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Former Regulator Bair Recounts Behind the Scenes of Financial Crisis, Bailouts

Former FDIC chair Sheila Bair says there’s plenty of blame to go around for the financial crisis, but the foremost culprit is greed. Judy Woodruff talks to Bair about her new book, "Bull By the Horns," which assesses what role different figures from Wall Street to the White House and the regulatory offices played in the crash.

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    Now, a new book by a former insider takes a critical look at the government's actions during and after the financial crisis. The fallout from the crisis and those decisions is still reverberating on the campaign trail this fall.

    Sheila Bair was a key player as head of the FDIC, one of the nation's chief bank regulators. She worked with Treasury Secretary Tim Geithner, Federal Reserve Chairman Ben Bernanke, and former Treasury Secretary Henry Paulson, before stepping down last year.

    Her new book is called "Bull By the Horns."

    Judy Woodruff sat down with Bair yesterday.


    Sheila Bair, welcome.

    SHEILA BAIR, former chair, Federal Deposit Insurance Corporation: Thank you for having me. Nice to be here.


    So let's just — just to get some background out of the way, who and what do you think is responsible for the financial collapse of 2008?


    Oh, there's plenty of blame to go around.

    I think at the end of the day, it was greed. It was just greed that was unchecked by government and government regulators. This idea that this is all caused because the government wanted poor people to have mortgages, that's just not true.

    I think expanding access to homeownership for low-income people was a rationalization, but it was not a driver. A lot of people were making a lot of money, making a lot of irresponsible loans to frankly the vulnerable parts of our population that didn't understand these mortgages to begin with, and regulators didn't step in to stop it.


    And, broadly, what is it that you believe the Bush and the Obama administrations did right and did wrong to deal with it?


    Right. Well, I think the missteps going up to the crisis really were both the Clinton and Bush administrations.

    I think that the three big ones are we didn't raise bank capital requirements. We didn't constrain the ability of large financial institutions to use leverage, to use borrowed money to support their risk-taking.

    Instead, government took a lot of actions to allow investment banks in particular to take on even more leverage and fund their operations with borrowed money, instead of their own equity capital.

    The Federal Reserve Board had the authority to set mortgage loaning standards across the board for everyone, banks, non-banks, mortgage brokers. They didn't do that.

    And then, finally, of course — and this was in the Clinton administration — Congress just said that nobody is going to regulate derivatives. The SEC couldn't regulate them. The CFTC couldn't — over op-exchange derivatives.

    The SEC, the CFTC, even state insurance regulators were told hands off op-exchange derivatives market, so we don't think they need be to regulated.


    So, are you saying government had its own share of responsibility for what happened.


    They did.

    Yes, but I would say this is because industry lobbying to stop these kinds of steps from being taken.


    And what about in response to the crisis once it happened? What was done right and what was wrong?


    Well, right.

    Well, I think, as I have said before, I really question — the Bear Stearns bailout was done in March of 2008. We were not in a crisis situation. We were in a deteriorating situation. I never have seen a good analysis to justify that.

    But I do think when the government stepped in to bail out Bear Stearns and support its acquisition by J.P. Morgan Chase — and Chase was requested to do that — that that set up an expectation that the government wasn't going to let these other institutions fail.

    And so that sent a signal to Lehman Brothers that was having a lot of problems that they were probably going to get a bailout too. And they were a lot bigger than Bear Stearns. So they decided, well, they didn't really take steps to correct themselves.

    And because the market had an expectation that there were going to be bailouts, people didn't take steps on their own to fix their problems.


    And you're very critical in the book of the whole bailout process…


    Right. I am, yes.


    … and said these banks should have been let go.

    As you know, the government, the administration pushes back, saying, if we had let these institutions go, the problem would have been much worse, and what we have done has at least stanched the bleeding. We are now back, we are growing, it's slow, but we're growing.


    Right. Right.

    Well, I would agree, at the end of 2008, we were in a situation that was spinning out of control. And we needed to do something, so we threw a lot of money at it.

    But the major institutions that were insolvent, they were having what we call liquidity problems, so they were having a hard time because everybody was just so fearful. They were having a hard time borrowing money to contingent-fund their operations.

    But they had equity capital. They were not insolvent. Citigroup was insolvent. Merrill Lynch was insolvent. AIG was clearly insolvent. But the rest of the institution I think could have bumbled through it. They might have needed some liquidity support, but they had enough capital to absorb their losses.

    But in 2008, we were dealing with a lot of unknowns. And so we threw a lot of money at it. And I guess I can live with that more.

    But in 2009, we had a stable system at that point, and that was really the time when we needed to start imposing some pain and accountability.

    Very sick institutions like Citigroup should have been fundamentally restructured and broken up. But we didn't even — we couldn't even get conversations going about that.


    Do you feel you did enough to speak up internally against all this?


    Yes. When Congress did authorize all this TARP money, it was my clear understanding — and one of the reasons I participated in these bailouts — was that we were going to get a big loan modification program, wide scale, to prevent unnecessary foreclosures from occurring.

    And it never happened. Didn't happen under Bush. Didn't happen under Obama. So I do — that does still make me angry. And, no, I spoke out about it a lot. I was being criticized for speaking out about it a lot.

    On the bailouts, maybe I should have done more. We were asked to guarantee all the debt of all the financial institutions. And we said, no, we weren't going to do that. There is a — I was — I recall an anecdote where I felt like I was ambushed in a meeting in Hank Paulson's office. He and Ben were there. Tim Geithner was on the phone.

    They hand me a script that says the FDIC is going to stand behind all liabilities in the financial system. And I wasn't going do that.

    So, we dialed that back. They wouldn't even — there is an anecdote in my book where we were at least trying to say, let's ban bonuses. If we take any losses on these bailout initiatives, then executive bonuses should be banned.

    And the other regulators wouldn't even support us on that. So, yes, I did push. I didn't get much help or support. I was kind of surrounded. We were there by ourselves. Maybe I could have done more. I don't know. How many times can you run into a brick wall at 90 miles an hour? But we did what we did.


    Going forward, Sheila Bair, what is it that you see in the prescriptions of either President Obama or Gov. Romney that will fix the problem as you see it today?


    Right. Well, both say they want higher capital requirements. And that's good.

    But the problem is, we're hearing people talk good games, but actually getting the rules in place — we have more capital in the banking system now because the market has demanded it and because we have had this stress-testing process, which is a discretionary process.

    But the rules still allow a lot of leverage. We need to get the rules changed. They both say they want to do that, but when you gets specifics, well, how much leverage do you think is appropriate, where would you set the capital requirement, you really don't hear many details.

    They both say they want to end too big to fail, thank goodness. Even Alan Greenspan has said, if they are too big to fail, they are too big. Right? So if they can't be — if they can't fail without hurting the rest of us, then they need to be broken up now.

    But, again, Dodd-Frank has provisions to empower regulators to do that now. But will Mr. Obama or Mr. Romney appoint people who are willing to use that authority, who are committed to ending too big to fail?


    So, if are you a voter out there trying to make a decision, how do you make a decision then, based on hearing what you just said?


    Well, that's one of the reasons why I wrote the book. I tried to break down some of these issues.

    I don't think this gets changed. The financial services industry got too big. They got too big as part of our economy. They got too big in their political influence in Washington. And it is on both sides of the aisle. It is in both political parties.

    So unless people educate themselves — I know people are busy and you have got all sorts of things to learn about and prepare for. But that is one of the reasons I wrote the book, to describe some of these simple concepts and simple steps that need to be taken, and make some accountability with our elected officials to support regulators and appoint regulators who are willing to do it.


    Last question. So, are you optimistic this gets fixed or not?


    I am not. I really am not.

    We heard — there was — thank you to Jim Lehrer. There was a Dodd-Frank question — I appreciate that — at the first debate.

    The second debate, which was driven by town hall participants, we didn't hear much. And they're not really talking about it on the campaign stump.

    And my fear is, they are both worried about alienating all this political money that comes in from the financial sector. So, again, I think people have to educate themselves, speak up, get angry, raise this, or it's not going to get fixed.


    Sheila Bair, the book is "Bull By the Horns."

    And we're going to ask you to stick around and ask you a few more questions online.


    OK. Great.


    So, our viewers can hear more of what you have to say.

    Thank you.


    Sounds great. You bet.


    And you can watch more of Judy's conversation online.

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