Welcome Sheila Bair (Fortune article) (We Are Headed For Another Crisis – article) and Host James K. Galbraith (Univ Texas Austin) (Fiscal Cliff – article)

Bull by the Horns: Fighting to Save Main Street From Wall Street and Wall Street From Itself

From June 2006 to June 2011 Sheila Bair served as Chairman of the Federal Deposit Insurance Corporation – in which position for a time she held the fate of America in her hands. The FDIC is not normally a high-profile agency. But beginning in August 2007 it was our flood-wall against waves of financial panic, our source of confidence that whatever happened on Wall Street working Americans would not lose their deposits and the payments system would not fail. Chairman Bair was the custodian of that confidence.

Who is Sheila Bair? We were young contemporaries on Capitol Hill, she the protegée of Senator Robert Dole, a conservative of another age. Later she served in the Treasury, and then went to the University of Massachusetts in Amherst to teach, before President Bush asked her to replace an FDIC nominee whose confirmation had run into problems. There is here no trace of power-hunger or greed. Sheila Bair is best seen as capable, hard-working, successful – yet in these and other respects essentially an ordinary officer of the state.

Bull by the Horns is the story of financial calamity seen from the perspective of this public servant, rendered from detailed notes. We learn with whom she met, what was said, what decisions taken, and how things turned out. She begins with the battles over deregulation of the banks (Basel II), with the gathering sub-prime storm, and proceeds through the disaster: WaMu, Wachovia, Citigroup, Bank of America, AIG, Citigroup again. And then the battles of the aftermath, over among other things Dodd-Frank, Basel III and the robosigning frauds. This is a book for aficionados of infuriating detail.

Yet beneath the froth of facts courses an epic struggle. It pits Sheila Bair and the civil servants of the FDIC on one side and… who… on the other? Not the bankers who dominate the tale of an Andrew Ross Sorkin; not the mortgage crooks portrayed by Bethany McLean and Joseph Nocera; not the short-sellers celebrated by Michael Lewis; not Matt Taibbi’s Goldman Sachs. No. On the other side of the struggle, we mainly find other high officials. And first among them, the President of the Federal Reserve Bank of New York and then Secretary of the Treasury, Timothy Geithner.

Geithner emerges in these pages bit by bit, meeting by meeting. The key difference between him and Bair is first stated on page 99:

 “He did not want creditors, particularly bondholders, in those large, failing financial institutions to take losses. I did. For years, those poorly managed institutions had made huge profits and gains from their high-flying ways, and large institutional bond investors had provided them with plenty of cheap funding to do so. … the implied assumption [was] that if anything went wrong, the government would bail them out. But we do not have an insurance program for big bond investors.  They are sophisticated and well heeled and can fend for themselves.  There is no reason for the government to protect them.”

It was not merely bond investors that Geithner determined to protect. As Bull by the Horns unfolds, it emerges that there was one company, above all, around which his policies were built. Citigroup. Here for example is Bair’s account of a crucial meeting, over whether Wells Fargo or Citi would take over Wachovia:

“During the Friday evening call, Tim Geithner was apoplectic. He wanted us to object to the Wells transaction and support Citi in making an enhanced bid… which was a huge stretch for it. It was amazing to me that Tim wanted us to take that additional exposure when there was another offer on the table that required no government support. He used that familiar saw: if we didn’t support Citi, it could destabilize the system. I was incredulous.” (p. 105)

Or when in early 2009 the government confronted the need to restructure Citi – including the weakness of its CEO, Vikram Pandit, a man with no commercial banking experience. In Treasury’s press release “There was no mention of dealing with Citi’s trouble assets, nor was there a hint of management changes. It was unbelievable to me how little Treasury was asking of the institution to right itself.” (p. 167). Bair was prepared at least to discuss putting Citi through receivership, using the powers already vested in the FDIC by law.

Not that Geithner helped only Citi. There was the day in 2008 that Paulson, Bernanke and Geithner (then still at the NY Fed) tried to get Bair to guarantee all the liabilities of the banking system, ambushing her in Paulson’s office with a prepared statement.

“It was overreach of the worst sort, and there was no doubt in my mind that Tim Geithner was the instigator. For months, he had been arguing that the federal government should guarantee all the debt of the U.S. financial system, but no one had taken him seriously – until now.” (p. 111.)

No wonder that, as she writes, that when “a few weeks later, Obama announced his choice of Tim Geithner to become Treasury Secretary. It was like a punch in the gut. Tim Geithner had been the bailouter-in-chief during the 2008 crisis. If it hadn’t been for my resistance and the grown-up supervision of Hank Paulson and Ben Bernanke, we would have spent even more money bailing out the financial bigwigs and guaranteeing all their debt.” (p. 142.)

Not that Geithner always won. When he lost, it could be interesting:

“On Friday, July 31 [2009], he summoned all of the major agency heads to his conference room and proceeded to give us an expletive-laced tongue-lashing about talking to people on the Hill. The arrogance and disdain he showed for the agency heads, who also included Ben Bernanke and Mary Schapiro, was astonishing… I patiently listened to his rant and then pointedly told him that the problem was one of his own making…” (p. 191).

This is the Secretary of the Treasury? Later as the cleanup went on, Bair writes, “I couldn’t think of one Dodd-Frank reform that Tim strongly supported. Resolution authority, derivatives reform, the Volcker and Collins amendments, he had worked to weaken or oppose them all.” (p. 229).

To be sure, Geithner isn’t alone. The leaders of the Office of Comptroller of the Currency and the Office of Thrift Supervision were disasters. Steven Rattner, the car czar, “clearly thought that he was entitled to whatever help he wanted from the FDIC…” (p. 177) On housing Larry Summers carried water for the “free market economists” of the Bush Treasury (p. 147) and sought to freeze Bair out of the policy process – as not a team player. Some team! Most of them were protegés of Robert Rubin, who also hand-picked Pandit for Citi and was, in Bair’s words, “indifferent to his culpability.” (p. 122).

What’s happened here? We can see: the money-power in American government has been handed over to a coterie of boys – boys who work for other boys, to whom the public purse is what the truffle is to the pig. Bair does not quite say this, but, really, she doesn’t need to.

Not everyone in high office should be tarred with this brush. Henry Paulson and Ben Bernanke retain Bair’s respect. Elizabeth Warren is an ally; Barney Frank is someone she has “always liked and respected.” There are others. Yet overall, Sheila Bair’s strength in crisis came from the government’s professionals – the people who know their mission, do their jobs, live on their pay, and expect no greater rewards. She is in spirit very much one of them.

And for that reason, it is an honor – a great honor – to host this event, and to welcome Sheila Bair, former Chairman Extraordinary of the Federal Deposit Insurance Corporation, to Firedoglake.

James K. Galbraith served as Executive Director of the Joint Economic Committee of the US Congress in the early 1980s; he teaches at the University of Texas at Austin and is the author, most recently, of “Inequality and Instability: A Study of the World Economy Just Before the Great Crisis.”

 

[As a courtesy to our guests, please keep comments to the book and be respectful of dissenting opinions.  Please take other conversations to a previous thread. - bev]

176 Responses to “FDL Book Salon Welcomes Sheila Bair, Bull by the Horns: Fighting to Save Main Street From Wall Street and Wall Street From Itself”

BevW November 18th, 2012 at 1:51 pm

Sheila, Welcome to the Lake.

James, Welcome back to the Lake, and thank you for Hosting today’s Book Salon.

BevW November 18th, 2012 at 1:52 pm

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Sheila Bair November 18th, 2012 at 1:59 pm
In response to BevW @ 1

Hi Bev. I’m really looking forward to this conversation. Thanks to FDL for hosting it.

James K. Galbraith November 18th, 2012 at 2:00 pm

Welcome, Chairman Bair! It’s a pleasure to have you here.

Ready to go?

Sheila Bair November 18th, 2012 at 2:01 pm

Yes. I am

James K. Galbraith November 18th, 2012 at 2:01 pm

Let’s begin with mortgage modifications. Just last Wednesday in Washington — I’m told by someone who was there — Larry Summers stated that in early 2009 there were no viable plans for systemic loan modifications — nothing that would not have undermined the economic incentives for solvent homeowners to pay their mortgages.

What’s your view of this claim?

dakine01 November 18th, 2012 at 2:01 pm

Good afternoon Sheila and welcome to FDL this afternoon. Welcome back Jamie.

Sheila I have not had an opportunity to read your book so forgive me if you address this in there but were you ever tempted to take a 2×4 to meetings with Geithner et al – just to get their attention of course?

I am part of an email group that for a period through most of ’08 and ’09 there were standard emails on Fridays for “bank failure Friday” that would list all the banks that the FDIC had taken over that day with occasional speculation as to how Citi, BoA, and others managed to avoid being taken over (and belief that if they had to honestly value assets they would have HAD to be taken over as completely insolvent)

Peterr November 18th, 2012 at 2:03 pm

Welcome, Sheila!

When I first began following the financial crisis, one of the things that struck me was the high number of jobs that were posted at the FDIC. As I wrote here at FDL, it seemed clear to me that you were ramping up for a LOT of bank closures — which indeed is what happened.

When did you see the tidal wave of bank failures coming?

Sheila Bair November 18th, 2012 at 2:04 pm

Well, I have been accused of being blunt — and I am – but a 2×4 would exceed even my propensity for directness.

You are, of course, right. We should have restructured Citi and required shareholders and unsecured creditors to absorb losses, as we did with community banks. BofA bought its problems, and in 2008/2009 its bigger problem was with the Merrill acquisition. I wish that acquisition had never gone through, but it’s history now.

James K. Galbraith November 18th, 2012 at 2:06 pm

What was the biggest obstacle to taking that course toward Citi?

Sheila Bair November 18th, 2012 at 2:07 pm
In response to Peterr @ 8

The FDIC staff was already worried when I arrived at the FDIC in June of 2006, and we started ramping up hring pretty quickly. Even though we were the most bearish on the situation, not even we predicted just how bad it would get. But we were ready, and I take great pride in that. The failures were handled very smoothly.

DWBartoo November 18th, 2012 at 2:07 pm

Sheila and James, thank you for joining us this evening.

DW

Sheila Bair November 18th, 2012 at 2:09 pm

The NY Fed and the OCC – Citi’s two primary regulators. In fairness, it would have been challenging because we only had legal tools to resolve the insured bank subsidiary. Other holding company activity was beyond our authority. But we did have some leverage in our ability to put the bank in receivership, and I was dismayed that we couldn’t even get a conversation going about it.

emptywheel November 18th, 2012 at 2:09 pm

Welcome Jamie, Sheila. Thanks for joining us.

Sheila: from the very beginning–even before the crisis–your efforts to seek obvious “bureaucratic” (in the best sense) solutions seemed to knock up against obstruction. Can you differentiate how much of this is just pure dysfunction and how much is Obama’s efforts to coddle the banks?

James K. Galbraith November 18th, 2012 at 2:12 pm

So, let me follow up on that .. did you see that as being mainly a professional difference of view about the potential banking-system consequences of trying to untangle and resolve Citi, or, in part, was it a political matter as well?

Dean Baker November 18th, 2012 at 2:13 pm

Ms. Bair,

It’s great to have you on this book salon at FDL. I have long admired your work at the FDIC and my admiration has grown as I’ve learned more about the battles over the bailouts within the Obama administration.

I apologize for not having done my homework and read your book yet, but I want to jump ahead and ask a basic question. Given your knowledge of the current political line-up, can you envision a scenario in which the government will break up the big banks any time in the near future? if you address this in your book you can just refer me to the section.

Thanks,

Dean Baker

Sheila Bair November 18th, 2012 at 2:13 pm

Simply not true. We had an insurance program which I think would have worked, but we couldn’t even get them to agree to a pilot. Another program – but it would have required a real financial commitment — was the one John McCain proposed during the campaign, designed by Mark Zandi. They would have set up a government facility as was done during the Depression, to buy the loans and restructure them. Glenn Hubbard and Martin Feldstein also had good proposals.

James K. Galbraith November 18th, 2012 at 2:13 pm

(same question as emptywheel, just mine is less pithy~!)

emptywheel November 18th, 2012 at 2:15 pm

Reading the book you really get the feeling that and form of competence is toxic in this political/corporatist world.

DWBartoo November 18th, 2012 at 2:15 pm

Sheila, so long as money owns the political class, which includes the media, and the political system, how is it possible or probable that we might avoid, all too soon, another “bailout” of even too-much-bigger-to-fail “institutions” with the admonition that we are “all to blame”?

Clearly, we are NOT all to blame and what happened was permitted and allowed by the political class, who, by and large, have benefited from the criminal fraud quite as much as the banking elites.

The Rule of Law is in shambles, trust is utterly broken, and crushing “austerity” is the “medicine” prescribed by the very ones who profited from the economic destruction.

Do you see any likelihood that “the people” may find any means to survive a lengthy assault upon civil society, as is now quite obviously intended?

If so, specifically what might those means actually be?

DW

tuezday November 18th, 2012 at 2:16 pm

“It was overreach of the worst sort, and there was no doubt in my mind that Tim Geithner was the instigator. For months, he had been arguing that the federal government should guarantee all the debt of the U.S. financial system, but no one had taken him seriously – until now.” (p. 111.)

Unbelievable.

However, this may be, may be, would have woken people up to what privatization is really all about.

Sheila Bair November 18th, 2012 at 2:16 pm
In response to emptywheel @ 14

Equal parts probably. I don’t think Obama wanted to coddle the banks, actually, and I know others are skeptical of my view on that. I think the team he put in place — it was really the Bob Rubin team- they just had different ideas, and he deferred to them. Too many government officials are intimidated by financial matters and defer to “experts” who too often just see the world through the eyes of Wall Street.

James K. Galbraith November 18th, 2012 at 2:17 pm
In response to Sheila Bair @ 17

To follow up, is there any chance that Larry Summers might have been unaware of these proposals, or of the history of the Home Owners Loan Corporation?

William Black November 18th, 2012 at 2:18 pm
In response to Sheila Bair @ 17

I want to express strong agreement with Ms. Bair. We have long known how to resolve failures of even very large banks.

June and I also want to thank Ms. Bair for her service.

fyi, just returned on the redeye from Quito, Ecuador where the big four banks feel even more entitled than Citi to dictate policy to the government.

Bill Black

Sheila Bair November 18th, 2012 at 2:19 pm

I think Tim thought that by making the banks profitable, the rest would take care of itself. That’s not how it worked out. I think he is human and was also unduly influenced by his loyalty to Rubin and how embarrassing to Rubin it would have been if Citi was closed. Rubin is obviously a big wheel in D politics, but I never saw the WH try to protect him. It was always Tim.

dakine01 November 18th, 2012 at 2:19 pm
In response to Sheila Bair @ 17

Did the folks like Summers and Geithner also suffer from “I didn’t propose it, therefore it is not a good idea” syndrome?

Sheila Bair November 18th, 2012 at 2:20 pm
In response to Dean Baker @ 16

Hi Dean. Nice to hear from you. I think the FDIC would absolutely be prepared to close them if they got into trouble. I worry that the Fed and Treasury are not as committed.

dosido November 18th, 2012 at 2:21 pm

just piping up to say Welcome and thank you for coming to visit The Lake, Ms Bair. And thank you for your service.

I’ll defer to more informed participants to pose questions. Look forward to the conversation.

DWBartoo November 18th, 2012 at 2:21 pm
In response to Sheila Bair @ 22

As well as “through” the “eyes” of those who reside at 740 Park Avenue, perhaps?

;~DW

William Black November 18th, 2012 at 2:23 pm

Can you discuss how OTS came to see its mission as protecting S&Ls such as WaMu and Indymac from the FDIC examiners? When he was with the FDIC, the future head of OTS complained in his congressional testimnony that the OTS was actively interfering with the FDIC’s efforts. When he became OTS head my view is that he led the agency into even greater obstruction of the FDIC’s backup examination and regulatory authority. What is your view?

Bill Black

Sheila Bair November 18th, 2012 at 2:23 pm
In response to DWBartoo @ 20

The only way this gets fixed is if the voting population becomes engaged and people start educating themselves and voting on financial reform. That’s why I wrote my book and why I have formed a group to monitor reform and speak out.

emptywheel November 18th, 2012 at 2:25 pm
In response to Sheila Bair @ 22

I know you think (or did when you wrote the book) that Jamie Dimon is the best of the bunch. But just before this started CBS reported that Obama called–among others–Dimon on the so-called fiscal cliff. I can’t even imagine why that would be necessary (unless Chase was going to get to sell privatized retirement accounts.

So it seems it’s not JUST deferring to experts but also believing these crime-ridden welfare recipients have a central role in all national policy.

Sheila Bair November 18th, 2012 at 2:25 pm
In response to tuezday @ 21

We could not have credibly guaranteed everyone. People tend to look at the government as if it is a bottomless resource – or a truffle for pigs as James so eloquently put it. I’m a Republican and I believe in folks who can do so standing on their own two feet – that includes Wall Street firms.

Jane Hamsher November 18th, 2012 at 2:26 pm

Thanks for being here Ms. Bair, and thanks for hosting Jamie.

We really appreciate you writing this very brave book at a very critical time.

Can you tell me what the response to the book has been, particularly among the financial elite?

Sheila Bair November 18th, 2012 at 2:27 pm

Geez. They had a team of people working on it. McCain had talked about it during the campaign. Hubbard, Feldstein, others had published their proposals. If Larry didn’t like our proposal – which he didn’t tell me until February 2009, even though he had nixed it with the POTUS in Dec 2008, there were plenty of big brains out there with proposals.

James K. Galbraith November 18th, 2012 at 2:28 pm
In response to Sheila Bair @ 25

Let me ask another policy question. What is the main problem with “megabanks” — even when they are not failing — and how should it be dealt with?

I know you deal with this at the end of your book but a few words here would be very helpful.

Sheila Bair November 18th, 2012 at 2:28 pm
In response to William Black @ 24

I’m not sure it makes me feel better that other countries are worse…

Sheila Bair November 18th, 2012 at 2:29 pm
In response to dakine01 @ 26

Probably.

Mauimom November 18th, 2012 at 2:29 pm

Welcome, Ms. Bair. We’re so delighted to have you here!! Thanks for coming.

A month ago, in a book salon with Jeff Connauton, moderated by Bill Black, I asked the following question:

I’d like to revisit a question I ask every time this topic comes up, but for which I never get an answer. Could you [and/or Bill] talk some about what “great crisis” was “averted” in 2008-09 by plying the banks with all of that taxpayer money? Paulson is running down the hall with his 3 page memo about how HE should be given billions to distribute to the banks, and the financial end of the world is predicted, but really, what did they fear? And what other path(s) could they have taken when confronted with the massive fraud and mismanagement?
We all know that no effective controls or oversight were baked into the “rescue” bill, but what, exactly were they afraid would happen? And weren’t there other ways to deal with the situation?

After asking this question numerous times, of numerous accomplished folks, I still don’t feel like I have an answer: what WAS this big, scary, “meltdown of the financial system” or whatever that herded Congress and the Administration(s) to rush through TARP and shower money on the banks?

I was startled to read in the opening scene of your narrative about the veritable “forcing” of money on at least some of the banks — not their coming to you with tin cups and their hair on fire.

I’m sorry to be so dense — and for such a long question — but I seriously don’t understand what was “feared,” such that this drastic “remedy” had to pushed through, one, as you explain was immediately diverted away from relieving underwater homeowners to banks and their bonuses.

Sheila Bair November 18th, 2012 at 2:29 pm
In response to dosido @ 28

Thanks for joining.

James K. Galbraith November 18th, 2012 at 2:30 pm
In response to Sheila Bair @ 35

(For readers who may not know, Martin Feldstein is the Harvard Professor who first brought Larry Summers to Washington, to work for the Council of Economic Advisers in 1982, when Feldstein became CEA Chair under Reagan. I suspect that they have remained in touch…)

Sheila Bair November 18th, 2012 at 2:31 pm
In response to William Black @ 30

It was very difficult.. That could be. I was not at the FDIC before his tenure at OTS. They were a dying agency fighting for charters – which of course provided their funding. The structure was flawed an ripe for capture.

emptywheel November 18th, 2012 at 2:32 pm
In response to Sheila Bair @ 25

When people try to deny this obvious fact–that it’s all Tim–they point out he’s never worked in the private sector.

So was Rubin that powerful at pressing his ideology, or are we just waiting for Geithner to get rich working for Citi?

That is, is it safe to assume this involves more revolving door, or just powerful ideology?

Sheila Bair November 18th, 2012 at 2:34 pm
In response to emptywheel @ 32

This is frustrating because fiscal policy should be about protecting taxpayers and supporting economic growth that is real and sustainable. All of these CEOs will approach issues from the perspective of what is best for their business. I don’t fault them for that. It is their job. But we have to stop managing policies based on a Wall Street centric view point. Their interests are not necessarily the country’s interests.

DWBartoo November 18th, 2012 at 2:35 pm
In response to Sheila Bair @ 31

That sounds well and good, Sheila, and I agree, in principle. Yet, forgive me for suggesting that the voting public does NOT get to vote on “policy”, it is permitted to vote only “for” or “against” politicians who are, more often than not, members of two political parties, the legacy parties, who have both been instrumental in bringing about the “crisis”.

To put a finer point on it, the two legacy parties are PRIVATE entities which desire to influence or control public policy AND the public purse.

Further, the Supreme Court, with the “Citizen’s United” decision made clear that Big Money is “speech” and that corporations are “people” … and money and corporations, especially the biggest, the banks, oil& gas, the “energy corporations” (think BP, for example), and Big Defense corporations, such as Lockhheed Martin just happen to control many of the government’s data bases … the power of money is pervasive and quite controls the “acceptable dialogue”.

By what means or through what mechanisms do you imagine that “the people” shall find the power to more directly influence policy when there are many serious, and intended, systemic roadblocks to their doing so?

DW

Sheila Bair November 18th, 2012 at 2:35 pm
In response to Jane Hamsher @ 34

I don’t think they are happy with it, but they are probably not surprised. They know I speak my mind.

Sheila Bair November 18th, 2012 at 2:37 pm

The problem is that so long as the market views them as having implied government support, they will invest in them, thinking that they only have upside – the government will take the downside. That makes these institutions even bigger. It also skews investment dollars to the financial sector, at the expense of the “real economy”.

Mauimom November 18th, 2012 at 2:38 pm
In response to Mauimom @ 39

Just to add: we’ve seen with this whole “fiscal cliff” situation that folks are very adept at attempting Shock Doctrine rule — describing a situation in increasingly frightening terms, such that a “solution” becomes even more “necessary” RIGHT NOW, and evaluation of that solution is abandoned.

One of the things I loved about your book is your description of FDIC’s evaluation of situations and coming up with solutions, indeed, looking ahead at what problems might develop and crafting solutions to address them. The current crowd seems to love the approaches of a) nothing bad can happen; b) no planning is needed; we’ll deal with anything if it occurs; c) leave it [and all the money] to us; we’re so smart and you guys don’t understand; plus, of course, d) no, we CAN’T do what you propose.

I’m trying to learn from the last “crisis,” since we all know those clowns will be here begging for $$$$$ again. RIGHT NOW!!!!

James K. Galbraith November 18th, 2012 at 2:42 pm
In response to Sheila Bair @ 47

That being so — here are two more policy questions:

- Are the biggest banks truly restored to health at this point? Or do they still have major unresolved problems on their balance sheets, such as toxic mortgage-backed-securities?

- If they are now basically healthy, thanks to the taxpayer, what should be done to deal with the fact that they are (in some cases) to complex to unravel? These are what Bill Black calls “Systemically Dangerous Institutions”. Does the government now have the power to reconstruct them, and if not, what new authority should be drafted?

Sheila Bair November 18th, 2012 at 2:43 pm
In response to Mauimom @ 39

You are right to ask this question. All the trillions we threw at these banks – if you include all the Fed loans– the public deserves better analysis and explanation. In late 2008, we were dealing with a liquidity crunch. Too many large institutions borrowed from each other to fund themselves with short term loans – what is called the “wholesale” market. Ironically, even as Main Street depositors were leaving their money in the banks, the banks themselves got scared and didn’t want to lend to each other. Another source of bank funding – money market funds – were also cutting off the spigot. So that while most were solvent – they had enough capital to bumble through- the short term funding they used to maintain operations was being disrupted. That was the main problem that needed to be fixed in late 2008, and in retrospect, it could have been fixed with a lot less money. The bigger problem for the economy was the huge number of troubled mortgages, but we never really fixed those.

DonS November 18th, 2012 at 2:44 pm

Obama seems to be lacking in both commitment and/or action, save for an occasional platitude, to apply such serious medicine as he can, or to push congressional colleagues to act. We don’t even see evidence of ‘jawboning’ which in the old days was considered a valid and sometimes effective tool. With respect, your call for the voting population to become engaged and for people start educating themselves and voting on financial reform seems like placing more responsibility on the public at large , which has only a tangential effect on Washington machinations, than our political representative are willing to practice themselves. The public after all have been the ‘victims’ here and the pols should already know things REALLY need fixing . What am I missing?

Sheila Bair November 18th, 2012 at 2:44 pm
In response to emptywheel @ 43

I don’t think Tim was looking for a job on Wall street. I don’t even think with him, it was ideology. I just think Rubin and his ilk are people Tim looks up to and listens to.

CTuttle November 18th, 2012 at 2:45 pm
In response to Sheila Bair @ 47

…they will invest in them, thinking that they only have upside – the government will take the downside…

Privatize the Profit, Socialize the Losses…! 8-(

Aloha, Sheila, James, Bill, Marcy, Jane, et al…! *g*

Is there any chance we can shield ourselves from all those Deriatives, however many Trillion$ there are of them…?

William Black November 18th, 2012 at 2:45 pm

You had to deal with the effects of the FDIC’s deeply flawed “MERIT” examination system, which I saw as the FDIC’s version of “Fed-lite.” I doubt that even members of the Firedoglake community, who tend to follow these issues closely, know how deep the cuts in FDIC personnel were from roughly 1993-2007. Can you talk about your efforts to re-establish the FDIC as a credible force dealing with a naitonal emergency?

Bill Black

bluedot12 November 18th, 2012 at 2:45 pm

Lets add to that one. The fed is now buying MBS. Are they all good or is this another bail put of toxic assets held by the banks?

Sheila Bair November 18th, 2012 at 2:46 pm
In response to DWBartoo @ 45

I wish I had a better solution for you. Political reform, fundraising reform, would help. But the support for that has to come from voters as well. We can’t lose heart. Then we are really sunk.

dosido November 18th, 2012 at 2:47 pm
In response to Sheila Bair @ 44

oh, guess I’m going to chime in after all.

Yes, I was really really tired of the claim that “Romney knows more about business” as though he was running for CEO of America, Inc. I wish more people were aware that a country is a social system, not a for-profit business. Kind of a big difference.

Sheila Bair November 18th, 2012 at 2:49 pm
In response to Mauimom @ 48

The FDIC is a jewel of the government, and under appreciated. I loved James’ description of them in his review. They were my strength. A top notch group of people.

szielinski November 18th, 2012 at 2:49 pm

To add another question to Jamie G’s questions:

If the large banks are quasi-public institutions, as they seem to be, why not nationalize them and make them wholly public institutions?

There is, after all, no sound reason to give such power to players in a casino.

David Dayen November 18th, 2012 at 2:50 pm

Sheila, pleasure to have you here.

I’m wondering if you see an imbalance in our current housing recovery. It appears to be driven by two factors – artificially constrained supply delivered by banks keeping their REO off the market; and demand goosed by institutional investors buying up foreclosed properties at prodigious rates, usually with cash borrowed from large banks, for the purposes of renting out the units for a few years (and even securitizing the rental revenue). This week it was reported that Blackstone is buying up $100 million in homes every week.

I have a number of problems with this, from investors driving up demand and edging out individual would-be homeowners, to their inadequacies at being landlords, to what happens when the revenue streams don’t match their projections and they try to all sell at once, to the crazy idea of securitizing the rental revenue. Do you have any concerns about the trajectory of the housing market? Even if it’s sustainable, shouldn’t the scooping up of all these properties raise concerns?

emptywheel November 18th, 2012 at 2:50 pm
In response to Sheila Bair @ 52

Thanks.

JamesJoyce November 18th, 2012 at 2:51 pm

Mr. Peter Orszag and Revolving doors?

http://www.bloomberg.com/view/bios/peter-orszag/

Peter R. Orszag is a Bloomberg View columnist appearing on alternate Wednesdays. Vice chairman of corporate and investment banking at Citigroup, he was President Obama’s director of the Office of Management and Budget.

Orszag was previously the director of the Congressional Budget Office, from 2007 to 2008. He served in two different jobs in the Clinton administration, as a senior economist at the Council of Economic Advisors from 1995 to 1996 and, in 1997, as top adviser to the director of the National Economic Council. He has a Ph.D. from the London School of Economics and a B.A. in economics from Princeton University. An adjunct senior fellow at the Council on Foreign Relations, he lives in Manhattan.”

Revolving doors are like deli meat slicers, for Americans, who have been sliced then diced into oblivion! It is called backscratching.

Phoenix Woman November 18th, 2012 at 2:51 pm

Hello, Sheila, and welcome to the Lake!

Sheila, following up on your reply at #50 to Mauimom, where you mention that the huge number of troubled mortgages (a problem still largely unaddressed) was a bigger threat to the economy than banks needing more capital —

As you probably know, the Occupy Wall Street folks are quite busy lately; they are the go-to people for on-the-ground relief efforts in the wake on Hurricane Sandy, and they have a new project called “the Rolling Jubilee“, which seeks to buy up various forms of consumer debt (such as medical debt) at around five cents to the dollar and then forgive it. One wonders if the government should have tried something along these lines rather than shovel money at Citigroup et al.

Sheila Bair November 18th, 2012 at 2:52 pm

The big banks are stable. They still have unrealized losses on their balance sheets, but also a lot more capital now and that should not preclude restructuring them to make them simpler and easier to resolve. Yes, Dodd-Frank does give regulators considerable authority to order restructuring (so for instance the insured bank is walled off from higher risk activities) or even divestiture if they feel the institution is a systemic threat. Of course, they need to have the will to do so.

Sheila Bair November 18th, 2012 at 2:53 pm
In response to DonS @ 51

The President needs to appoint people who believe in effective regulation and are strong on reform. That would help immeasurably.

Nathan Aschbacher November 18th, 2012 at 2:55 pm

I’ve been having an ever more difficult time figuring out why we abide private for-profit banking at all.

The typical claim of banks in a capitalist structure is that they exist to efficiently allocate capital to productive enterprises, except that with each year they soak up a larger and larger share of all corporate profits, which means implicitly that unless money-changing is itself the most productive enterprise, they’re grossly failing at the sole purpose of their existence and special charter. It just seems bizarre to me.

It’s extremely difficult for me to understand on the most fundamental level what society actually gains from the organization of banking as it is. Most of the interesting investing happens along the lines of venture and angel capital, the government already takes on the loan guarantees for the lion’s share of business loans through the SBA.

From what I can tell the only function that our banking system serves, that couldn’t be otherwise be easily serviced through government intervention directly combined with not-for-profit depositor institutions, is to throw a whole boatload of government largesse (both fiscal and structural) at arguably the least productive members of our social economy for its own sake. Again, it just seems bizarre to me.

I look at it from an engineer’s perspective and see nothing but a grossly dysfunctional system with all the wrong trade-offs that ultimately doesn’t even remotely satisfy the requirements of the claimed functional specification.

William Black November 18th, 2012 at 2:55 pm
In response to szielinski @ 59

I would caution that public ownership of banks does not preclude “casinos” — witness the German public-owned banks and the Spanish cajas that were often controlled by non-profit entities.

I also urge you to reconsider the “gambling” metaphor. As Akerlof & Romer (“Looting: the Economic Underworld of Bankruptcy for Profit”) found, accounting control fraud is a “sure thing.” Criminologists and regulators of that era agreed with Akerlof & Romer. If you look at what has made public about the originators of “liar’s” loans, you will see that they followed the same accounting “recipe” made infamous by those earlier frauds.

Bill Black

RevBev November 18th, 2012 at 2:56 pm

Why was Geithner able to keep his job when he seems not very effective at his job and appears to be a snake?

Sheila Bair November 18th, 2012 at 2:56 pm
In response to CTuttle @ 53

Derivatives are still a significant threat to system stability. We need to move them to centralized exchanges but we also need to do more to curb speculation in the credit default swap market. As with other insurance, if you want to buy credit protection, you should have to have an interest that you are insuring. This wild speculation on the direction of the housing market using CDS up to and during the crisis was a major problem.

DonS November 18th, 2012 at 2:56 pm
In response to Sheila Bair @ 65

thanks

James K. Galbraith November 18th, 2012 at 2:56 pm

Something he may have the opportunity to do, in a few weeks — if he chooses to do it.

Suzanne November 18th, 2012 at 2:56 pm

thank you ms. bair for writing this book. i’m still reading (and learning from) it. i hope my question isn’t too personal (and perhaps it is answered in the book in which case nevermind) but what got you through your time as chair? it had to have been incredibly frustrating for you to feel like you were always banging your head against a brick wall.

i’m going to go back to lurking — the discussion today is fascinating and so informative.

thank you ms bair to being here today and thank you mr galbraith for hosting.

DWBartoo November 18th, 2012 at 2:58 pm
In response to Sheila Bair @ 56

I don’t think a question of “losing heart”, Sheila, but more a question of what “signals” FROM “the people” might move the political class to fulfill THEIR obligation to the people and to the Constitution … that is the clear and present NEEDS of the people and the necessity of the Rule of Law.

The people in their millions are suffering and are likely to continue suffering under such “solutions” as the political class is willing, now, to put forward.

And it is the mortgages, which reflect the massive criminal fraud, which ought to result in criminal consequence for the elites who deliberately “engineered” MERS, and trashed the property recording system at the county-level in this nation, a coherent system some two hundred years and more old, btw.

There has been massive damage and there must be a legal accounting … not simply a cost-of-doing-business “fine” with no admission of wrongdoing.

Massive wrong was done.

And trust in the government and in he economic system requires actual justice be served and not the establishment of a two-tiered “legal system”.

DW

masaccio November 18th, 2012 at 2:58 pm
In response to Sheila Bair @ 58

I know some of your people and they are smart and dedicated. I wonder if you had as much trouble defending the FDIC from Paulsen and the Bush Administration as you did with Geithner and the Obama Administration. Do you think the Obama team discounted your input because you are a Republican?

James K. Galbraith November 18th, 2012 at 2:58 pm
In response to Sheila Bair @ 69

Is the idea of requiring an insured interest in CDS enforceable?

Or to put it another way, what would it take to enforce it?

William Black November 18th, 2012 at 2:58 pm
In response to Sheila Bair @ 65

Very true. But Obama could have done so easily by picking leaders with a track record of success — real regulators like Michael Patriarca.

Obama inherited his strongest regulator — you.

Bill Black

szielinski November 18th, 2012 at 3:01 pm
In response to William Black @ 67

You are right, of course, on both counts. Unfortunately, we must find the political resources needed to create institutions we can trust and which are trustworthy. Lacking such institutions, we are lost in any case. At this point, I’d say that the big banks have forfeited whatever claims they may have once had to trustworthiness. These days they seem to be grenades with very loose pins.

DWBartoo November 18th, 2012 at 3:03 pm
In response to William Black @ 76

There is “that” fact, Bill.

;~DW

Sheila Bair November 18th, 2012 at 3:03 pm
In response to William Black @ 54

Thanks Bill. Yes, the agency had gone from about 12,000 people to 4500 people before I got there. Morale was bad and the cuts had gone far too deep. This was just representative of the “self-correcting” market dogma that had overtaken Washington. We hadn’t had a bank failure in nearly 3 years, and the industry was saying the good times would last forever, so who needed examiners. The MERIT program really limited the ability of examiners to go into banks and dig down into their loan files when a bank had been in good shape in the past- this, when we were on the cusp of a housing downturn. Past performing loans were certainly not good indicators of a bank’s future health. It was ill advised and I was happy that we got rid of it.

It was a tremendous re-building effort, but a successful one. The agency performed superbly. And employee morale soared to number 3 in 2010 and number 1 in a survey taken in 2011 before I left office among major federal agencies.

Nathan Aschbacher November 18th, 2012 at 3:05 pm

Or to put it more succinctly, since there are at least five very smart banking and finance industry experts here, what specifically and explicitly is gained in our social economy by backing our depositor institutions with a profit motive and the protections of the corporate veil? Then further, what specifically and explicitly is gained in our social economy by backing speculation with corporate welfare and government largesse?

It seems like those two sets of incentive structures have gotten completely reversed from what arguably makes any sense at all.

I’m sorry if this is off-topic. I’ve just been befuddled by it for awhile now, and never in a million years thought there’d be so many people with the knowledge and expertise to comment on it in the same place at the same time.

CTuttle November 18th, 2012 at 3:06 pm
In response to Sheila Bair @ 69

Mahalo for answering, Ms. Bair…! Do we even have any tangible idea of how large the Derivative market truly is…?

Mauimom November 18th, 2012 at 3:06 pm
In response to Sheila Bair @ 50

Thank you so much for this response. At the time, Geithner et al. were making it sound like if we didn’t bail out AIG, every widow, fireman, policeman and grandmother in the US would immediately lose his/her pension because AIG would go under and couldn’t pay.

Clearly the MOTU don’t want to admit they’re asking for the money to cover incompetence & mismanagement, so they gin up these scare scenarios to get people to push for a “solution.” Then, as you’ve described, they don’t even solve the problem they’ve so creatively described, but use the money for their own purposes.

BTW, I really appreciated the explanation in your book of issues surrounding FDIC insurance [e.g., lifting the limit from $100K to $250K], how “deserving” folks would be affected, real problems that had to be faced [depositors pulling money out of smaller banks]. Financial illiteracy among the American people is endemic; your book is a welcome antidote to that.

Sheila Bair November 18th, 2012 at 3:07 pm
In response to bluedot12 @ 55

I believe they are buy GSE MBS so it is unlikely that they will take losses. Those are government backed. But the near zero interest rates which these policies perpetuate does help the big banks with large trading operations. They can take the cheap money and reinvest in higher yielding securities, or go overseas where they can get better returns. The traditional banks don’t have the same potential to benefit from the carry trade. If you make money by making loans, this is a tough environment.

James K. Galbraith November 18th, 2012 at 3:08 pm

Let me ask a question (along Bill Black’s line) about the role of criminal referrals in the process of bank supervision. It’s a topic that doesn’t come up much in your book.

What’s your view of referrals as a regulatory tool and, in your view, have the regulators and the DOJ done their job in this area?

Also, what is the role and potential for civil litigation, at this point, to recover in the case of securities and derivatives based on fraudulent mortgages?

juliania November 18th, 2012 at 3:08 pm

Just a lurker here, but I want especially to thank FDL and guests for this very important discussion.

bluedot12 November 18th, 2012 at 3:11 pm
In response to Sheila Bair @ 83

If GSE risk is probably small. But the next question is why do it at all?

Sheila Bair November 18th, 2012 at 3:11 pm
In response to szielinski @ 59

You are right. If they are too big to fail, they need to be broken up. If we won’t break them up, then they should be run like nonprofit utilities, with the regulation and compensation to match. I prefer the the former approach, but this hybrid that we have now is quite dangerous. That said, I do think the regulators are making progress in having the tools to put them into a FDIC style bankruptcy if they get into trouble. But much more needs to be done.

bigchin November 18th, 2012 at 3:14 pm

Thank you, Sheila Bair, for your willingness to push against the tide.

Looking to the future, are you concerned that a tipping point may have been reached that doesn’t allow for a satisfying righting of the financial ship in terms of its response to the millions still suffering from the capsize?

bluedot12 November 18th, 2012 at 3:14 pm
In response to bluedot12 @ 86

I would also ask why there is no audit apparently of this program to be sure the fed does not buy junk?

Sheila Bair November 18th, 2012 at 3:15 pm
In response to David Dayen @ 60

There need to be better mechanisms to let smaller players and nonprofits also participate in buying these vacant houses. We also need better policies on rental conversions and rent to own, which if done right, could have a positive impact on the lower income neighborhoods which were hit the hardest. The banks and GSEs need to be careful about selling to folks who will make superficial repairs and flip the property. But we do need buyers to come into the neighborhoods and commit capital to their revitalization. It breaks my heart what the subprime crisis did to LMI neighborhoods. You go to Chicago, Cleveland, Atlanta, so many other areas It is a travesty.

Sheila Bair November 18th, 2012 at 3:16 pm
In response to JamesJoyce @ 62

Sigh.

James K. Galbraith November 18th, 2012 at 3:16 pm
In response to Sheila Bair @ 87

Picking up on that, isn’t this the moment? With the President re-elected, the economy and most of the banks stable for now, why not take the opportunity to take apart and restructure one of the biggest SDI’s, and show that it can be done?

Sheila Bair November 18th, 2012 at 3:18 pm
In response to Phoenix Woman @ 63

Absolutely. We tried to launch a program in 2009 for the private sector to buy troubled loans for a discount from the banks-get them to clean up their balance sheets, and then the buyers would have running room to restructure the debt. We couldn’t get it off the ground. My board approved it and so did the Fed. But we needed Treasury’s approval too.

Sheila Bair November 18th, 2012 at 3:20 pm

Traditional banks – by that I mean banks that take deposits and make loans but don’t have the big trading operations – they actually performed pretty well. They pay steady returns and don’t pay outsize salaries. There is a model that can work.

Nathan Aschbacher November 18th, 2012 at 3:21 pm
In response to Sheila Bair @ 91

Realistically what can even plausibly be done about this? It inevitably comes down to incentives I would think, no? What ought they to be, how would we get them there, and what would it take to maintain them? In real terms.

Sheila Bair November 18th, 2012 at 3:21 pm
In response to William Black @ 67

Agree.

Mauimom November 18th, 2012 at 3:23 pm
In response to Sheila Bair @ 87

But much more needs to be done.

Do you think there’s been any “learning” at all from this experience? I recognize that there’s an entire tribe of MOTU who have no intention of “learning,” but how about others: Obama, members of Congress, some members of the public.

You talk in the book about folks in 2001 or so being enthralled by the deregulation bug, “let the market work,” etc. There’s a laundry list of myths that contributed to the 2008 catastrophe [and another list of myths "explaining" all the bad loans, like "irresponsible people were borrowing to buy big-screen tvs," and "Democrats forced banks to lend to unworthy creditors"].

But specifically with regard to “don’t bother us with regulations,” it’s been 12 years!! While it’s not too surprising that the Chamber of Commerce recycles this tired myth, why is it being believed? And how do we combat it?

And BTW, when do the clowns who make all these arguments which turn out to be totally WRONG get to be discredited??? It happened with Karl Rove and Fox re the election; can such discrediting move on to Timmy, Paulson, Greenspan and the MOTU?

bluedot12 November 18th, 2012 at 3:23 pm
In response to Sheila Bair @ 90

Follow upon that, if one hedge fund is buying up to 100 million a week, there are likely others. Are we creating another bubble since those buyers are not into it for the long term?

Sheila Bair November 18th, 2012 at 3:23 pm
In response to RevBev @ 68

I don’t know.

beowulf November 18th, 2012 at 3:24 pm

Is the idea of requiring an insured interest in CDS enforceable?
Or to put it another way, what would it take to enforce it?

I think you have this framed backwards. A contract is only valid if its enforceable in court. Racial covenants and (more to the point) gambling debts in most states are legally unenforceable. If CDS contracts were declared unenforceable (whether by a court decision, Congress or, perhaps, New York State), well, good luck getting a payout from an insurance company working on the honor system.

Speaking of gambling debts, the revolving door we see between Washington and Wall Street doesn’t happen in the gaming industry. Every state with legalized gambling has stricter conflict of interest rules than the federal government. For example, no member of the New Jersey Casino Control Commission can have worked for a casino (or a law firm that represents casinos) in the 3 years prior to taking office or the 4 years after leaving office. A sad state when Atlantic City is the epitome of Good Government compared to Washington.

Sheila Bair November 18th, 2012 at 3:24 pm
In response to Suzanne @ 72

Hah! That’s for sure. Fortunately for me, I have a strong head.

bgrothus November 18th, 2012 at 3:24 pm
In response to Sheila Bair @ 83

I am out of my league with our company here today, but I wanted to offer an observation. My family comes from Los Alamos, one of the wealthiest (now) counties in the US and in one of the very poorest states.

The original scientists founded a number of credit unions and a local bank, and today, there is only one small counter for WF in the national grocery chain that monopolizes the grocery market of the town. In Los Alamos there are still about four (original) CUs and the town bank plus one other bank that is still a free-standing small bank from Santa Fe. There are NO other banks there, which I find astonishing.

I can say that the local bank is completely terrified of having one paper anywhere that does not comport with every tiny regulation that exists. I think they can lose their charter for any small infraction, and yes, I believe they are staying afloat on mostly mortgage income. I wonder how long these kinds of institutions will last in the corrupt system of large institutions. Their stock is privately held, and the value of it has gone from $30 to less than $10 in the last few years, no one buys it.

Nathan Aschbacher November 18th, 2012 at 3:24 pm
In response to Sheila Bair @ 94

That makes sense to me. But in that case we’re really just talking about a facility for demand deposits right? It makes sense to me that would be extremely banal by and large, but it likewise strikes me as something for which a profit motive is a wholly unnecessary performance incentive, and further is something that could largely be operated like a public utility.

Perhaps such drastic changes aren’t necessary currently, as by your statement that marketplace seems to be largely regulating its abuses and outliers well enough on its own under the FDIC.

But it begs the question… how did all this other arguably reckless and perverse banking activity come to occupy the same mindshare as the traditional bank in our economy and politics?

James K. Galbraith November 18th, 2012 at 3:25 pm
In response to Sheila Bair @ 94

I realize you are working your way through a lot of good questions, but let me toss out one more that you might get to eventually.

According to reports I’ve read in the press, Sec. Geithner believes that we need our big banks in order to have major US players on the world financial scene — to penetrate emerging markets such as India and China, for instance. This he sees as a source of profit income for the US economy as a whole.

What’s your view of this argument?

Sheila Bair November 18th, 2012 at 3:26 pm
In response to masaccio @ 74

No. Others in the Obama team were quite helpful, like Rahm Emanuel and Valerie Jarrett. I just think Tim and Larry had a Wall Street world view, and we didn’t. That was the problem.

Sheila Bair November 18th, 2012 at 3:30 pm

Insurance companies do it all the time. Yes, at least for bilateral contracts written by dealers, they should require proof of insurable interest and proof of loss to collect, just as you have to do on an insurance policy. I think this is a safety and soundness issue for banks. If their counter-parties have to actually lose money to collect on the CDS contract, they won’t be on the other side trying to squeeze them as we saw with the London Whale episode. I don’t want insured banks duking it out with big hedge fund speculators, but that is what a lot of this market is about.

Sheila Bair November 18th, 2012 at 3:31 pm
In response to William Black @ 76

Well he kept me, even though Tim wanted me out.

Sheila Bair November 18th, 2012 at 3:31 pm
In response to szielinski @ 77

Good (but scary) description.

Mauimom November 18th, 2012 at 3:33 pm
In response to Sheila Bair @ 65

Do you think we’ll get any better appointments from Obama in his second term? Has he learned anything?

Some speculated previously here [in other FDL book salons] that Obama was so financially ignorant and insecure that he chose what he thought were the “experts” [Rubin and his acolytes], not realizing that there was a point of view other than theirs [i.e., one favoring the public interest].

Others say, “ignorance, hell. Obama has ALWAYS wanted to follow these policies. No one had to talk him into it. He wants to BE one of these guys and to curry favor with them.”

Do you see any “growth” on his part, and thus any hope for getting better appointments and advice?

Nathan Aschbacher November 18th, 2012 at 3:33 pm

I guess a lot of my questioning comes from my experience in tech. Basically zero financing for any startup I’ve encountered or worked with has come from the “investments” of these megabanks. Almost unanimously they’re bootstrapped or VC funded. In rare occurrence they’re built-out on SBA loans.

So I’m exceedingly suspicious of the idea that the megabanks actually do anything useful and non-substitutable regarding either deposits or investing.

Sheila Bair November 18th, 2012 at 3:34 pm

The system we have now doesn’t make sense. But I think that if we implemented the reforms outlined in my book, we could have a rationale, stable system.

James K. Galbraith November 18th, 2012 at 3:34 pm
In response to Sheila Bair @ 106

A couple of follow-ups…

Can regulators now impose such a requirement, or do we need to go back and repeal the Commodities Futures Modernization Act first?

And, what about the counter-argument that the CDS market would just move off-shore?

Sheila Bair November 18th, 2012 at 3:36 pm
In response to CTuttle @ 81

Hmm. US interest rate swap market is about 350 trillion I think (notional value). CDS market is in the tens of trillions, but with CDS (unlike interest rate swaps) the entire contract amount is at risk

Nathan Aschbacher November 18th, 2012 at 3:36 pm

I realize you didn’t ask me this, but it seems like to be supportable that argument would have to establish a causal and necessary link between the U.S. megabanks and the reserve status of the U.S. Dollar?

Sheila Bair November 18th, 2012 at 3:37 pm
In response to Mauimom @ 82

yes. “Saving the system” was definitely over-used.

Nathan Aschbacher November 18th, 2012 at 3:40 pm
In response to Sheila Bair @ 111

I’ve only gotten through the first three chapters of the book unfortunately. Being interspersed with sessions of “Learn You some Erlang for Great Good”

I’ll have to bump up my reading priorities and hopefully start to make some sense of this world.

That said, you are one of my personal heros through the onslaught of the financial crisis, going back to March of that year even. If I’m ever in a position to name two buildings after anyone I’ve got you and Brooksley Born at the very top of my list.

Mauimom November 18th, 2012 at 3:40 pm

One issue that’s been pretty much shoved under the table is the whole “robo-signing” and other illegalities, and particularly how greatly these screw up a property’s chain of title.

There was the phony “buy-off”/settlement agreement among the state attorneys general re prosecuting these crimes, but I sense this problem has only gone underground, not away.

I certainly would be concerned about buying a house that had been in foreclosure. Is the title insurance going to protect me? Can I even GET a title insurance policy that covers the kind of issues that are going to come up with a property whose history includes robo-signings and foreclosure? To say nothing of “who holds the mortgage” when these things have been sold & securitized.

Do you see a time-bomb there, or is this beyond your ken?

beowulf November 18th, 2012 at 3:41 pm

Sheila,
since you’ve worked in both Treasury and as chair of an independent agency, I’m curious if you think the government wcould more (or less) effectively regulate the financial sector if regulators were unified under the Treasury Secretary (in the same way as when, after WWII, Congress put the military services under a single Defense Secretary)?

I ask because between the Supreme Court’s 2010 Free Enterprise Fund v. PCAOB decision (latest expansion of unitary executive theory) and the Federal Circuit’s 2011 Slattery v. US decision (making FDIC obligations direct Tsy obligations as well), I suspect that’s where we headed whether we like it not.

William Black November 18th, 2012 at 3:42 pm
In response to Sheila Bair @ 107

It’s not the same. President Reagan kept Ed Gray even though Gray was reregulating the industry in a manner that Reagan opposed — passionately. But Reagan made Gray’s task, and life, miserable through his Chief of Staff (and former Treasury Secretary) Don Regan who sought to undermine much of what Gray was trying to do. That strikes me as roughly analogous to what you had to face. Again, thank you for facing it.

Bill Black

Sheila Bair November 18th, 2012 at 3:42 pm

We made several criminal referrals when we discovered fraud that led to a bank failure, but our processes are really geared toward bank failures. If you bailout, the processes don’t apply.

Criminal cases have a very high burden of proof. Where do you draw the line between greed and criminal behavior? I would like to see more criminal cases of individuals, even if prosecutors lose. There has to be greater accountability. But with some of these guys, taking their money away is worse for them than going to jail… So more civil cases brought against individuals would be good and would do more to change behavior than cases brought against the corporate entity. Unfortunately, a lot of these folks have insurance coverage and indemnification agreements with the banks. That was a problem we ran into with WaMU. The regulators need to do more to ban those arrangements.

Sheila Bair November 18th, 2012 at 3:46 pm
In response to bluedot12 @ 86

The lower mortgages rates generate refi activity, which helps the banks and borrowers too, though they are not always getting the full benefit. I don’t agree with the Fed’s policies. We need fundamental structural changes in our economy – more manufacturing, more exports, less reliance on the housing market. The Fed is trying to keep us afloat with policies that are not sustainable. Our problems must be solved through fiscal policy, not monetary policy.

CTuttle November 18th, 2012 at 3:47 pm
In response to Sheila Bair @ 113

… US interest rate swap market is about 350 trillion I think (notional value)…

That’s a whole lot of trees lost to print that much, or platinum to mint…!

Any idea what would occur if the Petro-dollar was shifted to Rials, Dinars, Renminbis, and/or any other Brics and/or NAM currencies…?

Mauimom November 18th, 2012 at 3:47 pm
In response to Sheila Bair @ 115

“Saving the system” was definitely over-used.

Heck, it’s STILL overused!!! Every time someone refers to that time, they refer to “saving the system” or “averting a financial melt-down” or some other Doomsday phrase.

That’s one of the reasons I keep pressing for an accurate description of what went on. This was a horrid, wasteful response to a ginned up crisis, and the “remedy” rewarded the criminals who created the crisis and has done nothing to prevent this happening again. [At which time I'm assuming we'll hear the same calls for the next bailout.]

William Black November 18th, 2012 at 3:49 pm
In response to Sheila Bair @ 120

There are many of us who would be happy to help. We had to face all of these problems and, after years of experience we learned from our mistakes and successes and developed an extraordinarily successful system that was successful even against the elite and clever CEOs running the accounting control frauds.

To my knowledge, the FBI and DOJ have not called on any of us that did the key training. Nor are they reinventing the wheel. They’re deconstructing it.

Bill Black

bluedot12 November 18th, 2012 at 3:49 pm
In response to Sheila Bair @ 121

From little corner of the universe that seems right. It seems odd that the fed would need to buy MBS. It smacks of more bail puts.

Sheila Bair November 18th, 2012 at 3:51 pm
In response to bigchin @ 88

I don’t think we are ready to capsize quite yet. In addition to financial reform, we need structural change – a more efficient tax code, sustainable defense and entitle spending, financial institutions taking their losses in the housing market so that it can truly recover. I’m for stimulus too if it gives us some lasting benefit like a better trained workforce and much-needed infrastructure repairs. We also need to rationalize immigration policy so it serves our long term economic interests. Much to do. The question is can Washington deliver?

Sheila Bair November 18th, 2012 at 3:52 pm
In response to bluedot12 @ 89

The FDIC had annual GAO audits, as well as routine audits by our IG. I loved it. Helped to keep us on our toes.

BevW November 18th, 2012 at 3:53 pm

As we come to the end of this great Book Salon discussion,

Sheila, Thank you for stopping by the Lake and spending the afternoon with us discussing your new book, and your experiences at the FDIC and the financial crisis.

James, Thank you very much for Hosting this great Book Salon.

Everyone, if you would like more information:

Sheila’s website and book (Bull By The Horns)

James’s website (Univ Texas/Austin, with links to current articles) and book (Inequality and Instability: A Study of the World Economy Just Before the Great Crisis)

Thanks all,
Have a great week and a Happy Thanksgiving.

If you would like to contact the FDL Book Salon: FiredoglakeBookSalon@gmail.com

Sheila Bair November 18th, 2012 at 3:54 pm

Agree. The thing is these behomoths also deliver very weak shareholder value. I believe that Citi and BofA both trade at about half of tangible book value. Restructuring or breaking them up would also create better value for their owners…

spocko November 18th, 2012 at 3:55 pm

Bill Black in comment 67 talks about not confusing accounting control fraud with gambling.

What things are named (and repeated by the press) make a difference in what the solutions might be needed and the time in which it needs to be implemented.

So, with that in mind I would like to point out that everyone is talking about the “fiscal cliff” it turns out that the phrase “fiscal cliff” first came out of a former Goldman Sachs economist and then pushed by Fed chairman Ben Bernanke.

This question is for Ms. Blair, Mr. Black, Mr. Baker and Mr. Galbraith. What should this situation be called? When you talk to the media, do you ever correct their terminology to a better term?

Nathan Aschbacher November 18th, 2012 at 3:55 pm
In response to Sheila Bair @ 127

This is a statement that is a testament to the fact that you loved your work and derived purpose from it, rather than simply seeing it as a necessary evil or as a stepping-stone. Thank you very, very much for being wired that way.

James K. Galbraith November 18th, 2012 at 3:55 pm

We’re about at time. Let me thank Sheila Bair for her crisp, clear, frank responses to many tough questions, and thanks to all the participants for posing them. Bull by the Horns is an exceptional book, so thanks also for writing it. It tells us, in some ways all too clearly, what we needed to know.

Thanks to Firedoglake for having this Book Salon!

DWBartoo November 18th, 2012 at 3:56 pm
In response to William Black @ 124

Yes, there must be actual accountability, Bill, such as taking their money AND locking them up … if that is not a deterrent “affect”, at least those ONES will not be playing fast and loose. Throw the “kitchen sink” at them as a recent author, here, suggested.

DW

William Black November 18th, 2012 at 3:56 pm
In response to BevW @ 128

Congratulations on your book! Thanks for a career of public service.

Thank you Jamie for hosting a great session.

Bill Black

DWBartoo November 18th, 2012 at 3:56 pm

This has been a most excellent Book Salon. Enlightening and superbly educational.

Thank you, Sheila Bair, for your honorable service to the citizens of this nation, for your book and the education you provide us, and for your evident intention of staying at the forefront of this most necessary discussion.

Thank you, James Galbraith for hosting and for the guidance of your questions tonight as well as your continuing efforts to educate and inform.

Thank you, Bill Black, as always, for daring to pose the serious and necessary questions from a position of genuine knowledge and capacity, and as well for your efforts to educate and inform.

Thank you, Bev, as always, for providing us such amazing and important Book Salons.

And thank you to all the freedom fighters who raised questions and awareness throughout the “ordeal”, with special appreciation to David Dayen, Marcy Wheeler, and Dean Baker for your many in-depth posts around these issues.

DW

Sheila Bair November 18th, 2012 at 3:56 pm

Yes, its always about incentives. Higher capital, risk retention on securitized loans, clawbacks of compensation, anything that forces skin in the game and real, financial loss if there is a screw up – that is the best kind of regulation.

James K. Galbraith November 18th, 2012 at 3:57 pm
In response to spocko @ 130

And to answer that last question, yes.

bluedot12 November 18th, 2012 at 3:57 pm
In response to Sheila Bair @ 129

Sounds like an idea we might support here.

William Black November 18th, 2012 at 3:58 pm
In response to spocko @ 130

I’ve tried to get people to call the overall “Grand Bargain” the “Great Betrayal.”

The fiscal cliff is a slope that will be removed by retroactively effective tax cuts for the less wealthy.

Sheila Bair November 18th, 2012 at 3:58 pm
In response to beowulf @ 100

Yes. Ethics rules have become almost trivial. You can’t accept a $10 sandwich, but you are free to go work for a bank who benefited from legislation or a regulation you just passed.

Sheila Bair November 18th, 2012 at 4:00 pm
In response to bgrothus @ 102

I fear that regulators tend to crack down more on smaller banks because they understand them better and they are less likely to push back. We need quality regulation for all institutions, but detailed, complex, bureaucratic rules are a barrier to entry and will only increase consolidation – the last thing we need!

DonS November 18th, 2012 at 4:01 pm
In response to William Black @ 124

When one sees the unprosecuted nature of white collar crime/malfeasance, it become a no-brainer that more certain threat of both criminal and/or civil prosecution needs to be in the mix. With the honorable, uncorrupted, un- coopted regulators and bureaucrats that Ms. Bair harkens, and with some serious track record, bringing the deterrent factor into play might just pay off.

DWBartoo November 18th, 2012 at 4:01 pm
In response to Sheila Bair @ 136

“Clawback of compensation” … delightful, and a great “beginning”.

Thank you again, for joining us, this evening, Sheila.

I hope that you might drop by from time to time, as you will always find a warm and friendly welcome here.

DW

dosido November 18th, 2012 at 4:02 pm

Sheila, how can we the people influence Obama on his picks for his finance reform team ie people like you, not the Wall Street players?

dosido November 18th, 2012 at 4:03 pm

Yes, thank you Ms Bair!

So many questions, so little time!

bigchin November 18th, 2012 at 4:03 pm
In response to Sheila Bair @ 126

Thank you for your very generous response. I hope the lifeboats are not already full and that those still in the water will, someday, find terra firma!

Sheila Bair November 18th, 2012 at 4:03 pm

This is the legacy of the deregulation mania we went through. It was definitely bipartisan, and for a time, seemed to work. The problem is it will take years for regulators to catch up, it went on for so long.

bgrothus November 18th, 2012 at 4:04 pm

This was incredible, thanks for the book, Sheila, for your service and continued commitment. Thanks to our illustrious participants, FDL is amazing.

spocko November 18th, 2012 at 4:05 pm
In response to DWBartoo @ 143

Just to echo DWBartoo, “Clawback” was one of my favorite terms. But did we see any of it? Hmmm. Don’t think so.

I’m very interested in any of your appearances on right wing media about your book. Do you have any scheduled? One of the issues is how Fox News and the RW media push certain ideas about the “free market” and the evils of regulators. It would be interesting to see them talk to you about your book while at the same time telling their viewers that the regulations are bad.
I would love to know about those interviews so I can tape them.

beowulf November 18th, 2012 at 4:05 pm
In response to William Black @ 119

Yeah, but wasn’t Gray chair of the Federal Home Loan Bank Board, like the FDIC, an independent agency whose members require the President to show cause before he (or she!) can be removed? That was the holding of the 1935 Humphrey’s Executor v. US case which, as Circuit Judge Brett Kavanaugh noted, is the last anti-New Deal Supreme Court decision that’s still good law (though perhaps not for much longer).

bgrothus November 18th, 2012 at 4:06 pm
In response to spocko @ 149

lol

William Black November 18th, 2012 at 4:06 pm
In response to beowulf @ 150

Not as a practical matter. Ed Gray worshipped Reagan. If Reagan had asked him to resign he would have done so immediately.

Sheila Bair November 18th, 2012 at 4:08 pm

It’s not size so much as it is complexity. European banks are starting to spin off or segregate their investment banking from their traditional lending function. Big banks might be more competitive if they specialized in different business lines, instead of trying to do everything –which no one can manage.

Most of them syndicate the big deals anyway — they don’t want to take all the risks by themselves.

DWBartoo November 18th, 2012 at 4:08 pm
In response to William Black @ 139

“Great Betrayal” it is, Bill, and I thank you for sharing that term.

I hope that the majority of human beings living in this nation may come, and fairly soon, to understand what is occurring, what is being forced upon the rest of us by the political class, in service to the monied class.

DW

DWBartoo November 18th, 2012 at 4:10 pm
In response to spocko @ 149

Ah, spocko, you do me funnybone great and wonderful good.

Does not the “right” usually murmur, “Considering all the money they are making, they must be doing something right”?

;~DW

Sheila Bair November 18th, 2012 at 4:10 pm
In response to Mauimom @ 109

I’m hoping that because he got re-elected without much help from Wall Street (just the opposite) he will be more independent and appoint people who are not so close to that sector.

spocko November 18th, 2012 at 4:11 pm
In response to bgrothus @ 151

You lol, but I’m quite serious. If you remember a lot of the tea party people said they had a problem with bank bail outs.

And I don’t ask that question just to be snarky. I prep authors for media appearances as well as book them sometimes and Sheila’s PR team has probably pitched her to Fox Business and other shows, I would like to know if they got through and then see how it goes. She said that she is a Republican, so she isn’t some Dirty Hippie, and she did lead a agency that is not hated by the right, she should be able to get on to talk about the book and the issues. If she doesn’t then, if I was her publicist, I would suggest to the bookers at Fox that she has some harsh things to say about Obama’s advisors. They always want to hear that stuff.

Sheila Bair November 18th, 2012 at 4:12 pm

They should have repealed the CFMA, but instead layered on top with new authorities for the CFTC and SEC.

If other countries want our speculative CDS, let them have it. Europe is actually ahead of us in cracking down.

DWBartoo November 18th, 2012 at 4:13 pm
In response to Sheila Bair @ 153

Hmmm.

“Syndicate” … sounds like a crime “family”, Sheila.

Somehow, “innocence” seems long ago lost when it comes to the Big Players.

Cynicism and “gaming” the systems, economic, legal, and political … seem more the case.

DW

bgrothus November 18th, 2012 at 4:13 pm
In response to spocko @ 157

I know you are serious, spocko.

Sheila Bair November 18th, 2012 at 4:13 pm

thanks

spocko November 18th, 2012 at 4:16 pm
In response to Sheila Bair @ 156

Could you possibly float some suggested names that he should be looking to?

I always ask authors, “Who are the banks afraid of? Why? Then what can we do to help realize those fears?”

One woman who we heard the banks were afraid of was Elisabeth Warren. That was when I decided that we needed to get Warren in a position of power.

beowulf November 18th, 2012 at 4:18 pm

Thank you Sheila for coming here to answer questions today. I should have said at the outset, you were far and away the most on the ball govt official during the banking crisis. I hope you have an opportunity to serve in government again.

DWBartoo November 18th, 2012 at 4:18 pm
In response to spocko @ 162

Excellent question, spocko. One hopes that Obama might be looking in, or having some underling checking, to see what is said here, this evening.

DW

spocko November 18th, 2012 at 4:19 pm
In response to bgrothus @ 160

On the other hand, I’m always happy to provide a real LOL!

BTW, Anat Shenker-Osorio’s book, Don’t Buy It, The Trouble with Talking Nonsense about the Economy http://www.amazon.com/dp/1610391772
Said that she is looking at “Fiscal crossroads” instead of cliff.

Krugman is calling the ‘Grand Bargain” the Austerity bomb.

szielinski November 18th, 2012 at 4:22 pm

Thank you Ms. Bair for appearing here and discussing your book.

spocko November 18th, 2012 at 4:23 pm
In response to DWBartoo @ 164

I find it helpful to know what motivates people on both the positive side and the negative said.

The Chocolate bar and the stick. (I mean who wants carrots? Donkeys! I like chocolate!)

When you look at the mortgage problems I looked at what the incentives were for people selling bad mortgages and what were the punishments. If you can only see upside and little downside of course you will sell more of the crappy mortgages to people. We often read about civil penalties and hear, “The cost of doing business” well if that is your attitude, then you are never going to change. Make a billion dollars, pay a 100 million fine and no jail time? You are still winning.

Sheila Bair November 18th, 2012 at 4:25 pm
In response to Mauimom @ 117

No time bomb. Just a missed opportunity. I think prospectively, the paperwork is being handled much better, but there is still a mess to clean up on the legacy loans.

Dear Everyone- This was a lot of fun and you really took me through my paces. I’m going to go get some dinner now and walk two very restless dogs with my also-restless husband. So sorry I couldn’t get to all of these. I will try to do a blog later that addresses issues I haven’t covered.

My Very Best,
Sheila Bair

tuezday November 18th, 2012 at 4:27 pm

I would like to say, my long ago undergrad self, would like to thank you profs for your continuing education. I salute you, now more than ever!!!

CTuttle November 18th, 2012 at 4:28 pm
In response to Sheila Bair @ 168

Mahalo Nui Loa, Ms. Bair for writing the book and all your efforts…!

Mahalo to James, Bev, and all, for another outstanding Book Salon…! *g*

DWBartoo November 18th, 2012 at 4:29 pm
In response to spocko @ 167

Very well said, spocko. The “cost” of “doing business” may always be passed “on” … while personal consequence is actually personal and costly, or should be in “time” … which is “all” that human beings truly have to spend on that level of the “personal”.

Who knows, an appreciation of “time” might lead to an appreciation of life … even beyond one’s own?

Therein lies such hope as humanity must have, in terms of civil society and for the planet’s capacity to support human life …

DW

spocko November 18th, 2012 at 4:31 pm
In response to Sheila Bair @ 168

Thanks! Please do a blog post later on these or come back an answer these after dinner. The book salon remains open for 24 hours.

And I’d like to thank your husband for his service :-) Having a supportive spouse makes all the difference sometimes.

DWBartoo November 18th, 2012 at 4:35 pm
In response to spocko @ 172

I’ll second that comment in all particulars!

DW

dstatton November 18th, 2012 at 4:46 pm

I am a retired FDIC bank examiner (1972-2003), and I keep in touch with some of my former colleagues, one on whom worked closely with you, and they are unanimous in their admiration for your work. I have never been prouder of my former agency. Call me biased, but I always felt that the FDIC was the most effective bank regulator because of its independence and its focus on its primary mission, protecting the deposit insurance fund.

emptywheel November 18th, 2012 at 5:50 pm

Thanks again for such an engaged salon, Sheila, and for your service.

Mauimom November 18th, 2012 at 9:25 pm

Dear Sheila,

Thank you again for spending two hours with us. It’s much appreciated.

As I read back over the discussion tonight, I was struck by this comment of Professor Galbraith’s [@ #6]

Let’s begin with mortgage modifications. Just last Wednesday in Washington — I’m told by someone who was there — Larry Summers stated that in early 2009 there were no viable plans for systemic loan modifications — nothing that would not have undermined the economic incentives for solvent homeowners to pay their mortgages.[emphasis added]

In your response to this – illustrating Summers’ “error” or downright lying — none of us ever focused on the portion I’ve highlighted.

But doesn’t this illustrate a big part of what was going on then [and what continues today]: these guys were just CRAZY about keeping those “economic incentives” for regular folks to pay their mortgages [whether under water or not]. They were NOT so keen on “economic incentives” for assuring that bankers and hedge funds behaved honestly or paid for their errors.

All this talk about “moral hazard” always focuses on the fear that “little guys” will walk away from their mortgages. And all of the “solutions” seek first to assure that bankers & hedge funds will bear no cost for their stupid and risky behavior. Again and again it appeared to me that you and the agency would come up with a solution, but it would be shot down by Geithner et al. on grounds such as this.

In reading your book I was inspired by what I took to be your overriding belief that the law should apply to EVERYONE, and that government has a role in protecting consumers from those who seek to cheat and evade.

Like so many here, I appreciate your service & thank you for it.

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