The former FDIC chair talks about her role on the Systemic Risk Council and her assessment of the U.S. financial crisis, as detailed in her book Bull by the Horns.
Former FDIC chair Sheila Bair
Tavis: Sheila Bair is the former chair of the FDIC whose tenure as America’s top banking watchdog coincided with one of the most turbulent times, of course, in our economic history. Her heroic efforts to take on Wall Street excess and stand up for average Americans is the subject of the new text, “Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself.” Sheila Bair, good to have you on this program and here in L.A. for a change.
Sheila Bair: Thanks for having me.
Tavis: Good to have you on.
Bair: Thank you.
Tavis: I’ll get to the book in just a second.
Tavis: Let me start with the news of this week. I suspect that everybody knows in 48 hours, for the first time, Mr. Romney and Mr. Obama will come face-to-face in a debate that we expect, what, 50 million people to tune in to see. If you were Jim Lehrer Wednesday night, where these issues are concerned, issues of the economy, how we avoid what’s happened already happening again, how we avoid falling into another recession.
Around those issues, what ought to be asked, what ought to be debated Wednesday night?
Bair: Well, I think they should be challenged about whether we want a sustainable financial system, one that supports the needs of the really economy, and will both presidents appoint people to their economic team who will see the economic interests of the country broadly, from the standpoint of Main Street and not narrowly from Wall Street to financial institutions.
Will they appoint regulators who will be independent of Wall Street? Will they support them when they need to make decisions that industry lobbyists may not like? Will this president protect regulators when Congress tries to beat up on them because they’re trying to be independent of industry and protect our broader interests?
Do they recognize, really, the crucial connection between our economic growth and prosperity and a financial system that’s not out there taking wild risks that are going to get us in trouble again, but ones that are making prudent loans and supporting our real economic needs?
Tavis: I’m not naïve in asking this question, but if you were going to, to your first question, at least.
Tavis: If you were going to appoint regulators and others who were not connected to, not bought and bossed by Wall Street, without looking for names per se, where would you look for those types of people?
Because it seems that whenever you talk about financial issues, the people who end up running these institutions, whether it’s the Treasury Department or the president’s Council of Economic Advisers – we could run the list all day – they always seem to come from the same pool of choices.
Bair: Right, right. Well, I think that’s true, and it’s true, it’s just not – it’s bipartisan, Republicans and Democrats, it’s on the Hill, it’s in the regulatory community. That’s not to say there aren’t good people. There are. But we need more of them.
First of all, I would say to the people who are appointed to regulatory positions, will you commit to never work for a financial institution you regulate? Not just work for them, but don’t go to a law firm or an accounting firm that works for them.
I think sometimes the people who actually could be the best regulators are people who used to be in the industry but were good stewards and had good reputations, but are at the end of their careers. They understand the issues better than anyone, and I think they can frequently make very good regulators.
You have the industry background, but you also have people at the end of their career that have no interest in ever going back. People who are have proved that they’re also good former regulators with proven track records. Some academics, I think, can also make very good regulators. Elizabeth Warren would have made a very good regulator as the head of the consumer bureau, and hopefully will make a very good senator.
So there are people out there, but the president needs to find them, stand up for them, and get them confirmed.
Tavis: How much of this, to your point now, is the problem of a revolving door? This is always the case, of course, in Washington. In your book, which we’ll get to in a moment, you talk about the cozy relationship between Wall Street and Washington.
So it’s always the case in the nation’s capital, but it seems especially to be the case where money matters are concerned, that there’s a revolving door of persons who work in the industry, come into government, go back into the industry – I could do this all day.
Tavis: From Larry Summers to – there’s a long list of people. But how much of this is a problem?
Bair: Well, I do, and it’s not so nefarious, it’s just really accepted, and people start to view the world from the perspective of large financial institutions. They aren’t able to differentiate between a broader economic interest and how Wall Street institutions see the world, which is why you need much greater diversity of perspective.
They think it’s a problem. It’s not just with regulators, it’s with the Hill, too, Congress and the staff, and it’s not a problem just with political appointees. Examiners can go work for industry too, which is why I suggested there be a lifetime ban, especially on examiners.
We want that to be like the Foreign Service. This is a prestigious thing. We pay them well, we train them well, but we make a commitment, they need to make a commitment to never go work for the industry that they’ve regulated.
Tavis: Since you went there, inside the book directly now, how much of the drama that we have endured these four years of the Obama administration has specifically to do with the people that he chose, with bad personnel choices?
Bair: Right. Well, I think he did – I’ve tried very hard – I obviously had a lot of disagreements with Secretary Geithner throughout my tenure, and I have tried very hard and I do believe this. I think Tim always has tried to do what he thought was best for the country.
But I do think his perspective and Larry Summers’ and other, these folks are really part of the Bob Rubin, when he was secretary of the Treasury in the Clinton administration, and really part of his team. That was very much during this deregulatory frenzy, self-correcting markets, Wall Street is kind and the fount of vocal, this prosperity that’s going to benefit us all.
It was that kind of a mind-set, and I think we needed a fresh mind-set. I had suggested Paul Volcker to be secretary of Treasury and I didn’t succeed in that. But I do think they just had a different philosophy and a different perspective about how you get to a broader economic interest. They thought that taking care of Wall Street would take care of a broader economic interest, and I wanted to impose some pain and suffering and accountability on Wall Street.
Tavis: How would you describe – obviously the reader will get a chance to get into this in detail, but for the sake of our conversation, how would you describe in retrospect your relationship with Tim Geithner, and I ask that specifically because you mentioned a moment ago that you had a bumpy relationship.
Tavis: But more than that, here’s a guy, according to news reports, who was pushing for your ouster.
Tavis: So how do you work with somebody who you read in “The New York Times” is pushing to have you ousted?
Bair: Yeah. Well, that was difficult, and he never told me that directly, and I reached out to him after those press reports were leaked and tried to have a conversation with him about that. I think that was one of the many problems and reasons there was so much tension, was that he didn’t communicate a lot with me directly, and I think that would have helped.
I did feel with Tim that he viewed me more as an adversary, someone to force into taking a position as opposed to someone to sit down and have a two-way conversation with, and part of that may have been our different institutional rules. I, as chairman of the FDIC, I had a very specific public mandate, and we also have a process for dealing with field institutions that is very rough.
It’s as rough as the bankruptcy process, probably tougher. So I think there were some institutional tensions, especially when he was at New York Fed and the FDIC, about what our roles would be and how we would intersect.
So it was a difficult relationship, but as I said, I don’t question his motives. I think he was doing what he thought was best for the country, but I think he had very much of a perspective that was formed by his tenure with Bob Rubin, and then as head of the New York Fed, which also functions very closely with Wall Street banks, it just gave him a different perspective.
Tavis: You say in the book that when you were writing this up, Sheila, you were getting more and more upset, more and more angry, as you had to re-live all of this.
Bair: Right, I did, yes.
Tavis: Because the more that you got in the rearview mirror, hindsight, has allowed you to see that this could have been avoided.
Bair: I think it could have been, a lot of it. You always have downturns. That’s part of the system. But leading up to the crisis we should have had mortgage lending standards. The Fed had the ability to write mortgage lending standards. They didn’t.
Leverage – banks and other big financial institutions using other people’s money to take risks as opposed to their own money and their own shareholders’ money. Leverage was going up during the crisis and the Fed was trying to implement some new rules that would have allowed big institutions to taking on even more leverage, which we fought tooth and nail.
We should have been raising capital standards and instead, the FDIC was pretty much fighting a lonely battle to keep the other regulators from increasing leverage for large financial institutions.
Derivatives is another, a prime example too. Congress basically passed a law that prohibited anybody from regulating what were called op-exchange derivatives. Those are not traded on regulated exchanges. The SEC couldn’t regulate them, the CFDC couldn’t regulate them, the insurance regulators couldn’t regulate them, and as a result when we got into the crisis we had hundreds of trillions of derivatives that were based on these mortgages that were going bad.
How the derivatives performed would be based on how the mortgages were performing, and nobody had good information about those markets. So those were three really, I think, key mistakes that were made leading up to the crisis that if we had handled things differently, we could have averted it.
The reason it happened, though, was industry lobbying, and the regulators should have stood up to it and done better, but the pressure was relentless from the industry, and you still see it now as they try to implement Dodd-Frank.
Tavis: I’m glad you make that last point, because I wanted to go there, so let’s go there now.
Tavis: You were, in fact, a regulator.
Tavis: How much of this crisis had to do with regulators who just got rolled, essentially?
Bair: Well, a lot of it did. I think – I have some anecdotes. You just can’t win with the industry, and they have lodged not – listen. I think it’s important – not all banks are evil. I think there were some banks that were not part of the problem, and I think there’s still some banks that are trying to help the reform process.
But there are a lot of industry lobbyists who were really irresponsible prior to the crisis. I tell an anecdote about how in late 2006 and early 2007 the FDIC was pushing very hard to tighten lending standards for subprime loans for the banks that we insured, and we were getting some resistance from the other regulators and the mortgage banking industry as well opposed us.
They came in; they had what we call these intimidation meetings. So 20, 25 came in, sitting around a big conference table, all telling me how I was going to undue (unintelligible) credit. It made me so angry when these folks would say, “Low-income people aren’t going to be able to get mortgages if you can’t let us make these abusive loans.” I just wanted to throttle them.
Then they said, when I said to them, I said, “Well, these aren’t affordable loans. You can see the delinquencies going up.” Then they started bashing the borrowers, saying, “Well, these people, they’ll just – instead of paying their mortgage they’ll just go do something else.”
I said, “How do you feel that way?” It was very offensive. So we went ahead and we finally in the summer of 2007, we finally got the higher, tougher lending standards done, which sounds like a lot of time, but for bank regulators that’s lightning speed.
Then in the fall of 2007 the problem is we knew a lot of the problems were already there. So many of these horrible subprime mortgages had been made. They were quite abusive – steep payment resets, big prepayment penalties, they were terrible products.
So we could see the delinquencies and the foreclosure rates and the defaults going up, and we had brought a bunch of industry people in along with Treasury and the other regulators to try to get to agree to start restructuring these loans in a wholesale way, just convert them back into a 30-year fixed mortgage.
Get rid of these toxic loans, convert them back into a 30-year fixed-rate mortgage. We had what we thought were assurances that they were going to do that. They didn’t do that, and so in the fall I went to Wall Street and gave a speech, and I took them to task and I said, “We’ve got this wave of foreclosures. Why aren’t you helping? Why aren’t you getting these loans restructured?”
And a hand goes up in the back of the room and here we go again. He says, “Well, these people, you can’t help these people.” The same disdain for borrowers. “We lower their payment, they’re just going to go buy a flat-screen TV.” And I said to them, “Well, if you felt that way, why did you fund these mortgages to begin with?” I’ll never forget – he said, “Bad regulation.” So in January of -
Tavis: So it’s not our fault, it’s the regulators.
Bair: Yeah. So here – yeah, so so much for self-correcting markets, these masters of the universe and the millions of dollars they had made, and their bonuses and their fees, and now they’re blaming the regulators for all these loans that were going bad, where in January they’d been in my office saying, “You can’t tighten lending standards. You’re going to constrict credit.” In the fall they were saying, “It’s all your fault because you didn’t tighten lending standards,” basically.
You have experiences like that, it really weakens your interest in listening to anything they have to say, frankly.
Tavis: Yeah. You mentioned Dodd-Frank a moment ago. That is supposed to be the way forward.
Bair: Yes, yes.
Tavis: That’s supposed to be the teeth, if you will, in banking reform in this country. There are a lot of us, and I say “us” as in Tavis Smiley included, who think that this is pablum, to some degree; that there really isn’t any real bite in Dodd-Frank.
Bair: Yeah, yeah.
Tavis: But you’re the former head of the FDIC. Tell me how tough Dodd-Frank is and whether or not it’s tough enough?
Bair: Well, Dodd-Frank gives regulators authorities to be very tough, but it’s truly up to the regulators how aggressively they want to use those tools. I would agree with you – I think the response and implementation so far has been somewhat tepid and incremental and timid.
I think part of that, again, is this relentless industry lobbying. I regret to say that members of Congress have sometimes tried to stop regulation or put pressure on the regulators. The SEC and the CFDC, who regulate the securities and the derivatives markets, have had their – they have to be funded every year through a congressional appropriations process, but other regulators are self-funded.
They assess fees on the industry, so they don’t have to go to Congress for funding. But the SEC and the CFDC do, and their appropriations, industry lobbyists have tried to hold back their appropriations to stop reform.
So it’s a very difficult situation which is back to your first question, would a president – the president needs to stand up and support a good regulatory process, support reform, provide – have the back of the regulators, because they’re really getting a lot of pressure from Congress.
But the regulators need to stand up to it too, and the Volcker rule was a prime example of something that could be very positive to constrain risk-taking on Wall Street. But the rule that was proposed has a lot of exceptions to it; it’s very detailed and complex.
I think it’s going to be very difficult to enforce. They haven’t finalized it yet. I’m hoping that they simplify it and strengthen it before they do, but again, it’s up to the regulators to use these tools. Dodd-Frank gave them the tools, but they have to use them.
Tavis: Here’s an impossible question. Let me ask it anyway. Is it possible, Sheila, and if so, how would you rein in these lobbyists? Again, I’m not naïve in asking that question. I know how Washington works.
Bair: Right, right.
Tavis: But they run this operation.
Bair: They do. They do.
Tavis: I’m just trying to figure out how, where these issues are concerned, it’s possible to rein lobbying in.
Bair: It is, and it’s certainly not – it’s not a problem unique to the financial services industry.
Tavis: Sure, sure, sure.
Bair: I think that’s why there’s such a low confidence level with the public for the government now, and I think a lot of it is because of the perception that these well-paid lobbyists are pretty much running everybody and everything.
It’s a good question. I think having independent regulators, one of the recommendations I make, the lobbyists also, another way they harass regulators is by threatening to tie up their Senate confirmation.
That has been a real problem with a number of them, and I suggest that people who are nominated should have the right of an up or down vote as opposed to basically in the Senate now if a lobbyist can just convince one senator to tie up a confirmation, it can take months. They can – so they should have a guaranteed right to a vote.
But it is a real problem, and it’s always the right balance between the First Amendment and right to advocate versus the need to have a process with integrity.
Tavis: There are two or three stories – there are a lot of great stories in this book, but there are two or three that come to mind immediately that I want to just literally set up and let you tell in your own words, because you’re – such a great job of re-telling these stories in the book.
Bair: Thank you.
Tavis: One of the great things about you writing this book is that we get a chance to hear from somebody who was in the room when this went down.
Tavis: So there’s a scene in the book, a story where you tell of the moment that President Obama is going off about these AIG bonuses.
Bair: Yes, yes.
Tavis: A hundred and sixty-five million dollars in bonuses -
Bair: Yes, he was angry, yes.
Tavis: – that we hear about, and he’s going off in the room. I’ll let you tell the story of that particular meeting.
Bair: Right. Well, I was driving in to work and I got a call on my BlackBerry and I answered it in hands-free mode, and it was Tim calling, actually. Very friendly, warm, saying the president wanted to see me at 10:00 that morning.
So I said, “Okay,” and he didn’t say what it was about. So I went into the – I went over there and was ushered right into the Oval Office, and the president was sitting there in a chair with another – a vacant chair by him in front of the fireplace, and there were couches on either side of where he was sitting.
Tim and Larry were both sitting there facing each other, and Rahm was standing over on the far end of the office by a window, and I just really couldn’t figure out what was going on.
The president asked me to sit down and so I did, and he said, “Well, did you read about the AIG bonuses?” and of course I had. Everybody’d read it. It was amazing. They paid all these millions in bonuses to these idiots, frankly, who had done all the trading (laughter) and had gotten AIG into trouble.
So I just knew what I’d read in the paper. So I was a little kinder than that. I said, “Well, yeah, I read about it,” and Tim and Larry were sitting there looking very uncomfortable. He wanted to know if I had any thoughts about what he could do about it. I didn’t have the facts, and the public explanations that Tim had put forward was that they were legally obliged to pay these bonuses.
I took that at face value, but I still thought it was outrageous. So I told them about the FDIC’s process, and that one of the things that we have is that we can take control of an institution and repudiate contracts. Those contracts don’t matter anymore.
Sometimes you do need to pay people from a transitional perspective, but you can control that – who you want to keep, how much you want to pay them. So I basically – I tried to be constructive. I didn’t want to express the outrage that I knew the president was feeling too.
But that was really when I first pitched to him the idea of having a reform that would give the FDIC or somebody like the FDIC the power to put these very large financial institutions into a bankruptcy-like process where they would be punished and those contracts could be broken, and he was later very supportive of this piece of the Dodd-Frank bill.
But it was clear to me he was quite upset, and all my interactions with him, I think he gets it. There’s no doubt in my mind he’s a Main Street guy. So I do think he did it for all the right reasons. He wanted to provide continuity. He was worried about the financial system being stable, and certainly Tim and Larry have good mechanical skills there.
But I don’t think – I just never sensed that they had the same sense of urgency or importance, especially in helping homeowners, who were at the crux of this problem. They were very focused on these big, large financial institutions.
Tavis: There’s another story – again, there are many, but there’s another story of the big meeting that we all remember.
Bair: Right, yes.
Tavis: We covered it on this program and everybody recalls the big meeting, and everybody who was anybody was in this meeting about the TARP funding. I’ll let you, again, tell the story, but I was blown away by the first question.
Here the country is being told that these institutions are, if they fail, the country fails. If these banks go under, we go under. You all have this emergency meeting in Washington, everybody, again, who’s anybody in the banking industry is there.
Bair: Right, right.
Tavis: And the first question gets asked by BofA. I’ll let you tell the story.
Bair: Right. (Laughter) Well, so, it was – I can’t remember the exact sequence, but the question that stood out the most in my mind as the most outrageous was John Thain, who was then the head of Merrill Lynch, who had just sold himself to BofA.
He was worried about compensation, were there going to be any restrictions on his compensation if he took this bailout money, and of course of the all the institutions there in that room, Merrill Lynch was one of the worst. They were (unintelligible).
Tavis: They need more help than anybody.
Bair: They needed more than anybody. Well, Citigroup maybe needed a little more.
Tavis: Yeah, maybe so.
Bair: But Merrill was in pretty bad shape. Yeah, he’s asking about bonuses. It was just unbelievable to me. (Laughter) Where are the guy’s priorities? I just (unintelligible).
Tavis: How is this going to impact my executive pay package?
Bair: But it is part of, it’s kind of reflective of the attitude, the entitlement attitude that we’re the big, important rich guys and we’re owed all this compensation and all this support, and government come help us because we’re the center of the economy.
It just really makes me angry, but I do think it’s not that unusual in this Wall Street culture. Not everybody’s like that, but it was just astonishing to me. And Ken Lewis, who was the CEO of BofA, to his credit, said, “I don’t think it’s appropriate to be talking about compensation.” But yeah, that was the first thing John Thain said.
Tavis: My time is almost up, but I’d be remiss to close this conversation without asking, because again, you talk about it openly in the book, and I think – I appreciate the fact that you admit – this is my phrase, not yours – but you admit in the book that there were moments of, again my word, not yours, hesitation or trepidation about walking into certain rooms -
Bair: Right, yeah, no kidding.
Tavis: – knowing that you were going to be the only woman in the room and that you had to go in and try to put your size -
Bair: Right, right, yeah.
Tavis: – put your foot down.
Bair: My size seven, yeah.
Tavis: Your size seven down in the room. So what was it like being the only woman during this major crisis, oftentimes the only woman in the room?
Bair: Well, you never know if it’s about gender or about something else, but there was a sense, throughout the crisis, that – I was always being invited to a meeting where the real meeting had already been held and they’d kind of made the decision of what they were going to do, and then this meeting was about convincing me and not having an interactive conversation with me.
Not always. I think Ben Bernanke liked and respected me and I think we had a good relationship and that he did listen. Paulson, actually, too. There was some tension with us on the loan modifications. I was very disappointed in him. But we did talk from time to time and I do feel that he would frequently listen to my point of view.
But with Tim I never felt that was the case and too often than not I felt like they were kind of off making their own decisions, then asking me to come in and then let me know what was going on.
There’s another one about how they wanted me to guarantee all the financial system’s debt, which we said we were not going to do, and scaled that back a lot. But I think young women ask me about this because they had that sense, too; that why are they being excluded.
You kind of drive yourself crazy wondering if it’s about gender or not, and I think just accept it as a fact of life and understand you’re going to have to work harder and be better prepared and hone your arguments, but don’t give up. You have a right to be heard, you have the right to be part of the decision-making, and just keep going back at them.
Tavis: Twenty seconds to go here. There are a number of names floating around Washington right now for who will take Tim Geithner’s place at the Treasury Department. He’s already said he’s not going to serve in a second term. He tried to get out in the first term to get back to New York.
Bair: Yeah, right, right.
Tavis: So he’s not going to stick around for a second term, along with Hillary Clinton. There are number of folk going to get out of there if the president wins reelection.
Bair: Right, right.
Tavis: So I’ve seen your name on a number of short lists of people.
Bair: Right. (Laughter)
Tavis: So the question is, if asked, would you serve?
Bair: Well, I’m not looking for a government – I’m going to dodge that question because I’m really not looking for a government job. But I kind of, when I was writing this book, which is a very straightforward and candid book, I knew I would be alienating some people.
But I just decided that – it could compromise a government job later. But I just decided it was more important to get the facts on the table so people could understand there was dissention, there were different perspectives, and it could have been avoided and it can still be fixed. The Main Street voters really need to rise up, though, and make this an issue in the elections.
Tavis: Well, you’re right. These kind of truth-telling texts can compromise futures in Washington – all the more reason why I appreciate the fact that you wrote it.
Bair: You are so welcome. (Laughter)
Tavis: No, I mean that. The book is called “Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself,” written by the former head of, the former chairman of the FDIC, Sheila Bair, who I’ve been delighted to have on this program.
Bair: Great. Thanks, Tavis.
Tavis: That’s our show for tonight. Until next time, thanks for watching, and as always, keep the faith.
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