Outgoing FDIC chair discusses the $8.5 billion settlement that Bank of America made with institutional investors.
FDIC chair Sheila Bair
Tavis: Sheila Bair is the chairman of the FDIC who has served under Presidents Bush and Obama during one of the most turbulent times in all of American history. On July 8th she will be stepping down from her post, but does so after winning bipartisan praise for her handling of the banking crisis. She joins us tonight from Washington. Chairman Bair, thank you for your time. Delighted to have you on this program.
Sheila Bair: I’m glad to be here. Thank you.
Tavis: Because it is breaking news I suspect you might not be able to say anything about it, but I want to raise it anyway at the top of this conversation for Americans who may not have seen the news earlier today – Bank of America announced plans today to set aside $14 billion to pay investors who bought securities it assembled from mortgages that later soured.
Without talking about the case specifically, because I’m sure you won’t, what should the American people make of this move by B of A?
Bair: Well, I think I can only talk about this issue generally. I never comment on open and operating institutions. But I do think it’s important for all banks who have been involved in the origination and servicing of some of these troubled mortgages to fully identify where their legal exposure may be and identify that, quantify it and seek to remediate it.
I think this litigation has the potential of being a big drag on the recovery of the housing market and the broader economy, so the sooner that we can identify it, address it and get beyond it, I think, I the better.
Tavis: How does it feel to sit where you have sat, to have sounded the alarm early on when you did, and apparently nobody listened?
Bair: Well, I think some people listened but perhaps they didn’t fully acknowledge or act, and it has been frustrating. I think we did a lot of things right during the crisis and I think the government and the regulators and the Treasury Department, that should be acknowledged.
One thing we never really effectively did was address this problem at the loan level, at the borrower level, and that’s really where the problem started and ultimately where the problem needs to be tackled and solved before we can get our housing market going again.
Tavis: Does that mean that borrowers and not banks are to blame?
Bair: Well, no, that doesn’t mean that at all. It takes two to make a loan, and there were a lot of bad practices, bad lending practices here, there were some borrowers who took advantage of the situation, but at the end of the day we have a lot of troubled mortgages, mortgages that people can’t afford.
Some of them, the loan itself was structured badly and other situations; they’ve lost jobs or have faced other economic hardship. But we need to have an orderly process for dealing with this, and that means to see if borrowers can qualify for mortgage modification if they are in distress.
If they can, that should happen. If they can’t then that should be explained to them, and then I think we should also pursue other alternatives to foreclosure, such as cash for keys or short sales. The foreclosure process is backed up significantly. I think there’s something like 2.3 million loans in the process of foreclosure right now.
It’s becoming a dysfunctional market and I think for those who can’t have the economic wherewithal to stay in their house, exploring some alternatives to help get the house back into the hands of someone who perhaps can afford it with relocation assistance or short sales, perhaps, which would involve principal write-downs, those are the types of strategies we should pursue.
I think this is really in everyone’s economic interest to tackle this. Our economy needs to have a healthy housing market, and the housing market can’t find its equilibrium, it can’t find its bottom until we start clearing this tremendous overhang of foreclosed properties.
Tavis: I recognize as head of the FDIC I am preaching to the choir raising this issue with you specifically, but there have been books, as you well know – I’m sure you’ve read many of them – there have been books and documentaries done about this, and I ask you directly and forthrightly, why is it that nobody has paid?
If you talk about the banking industry and all that was done to rape and pillage and take advantage of the American taxpayer and the money that we put forward to bail them out, nobody to this date has paid. Isn’t that untenable?
Bair: Well, I think there are different ways to pay. We have sort of seen some criminal prosecutions, and some of those have worked up to fairly senior levels. Colonial Bank is one where we have had some criminal convictions at this point.
I think there are also – some of this behavior may not have been criminal, but it certainly was egregious, and bringing civil suits against them, we do that a lot, against officers and directors of those who mismanaged failed banks and cost our deposit insurance fund money.
We’re quite aggressively suing them and seeking to recover not just money from insurance proceeds but personal assets where they’re available. So I think accountability can also take the form of the wallet, and in some cases those are cases that are easier to prove as well.
But I think throughout this crisis and leading up to the crisis the lack of accountability was a key problem. People making short-term decisions to make a lot of money up front without thinking about the long-term consequences of their actions, and folks need to be held accountable. That’s how markets work – you need to pay for your mistakes.
Tavis: To your point now, and I totally agree with it, why, though, is it that we should believe that this won’t happen again? There are a lot of us who don’t see the evidence as yet that we are protected, the American taxpayer, that is, from this ever happening again.
Bair: Right. Well, I think we have better consumer protections now. We have stronger lending standards, and there’s more in that in progress. With the new consumer agency I think you will have an agency focused specifically just on consumer protection, making sure that the protections are strong but also understandable.
The disclosures are understandable, the legal rights are understandable. Our consumer laws really have been, when we have had them, have been too complex. So I think we are making progress and we’re raising capital standards for large financial institutions. That will also hem in some of their risk-taking. We’re doing compensation reform, providing better regulation of derivatives oversight.
So these are all initiatives taken in large part as a result of the Dodd-Frank financial reform law, and I hope your viewers out there will support the continuation of this process, because regulators are not always popular and we get a lot of pushback from the industry sometimes. But I think if the general population supports these initiatives, we can get a lot more done.
Tavis: What does this Wall Street crisis say to the rest of the world, the economic world, the financial world, about the stability and sustainability of this industry?
Bair: Right. Well, I think there’s still some challenges ahead. It’s certainly much more stable than it was a couple of years ago. The loan quality, the delinquencies and charge-offs for loans have been receding, so that is improving.
There were a lot of bad loans that were made, loans that should not have been made, loans that were unaffordable to borrowers. We’re working through those, and that situation has improved. But there’s still a lot of challenges. The housing market is one; I think the instability we’re seeing in Europe is also something we need to keep a careful eye on.
Our fiscal situation, too – I think there needs to be a long-term plan to deal credibly with our fiscal problems because that, if investors, those who buy our government debt, lose confidence in our strength and will to stand behind our U.S. government obligations, that could have a very negative impact on interest rates, which in turn would hurt the real economy.
Tavis: You suggested earlier something that we all know – that regulators aren’t often that popular in Washington or –
Bair: No, they aren’t, no.
Tavis: – in New York, for that matter.
Bair: Yeah, that’s right. (Laughter)
Tavis: So I ask –
Bair: How about California? No. (Laughter)
Tavis: How about to California to Carolina? All across the country, yeah. (Laughter) But I ask this in all seriousness – how difficult has it been for you in your role to be the champion, to fight for the little guy, given what you’re up against?
Bair: Right, right. Well, it has not always been easy, but I will say I think it’s important to differentiate. Not everybody in the industry is bad. I think there are some good players, some people who want to do the right thing. There have been some disagreements.
I think and hope that we, at least at the FDIC, we’ve not made ourselves popular with a lot of banks, but I think we do have their respect, and they should, because the FDIC did a lot to stabilize the system during a crisis that was brought on by a lot of excessive risk-taking.
So we’ve not been completely popular with everyone but I think people respect the job that we’ve done, and it is our job to protect the public, not to protect banks, and that’s been true of my tenure and I’m sure it will be true of the future leadership of the FDIC.
Tavis: So speaking of your tenure, here’s the exit question. There are a lot of folk in Washington, as I said earlier. You’ve gotten bipartisan praise for your handling of the crisis, but a lot of folk in Washington concerned that if Elizabeth Warren isn’t the person selected to run the new protection agency, Sheila Bair now exiting the FDIC, who’s going to look out for average Americans, number one, and number two, have you decided what you’re going to do next?
Bair: Well, I think my successor, Marty Gruenberg, he’s been nominated to be the chairman. He will become the acting chairman when I leave. He has a long track record of consumer protection.
I don’t know what’s going to happen with the bureau head, but I know Elizabeth has had a big hand, obviously, in setting it up and hiring very talented people, and I think some of the people that she has recruited are under consideration to be nominated to be the bureau head. So I think there will be people with a strong consumer protection bent and I think that’s good and appropriate and really essential.
In terms of what I’m going to be doing next, I’m going to be writing a book and I’m going to be joining a policy foundation and doing a couple of nonfinancial boards and some public speaking, and I will continue to speak out on this issue.
Clearly I will still be involved in financial policy with the foundation, not with the government, going forward. But I remain committed to these issues and I think there are a lot of other academics and others who will speak out and continue to make sure that consumer protection gets the focus that it deserves.
Tavis: Well, if there’s a book forthcoming I’m sure that means we’ll talk again.
Bair: Okay. (Laughter) Okay, I hope so.
Tavis: The chairman, the outgoing chairman now, of the FDIC, Sheila Bair. Chairman Bair, thanks for your time. Appreciate it.
Bair: You bet. Thank you.
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