Sheila Bair and the bailout bank titans

By EmmaZahn on Fri, 09/21/2012 - 1:19am |

As the financial system melted down in the fall of 2008, the Treasury Department gave the nation's biggest banks billions in new capital. Was it all necessary? No, says the former FDIC chief in her new book.

URL:

http://finance.fortune.cnn.com/2012/09/20/bair-bull-horns/?iid=SF_F_River

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Thanks for sharing, EZ.

Sheila Bair, along with former Commodity Futures Trading Commission chair Brooksley Born, on the accounts I have seen, come off as among the saner voices of reason on how to think about the appropriate policy conclusions to draw from the huge changes in the financial sector over the years (former Goldman Sachs high-level executive Gary Gensler, who turned against the Clinton Administration's anti-regulatory stance by 2002, is portrayed as another).

This, from Ron Suskind's excellent Confidence Men, pp. 171-172, on Born:

A showdown of sorts occurred in 1998, when the CFTC's commissioner, Brooksley Born, said that something must be done to better regulate that already sizable world of financial derivatives. Born, once a pioneer in her own right as the first female editor of the Stanford Law Review, found herself across the table from a group of unsympathetic men: virtually every senior financial figure or regulator of that era, from Rubin and Summers to Alan Greenspan and then-SEC chairman Arthur Levitt. The financial services industry had been fighting with strength and success for more than a decade to keep their flash-fire terrain of financial derivatives separate from the rules--such as collateral and clearing requirements or standardized contracts and open trading exchanges--that governed the trading of sleepy, "tangible" products...Born was unconvinced by their pitch of having created a brave new world. A financial product was still a product, she asserted, every bit as sensitive to issues of price discovery, fair dealing, credit and collateral, shortages, gluts, and market panics as were silver or soybeans. Larry Summers, leading a regulatory vanguard of men, disagreed and was soon on the phone, from his office as Deputy Treasury secretary, "with thirteen bankers." He brusquely lectured Born...The next meeting was face-to-face with all the men--including the trio of Greenspan, Rubin and Summers--who said she must cease and desist. They said a golden age was dawning, in which sophisticated investment houses had created new, ingenious ways to manage risk. Born stared them down, quiet, sober, and unmoved. She'd spent her whole life as the lone woman in rooms of supremely confident men; she wouldn't budge. After the meeting, the Clinton Administration's regulatory barons, egged on by Wall Street, went to Congress and had her agency neutered.

What followed was a Cambrian explosion of derivatives traded OTC, or "over the counter," in the dark pools managed by the investment banks, large commercial banks, and related financial firms...

by AmericanDreamer on Fri, 09/21/2012 - 12:27pm

More from Suskind's Confidence Men, pp. 204-205:

On the afternoon of March 9, Sheila Bair girded herself for the next conference call. It was almost one a day--she would be the only woman on the phone with an army of men, many of them with close ties to Wall Street or an unshakeable belief in the miracle of the markets, the freer the better.

And she would be the scourge.

Tension between Bair and the men managing the town's other regulatory warships was rapidly looking like a redux of the battles Brooksley Born fought in the late 1990s with the fraternity of like-minded regulators allied with Wall Street over derivatives regulation.

It there was one difference, it was that Born had been alone. Now there was a small but powerful contingent of the sistehood, and a gender battle, long simmering just beneath the surface of cordial relations among regulatory colleagues, was finally starting to draw notice. With Born, now a Washington lawyer, as their inspirational hero, a team of women--led by Bair; Mary Schapiro, chairwoman of the SEC; Elizabeth Warren, heading the TARP Oversight Panel; and the irrepressible Maria Cantwell--was asserting its primacy. They had virtually all been right, and right early, about the way America's financial system was drifting toward crisis. All of them had been shooed away or shouted down by the men, both those manning Wall Street and those atop Washington's regulatory or economic policy posts...

...virtually all the top posts on Wall Street and at the largest national banks have long been held by men. Though most of the men won't say it, they feel that the nexus of math and risk--and the gaming of both, without flinching--is an area of male inclination. In fact, many of the women agree. They say that's part of the problem.

Few could, at this point, challenge the idea that the country's male-dominated financial industries had powerfully self-destructive impulses. But Geithner was just the latest in a succession of regulatory men, many with a past (or a bright future) in managing money and risk, who felt the town's few female regulators often didn't understand them or the way Wall Street's male Mecca really worked--knowledge that is crucial to being an effective regulator who can alter ruinous behavior.

The women's response, of course, was that they understood the men better than the men understood themselves.

History's judgments, of late, seemed to be bending toward the ladies.

Christina Romer was on the right track but she needed more allies in term one. If Obama does win re-election, he needs to put into key WH, Treasury, and other regulatory agency spots folks from among Bair (bonus--she's a Republican), maybe Schapiro, maybe Laura Tyson, plus some of the gentlemen who seem to get it, such as Krugman, Stiglitz, and Gary Gensler.

It is clear as day from Suskind's account that Obama wanted early on--March 2009--to move much more aggressively to clean up the worst off big banks. (And, I had not known this, he had been reading Krugman avidly and was persuaded by Krugman's advocacy of taking a Swedish vs. Japanese approach towards the most troubled financial institutions early on.) Even Summers, generally much more in line with Geithner in using their ultra conservative Hippocatic oath argument of "First, do no harm" to squelch proposals for government intervention to clean up big finance, was for a time with those who wanted much more aggressive action early on in winter-spring 2009.

But the Administration was early on not that far up the learning curve figuring out how to manage the policy decisionmaking apparatus. And Emanuel, Chief of Staff at the time, instead of acting like a neutral honest broker bringing a range of options to the President for the President's decision, which is what a Chief of Staff is supposed to do, used his position to influence Obama in the direction of his own personal views, which sometimes were at odds with the President's openly stated decisions to his team. Emanuel richly deserved to be fired but Obama is a loyalist, genuinely grateful for all the help his staff provide him, and wasn't willing to do that. He is portrayed as delighted when the Chicago mayor's job opened up to provide Emanuel with a graceful exit.

Apart from his very strong record, another reason Suskind's account rings true to me is that its portrayal of Obama's early MO is consistent with the picture we get from Woodward's book account of the Afpak war decisions. On Woodward's account, Obama is seen as someone who instead of listening to a range of views, making his decision, and then instructing his subordinates to make it happen, tried to negotiate a consensus among his advisors. This tendency, combined with the overly narrow range of points of view represented among the people who happened to be at the meetings, amounted in the Afpak case to a barrier to Obama reaching a decision that was coherent on policy grounds. (To be fair, he may have believed he had no choice but to handle Afpak primarily from a political standpoint that would enable him eventually to wind the war down over a period of several years.)

If Elizabeth Warren wins, and the Democrats keep the Senate, she and Senator Cantwell will be in a position to apply some significant pressure/support to come back at the financial sector issues left unaddressed by Dodd-Frank and other federal policy decisions, which include many of the most serious ones.

by AmericanDreamer on Sun, 09/23/2012 - 11:09am

As much as I am pleased that these women are being applauded for their foresight and good sense, I doubt they will succeed in changing much through new or revised regulation even if they succeed in establishing it. The financial industry is far too adept at avoiding, circumventing and arbitraging outside regulation. They do, however, usually abide by rules and practices agreed to among themselves and can be quite ruthless in punishing deviators -- buh-bye Bear, Stearns and Lehman.

The difficulty they face was illustrated very recently when Schapiro did not succeed in her attempt to establish new regulations of Money Market Mutual Funds (MMFs, MMMFs) as she explained in a WSJ op/ed. Shelia Bair also commented on the loss from her new position with Pew's Systemic Risk Council.

No, I doubt more or different regulation will solve systemic risk because the current system is the problem. The regulatory agencies, FRB, FDIC, SEC, CFTB, in the end are simply enablers offering the illusion of oversight and a gloss of legitimacy to an industry that has gone rogue.

The TBTF institutions are a global oligarchy with the ability to make or break entire regions and countries, e.g. Europe, Libya. What is needed is countervailing power that can only come from stable and legitimate governments*: new or disencumbered national banks that advances in technology and knowledge now make possible for individuals and businesses to bank with direct -- and make it the only bank whose deposits are insured by the government.

by EmmaZahn on Sun, 09/23/2012 - 2:09pm

What is needed is countervailing power that can only come from stable and legitimate governments*: new or disencumbered national banks that advances in technology and knowledge now make possible for individuals and businesses to bank with direct -- and make it the only bank whose deposits are insured by the government.

That's an interesting idea. I would think something like that might stand the best chance of getting serious consideration where individuals--such as the ones I mentioned in my comment--who have shown the greatest willingness to stand up to the power of the incumbent megabanks are holding influential and powerful positions. The existing megabanks could be counted on to oppose such a proposal in the same way as the private insurance companies fought tooth and nail to keep a robust public option out of the HC bill.

by AmericanDreamer on Sun, 09/23/2012 - 3:46pm

The existing megabanks could be counted on to oppose such a proposal in the same way as the private insurance companies fought tooth and nail to keep a robust public option out of the HC bill.

Insurance companies are the 'I' and banks are the 'F' in FIRE, so yes, they would oppose anything that cost them any of their subsidized cash flows.

IIRC, Shelia Bair, as then head of the FDIC, was the one official during the fall of 2008 that even mentioned the possibility of nationalizing any of the banks so she would likely be open to the idea. However, given our current level of economic indoctrination, I do not think nationalizing a private bank is doable. Maybe after the next crash.

What might be possible is to reestablish the US Postal Savings System for the un- and underbanked, 28.3% of households according to the FDIC most recent survey (PDF). This idea could benefit many, many underserved people and USPS at the same time. I wish I could recall where I read that idea. I know it was in an article about the problems USPS was experiencing with decreasing sales and its pension funding commitment. With a good plan, such a bank could be gradually expanded into a viable alternative to private banks.

Likely? No. But it is nice to think it could.

by EmmaZahn on Sun, 09/23/2012 - 8:28pm

I hadn't heard of the US Postal Savings System. If you remember where/who you read that idea I'd be interested to know, to get a sense of how close or not to the mainstream whomever was writing about it is.

When I read your comment I wasn't sure if you were referring to a US government bank or the concept of only insuring deposits of private banks which adhere to specified standards of prudence (what Glass-Steagall did) and transparency (necessary in this day of nontransparent financial wizardry--probably would need to include exchanges for derivatives trades that are deemed safe enough to continue to be legal) and, perhaps, maximum size to create helpful incentives dealing with too big to fail. Obviously during times where normal politics prevail and there is no immediate and widespread public sense of crisis and urgency, all of these kinds of proposals are nonstarters. It might well take another meltdown to create the conditions under which any of these or other farther reaching proposals becomes a live option, unfortunately.

In re to Bair and her views on nationalization, you may know this to be correct. Suskind has her in spring '09 favoring taking down several of the large troubled financial institutions, including Citi, through "resolution", implying a controlled bankruptcy and brief government takeover. (p. 204). (This was essentially the Swedish approach that Krugman had written in support of and that Obama had read and liked. In attempting to combat the predictable hew and cry of "nationalization" and "government takeover", etc., Krugman made a big thing at the time of trying to explain to his readers how this was not a long-term nationalization proposal but that the banks would be returned to private ownership over time as the toxic asset messes were cleaned up, as had been the case in Sweden.)

Romer and Summers(!) were in agreement with Bair, and the former two from the White House staff faced off against Geithner (promoting the stress tests, only, out of concern not to create a crisis of confidence he thought would further damage the financial sector) and Bernanke on the other side during a fateful White House meeting in March '09. During this meeting, Obama after listening to the arguments made it clear he favored Romer/Summers' bolder, more far-reaching approach, which was intended to impose some accountability for reckless behavior and expedite dealing with the toxic asset overhang that was freezing up credit flows.

Obama left the meeting for a time instructing his aides to wrap up. Whereupon Emanuel closed the door and essentially worked to sabatoge his own boss's directive by the time Obama returned, by instructing the meeting participants that what his boss wanted stood no chance with Congress and therefore they had to talk him out of moving in that direction when he returned to the meeting. Which they proceeded to do.

I share these details not only because I find them fascinating--and because they bear on longstanding speculation here and elsewhere about what Obama has been trying to do at various times on some of the big issues, of which this is obviously one--but also because it seems entirely possible that we could wind up in a similar situation not too far down the road so long as the most serious underlying problems remain unaddressed. If we do wind up in a similar situation again, these policy debates will be taking place again, and there will be a "road not taken" (from spring '09) argument that will come into play.

by AmericanDreamer on Sun, 09/23/2012 - 9:20pm

Found it: Postal Banking to the Rescue of the US Postal Service | NewAmerica.net.

When I read your comment I wasn't sure if you were referring to a US government bank or the concept of only insuring deposits of private banks which adhere to specified standards of prudence (what Glass-Steagall did) and transparency (necessary in this day of nontransparent financial wizardry--probably would need to include exchanges for derivatives trades that are deemed safe enough to continue to be legal) and, perhaps, maximum size to create helpful incentives dealing with too big to fail.

What I originally meant and still prefer would be a new central (or co-central) bank. Leave private banks not totally unregulated but definitely unsubsidized. I consider both the FRB Primary Dealer System and FDIC Insurance subsidies to TBTF banks by providing them with the illusion of safety and putting taxpayers directly at risk. There was actually a disclaimer on the FRB-NY website in 2008 warning that being one of its Primary Dealers was not a guarantee by the Fed of their transactions. We know how that turned out. So much for the disclaimer.

Although greatly lauded and possibly very useful when enacted, Glass-Steagall was not, imo, so great by the time it was repealed. So much of it had already been excepted and circumvented and even worse the regulatory arbitrage between Reg Q and Reg D basically created what became known as the shadow banking system.

Thanks for the human interest aspect. I tend to be drawn to the systemic aspects and miss some good stories as a result.

by EmmaZahn on Sun, 09/23/2012 - 11:08pm

This is an idea so simple and good that it's breathtaking. What a great way to use currently under-used post offices. And if the accounts were small, all kinds of people could have one! A whole underclass, currently using cash and prepaid cards, could have actual debit accounts again!

So much better than the below article, where people get a high-interest loan so they can buy a "prepaid" debit card.

by erica20 on Wed, 09/26/2012 - 12:41am

It's just plain stoopid that the USPS doesn't start offering more of the same services that check cashing industry does. (Now raking in more dough than ever, and getting huge, I just recently read--in any article on them, even in business publications, they use the adjective "predatory" like a 10 times.)

The area I live in the Bronx is very mixed income and ethnicity, but the further south you go, it gets poorer, and my Post Office is closer to the lower income areas.. I go there often. They do a bangup business in money orders to pay bills . It's clear that people go to the check cashing places to get cash and then take the cash to the Post Office to buy the cheaper (and more liquid) money orders that USPS sells and then can mail their bills at the same time.

USPS money orders are cash or debit only. They could have their own debit cards with paychecks going on them, they could be getting a lot of that business that the check cashing folks get, most people using their money orders would be happy to be able to do the one stop thing--deposit check, get money orders, mail bills, rather than run allover the place. They could become bankers that way quite easily. Of course, they'd have to stop cutting hours and staff....

by artappraiser on Wed, 09/26/2012 - 2:37am

More on what is happening to the un- and underbanked:

Comptroller Curbs Florida Bank on Prepaid Cards

A good reason for reestablishing the US Postal Bank.

by EmmaZahn on Tue, 09/25/2012 - 11:45pm

Not to mention the "De-Banked."

by erica20 on Wed, 10/03/2012 - 12:14pm

American Banker reviews Bair's book and Felix Salmon defends Geithner

Bair Details Inside Story of Regulatory Clash Over Basel III - American Banker Article: Sheila Bair, former chairman of the Federal Deposit Insurance Corp., nearly succeeded in forcing the largest banks to hold at least 10% common equity capital as part of Basel III rules, but was stymied by Treasury Secretary Tim Geithner.

Sheila Bair against the world | Felix Salmon: Geithner has only a few more months left in his job; once he leaves, he will surely be approached with many juicy offers from publishers. I have a feeling that discretion will win out, and that he’ll choose instead to float effortlessly into the world of grey financial eminences. But if he does choose to engage with Bair, expect sparks to fly. I’d give very good money to read his chapter on WaMu.

by EmmaZahn on Thu, 09/27/2012 - 8:50pm

A real tell for me will be whether, if Obama does win, Tim Geithner, or someone with a worldview and commitments similar to his, is our next Treasury Secretary.

Suskind would not state this as his conclusion but I conclude based on his reporting that Geithner--along with Summers and Emanuel--was during the first two years of this Administration simply insubordinate. They did not seem to understand that they are there to serve the President, to carry out the President's wishes. Some of them might have thought they'd *like* to be the President, or at least have the role of decider-in-chief, on economic policy. And some of them clearly did believe they knew better than the President, apparently concluding from that that therefore it was ok to do what they thought rather than what the President wanted. Never mind that no one voted for Larry Summers or Rahm Emanuel or Tim Geithner.

Our country could, for starters, sure use a Treasury Secretary who understands that s/he works for the President and is obliged to carry out the President's wishes whether they agree or disagree with a particular decision. We also could really use a Treasury Secretary who does not see his job as the Wall Street megabanks' chief lobbyist in Washington, strategically located inside the Executive branch of the US government. I tried but was unable to discern, in Suskind's rich account, any evidence of Geithner making any distinction whatever between what Wall Street megabanks wanted, versus what was in the broad public interest. At least during the first 2 years of this Administration, which is as far as Suskind's account extends.

It was famously said during the post-WWII era heyday of General Motors that what was good for General Motors was good for America. For Tim Geithner, what is good for high finance (or, more accurately, what high finance says it wants--the two do not appear to be the same) is good for America. At least during its heyday, when that sentiment was expressed, General Motors didn't arrange for bailouts from the taxpayers, at any time, let alone after their own disastrous and irresponsible decisions had left them in desperate need of one.

Bair's book is getting favorable reader reviews at amazon so far. Have you read it, or, do you plan to?

by AmericanDreamer on Wed, 10/03/2012 - 10:32am

Bair's book is getting favorable reader reviews at amazon so far. Have you read it, or, do you plan to?

Not yet. Yes. I will probably read any insider history written. I have spent so much time down this particular rabbit hole since Bear, Stearns was swallowed by JP Morgan in Spring 2008. It was surprisingly difficult during the cascading crises that followed to figure out what was going on and astounding how little leading economists knew about how money actually flows through the system as well as what and where the incentives are that channel it. I try to keep up with the professional stuff but there is just so much of it -- and the verbiage! Some days I feel like my head will explode. Simple narratives sound soothing.

by EmmaZahn on Wed, 10/03/2012 - 11:22am

Among the ones you've read on the financial crisis, are there particular ones you liked or found especially helpful, that folks who are not really deep into the weeds on this like you clearly are might hope to be able to at least partially grasp? How about ones you didn't like or did not find on the mark? Just curious, if you're interested and have time to respond. If not, no worries...

by AmericanDreamer on Wed, 10/03/2012 - 11:37am

Not really. Most of what I read is online and often more than I can absorb. I did buy a textbook that was referenced often in footnotes to FRB staff reports. Bonus: It turned out to have an interesting cover considering it is a pre-crisis edition.

Thanks for asking though. It prompted me to check my Amazon wish list where I discovered that A History of the Federal Reserve by Allan Meltzer that I wanted to read now has Kindle editions for much, much less that the hardcovers. Not exactly light reading but necessary for the line of inquiry I am pursuing.

by EmmaZahn on Fri, 10/05/2012 - 11:00am

Since I've quoted and otherwise drawn extensively from the Suskind book in this thread I'll link to some of the pushback the book generated at the time of publication, a little over a year ago, in a Washington Post piece : http://www.washingtonpost.com/politics/book-portrays-dysfunction-in-obama-white-house/2011/09/16/gIQAdxloYK_story_1.html

I love Summers' classic non-denial denial in his quoted email. So typical of how this town operates.

by AmericanDreamer on Wed, 10/03/2012 - 1:45pm