand the wave of
bank failures that came.
When the full-blown crisis did come in 2008, new battles
erupted, with much the same battle lines: the OCC, OTS, Treasury and to some
extent the Fed on one side, chiefly focused on bailing out Wall Street
institutions; the FDIC on the other, usually more focused on Main Street. Bair contended with her fellow
regulators and others on many objectives she thought essential, such as
limiting the ongoing bailouts; properly penalizing failed institutions, their
creditors and their management for aberrant behavior; rebalancing the
regulatory system to protect the economy and the taxpayer; and curbing
institutions that are "too big to fail." In arguing those issues, she consistently applied a coherent
set of core principles she deems necessary for a sound banking system. They
represent a delicate equilibrium between firm regulation and market
incentives.
Many of Bair's principles found their way through her
efforts into the 2010 Dodd–Frank Wall
Street Reform and Consumer Protection Act, which the financial industry is
now mightily trying to dilute. If
you were to read just one chapter of her book, it should be Chapter 26, in
which she explains her principles and gives recommendations for how they can be
further implemented. In effect,
the chapter is a charter statement for the subtitle of her book: Fighting to
Save Main Street from Wall Street and Wall Street from Itself.
Bair won some and lost some. She had to deal with many personalities during her battles,
some easy for her to work with, some not.
But her bête noire was Secretary
of Treasury Timothy
Geithner, who fought her fiercely on virtually every issue they
discussed. She still feels that
Geithner epitomizes the bias toward Wall Street and away from Main Street that
led to the crisis, and then handled the crisis and fought needed reforms with
the same bias. The net result, she
asserts, has been to magnify "too big to fail" by enlarging already
mammoth banks and deepening the unspoken assumption that, despite the dictates
of Dodd-Frank, government bailouts will be again be available in the next
crisis, thus encouraging continued overly risky behavior.
Bair can be very proud of her administration of FDIC during her very turbulent term. She adhered
to her principles as much as was within her power, given the interference she
faced from other agencies. A stunning 417 banks failed from 2006-11 because of
the Recession, almost 25 times as many as in the previous five years. Altogether, they had $680 billion of
assets, about half in banks regulated by the singularly inept OTS, which often
blindsided FDIC by rating its banks as much more solvent than they actually
were.
No matter which agency was their regulator, however, all
failed banks smoothly passed through the FDIC's resolution process, i.e., were
liquidated or sold to stronger institutions, without a single day's
interruption in the availability of insured deposits. Although resolution of the failures cost the FDIC's Deposit
Insurance Fund about $80 billion, not a cent of that was taxpayer money—it all
came from the premiums collected from banks, which would not have been possible
had Bair not won her fight to restore and increase them. Shareholders, creditors and management
were all forced to take losses that were consonant with their responsibility
for the failures.
That excellent record should be compared with the many
hundreds of billions of taxpayer dollars committed by the Treasury and the Fed
to save the very "too big to fail" financial institutions that were
principally responsible for the crisis—without exacting appropriate losses from
their creditors and management. At
this writing there is still a net loss to the taxpayer, which may never be
completely eliminated.
So I must conclude with a hearty, "Well done, Sheila
Bair! We need more like
you!" As a final stanza of my
song of praise to her, here's a measure of my admiration: Although she is a
lifelong Republican, and I a lifelong Democrat, I would gladly vote for her
were she to run for elective office.
It would possibly be the first vote I would cast for a Republican.