Bull by the Horns

by Sheila Bair

  Chase’s trading debacle pales in comparison to the problems at another megabank, Barclay’s, a multi-trillion-dollar institution based in the United Kingdom with significant trading operations in the United States. Barclays has admitted to U.S. and U.K. regulators that its traders tried to rig a key interest rate, the London interbank offer rate, or Libor, from mid-2005 to early 2009. Libor is used to determine interest rates on over $350 trillion of financial products used by businesses, households, and state and local governments. These include interest rates swaps, mortgages, credit cards, and variable rate notes and bonds. Nothing is more vital to the integrity of the banking system than the process by which interest rates are set. Yet, according to the government’s enforcement actions, Barclays routinely and blatantly sought to manipulate this key rate and colluded with other banks to do the same. One Barclay’s email shows two traders talking about breaking open a bottle of champagne to celebrate their rate fixing. It appears that most of the misconduct occurred at Barclay’s New York trading desk, which was subject to the jurisdiction of the NY Fed, led by Tim Geithner. Other major U.S. banks may also be implicated. Secretary Geithner has defended himself by pointing out that he had suggested reforms to the U.K. authorities in 2008 when reports of abuse in setting Libor came to his attention. But the reforms he suggested did not fix the fundamental problems with Libor, and it appears that the NY Fed never sought to investigate reports of illegal behavior. The government’s enforcement action was the result of an investigation conducted jointly by the CFTC, U.K. authorities, and the Justice Department, and did not involve Barclay’s primary U.S. regulator, the NY Fed.

  What does all of this say about our financial system and our regulators? It says that a culture of greed and shortsightedness continues to permeate our financial system, a culture that has infected even the best managed institutions and goes undetected by their executives and boards as well as their regulators. It is a culture that reflects a craven desire for personal profit that overrides any understanding or care about harm to others. Indeed, it is a culture that celebrates exploitation of an unwitting public for the sake of a fast buck. It is a culture that could not care less about preserving a bank’s name and reputation or maintaining long-term customer relationships. But should we be surprised? In 2008 and 2009, we bailed out the risk takers, coddled their managers and boards, heck we even made sure that the high flyers who brought AIG to its knees got their year-end bonuses. Enforcement actions, to the extent they have occurred, have been paid mostly by banks and their shareholders, not the individuals responsible. Small wonder that no one on Wall Street has learned a lesson given the hand slaps they received for the subprime mess

  I have been very candid and open about the policy disputes I had with my regulatory colleagues during the crisis and the years that followed. Let me hasten to say that notwithstanding our disagreements, I believe that they were trying to do what they felt was best for the country, and that they still are. The problem is that the financial regulatory system is so insular; regulators start to confuse what is best for large financial institutions with what is best for the broader public. They are not the same. It is true that we want financial institutions to be healthy and profitable in order to prevent failures and ensure their capacity to lend to the real economy. But their profitability is not an end unto itself; it is a means to an end. An institution that is profitable is not necessarily one that is safe and sound or one that is serving the public interest. All of the large financial institutions were profitable in the years leading up to the crisis, but they were making big profits by taking big risks that ultimately exploded in their—and our—faces.

  When regulators confuse their regulatory mandate with maintaining bank profitability, the inevitable outcome is the system we have now—timid regulators fearful of being too tough on financial institutions because of the negative impact on their bottom lines. Members of Congress, fed by generous campaign contributions, as well as prospects of employment for themselves and their staffs when they leave office, can also be a part of the problem. They too have an interest in promoting the profitability of large financial institutions that fund the campaigns that help them stay in office and represent a potential source of lucrative jobs and consulting contracts once they leave. I wish I could say that Congress serves as a disciplining influence on the regulatory process, but throughout my career I have observed just the opposite. Whether it is deregulating the OTC derivatives market or using the appropriations process to stop necessary rule makings, Congress, more often than not, has been part of the problem, not part of the solution. Congressional pressure reinforces the tendency of regulators to be timid when dealing with the powerful financial interests that they regulate. If they antagonize the industry too much, they may find Congress withholding funds that they need to operate or stripping them of authority. This is exactly what happened to Brooksley Born when she tried to rein in derivatives trading.

  So how does this get fixed? It has to start with you. Anger with our dysfunctional financial system and regulatory process cannot be confined to polarized advocacy groups on the left and right. Main Street—the heart and center of American democracy—needs to weigh in. It is not hard to fix these problems. We simply lack the political will and fortitude to get the job done. The reforms I have outlined in this book would not be difficult to implement, notwithstanding what financial industry lobbyists would have you believe. The tragedy of the crisis is that so much of it could have been avoided with a few simple measures. The Libor scandal is another example where the fix was straightforward and obvious. Banks should have been required to base rates on actual, bona fide transactions. But regulators let them use their “judgment,” leaving the door open to sustained abuse.

  The president needs to appoint—and the Senate needs to confirm—strong, independent people to regulate financial institutions and markets, people who understand that their regulatory obligation is to protect the public, not the large financial institutions. When Tim Geithner testified before Congress shortly after becoming treasury secretary, a congressman asked him about the effectiveness of regulation, and he proudly responded, “I have never been a regulator, for better or worse.” He did not even understand that part of his job as president of the NY Fed was to regulate some of the nation’s largest financial institutions. Indeed, he seemed offended292 that the congressman asking the question thought that he was a regulator.

  Let your elected representatives know that you are tired of the continuing scandals, and that financial reform matters to you. Demand that the presidential candidates explain in detail how they propose to fix these continuing problems. Financial reform needs to be an issue as central to American electoral politics as the economy and jobs. Indeed, we will not get our economy on a sustainable path until we redirect our major financial institutions out of the gambling parlors that our derivatives and securities markets have become and back into the business of supporting the credit needs of the real economy. Tell the politicians that you support much tougher capital requirements for big financial institutions, assessments on their risk taking, and that you want your FDIC insured deposits to support lending, not their high risk securities and derivatives trading. Tell them that you want an end to speculation in the credit derivatives markets and that you want to abolish captive regulators like the OCC.

  When you read about problems like the Libor scandal or the JPMorgan Chase trading losses, don’t accept gobbledygook about regulators needing more information or needing more power—after Dodd-Frank, they have all the power they need. And don’t let members of Congress off the hook by holding an oversight hearing or issuing a press release to tell everyone how shocked they are (while at the same time pressuring regulators behind the scenes not to be too tough).

  Life goes on, as Robert Frost observed. But financial abuse and misconduct don’t have to. Tell the powers in Washington that you want these problems fixed, you want them fixed now, and that you will hold all incumbents accountable unti
l the job is done.

  Sheila Bair

  July 16, 2012

  Acknowledgments

  Many thanks to the numerous FDIC staff who sacrificed their time in helping me reconstruct various events, chronologies, and bank and economic data. In particular, I would like to thank Mike Krimminger, Michele Heller, Andrew Gray, Jason Cave, Rich Brown, Chris Newbury, Paul Nash, Jim Wigand, and Jesse Villarreal. Thanks also to Evan Fitzpatrick for his top-notch research and data gathering, and Will Kryder for his help with the photos.

  I would also like to thank my representatives at the William Morris Agency, Jennifer Rudolph Walsh and Eric Lupfer, my editor at Free Press, Dominick Anfuso, and the entire Free Press team, ably led by Martha Levin. Thanks to you all: Sydney Tanigawa, Suzanne Donahue, Larry Hughes, Carisa Hays, Nicole Judge, Phil Metcalf, Erich Hobbing, Eric Fuentecilla, and Leah Miller.

  Finally, thanks to my family for all of their patience, support, and tolerance for the reams of file folders and binders scattered throughout the house during the eight months it took me to write this. Particular thanks to my husband, Scott, for serving as my in-residence senior editor, to Preston for his excellent copy editing, and to Colleen for her moral support and the healthy meals she cooked for us when I was busy writing.

  About the Author

  Sheila C. Bair served as the Chairman of the Federal Deposit Insurance Corporation from June 2006 through June 2011, during one of the most tumultuous periods in the history of the U.S. financial system. Called “the little guy’s protector in chief” by Time magazine, Bair wielded a steady hand in protecting bank depositors while handling hundreds of bank failures, including some of the nation’s largest financial institutions. Long before the 2008 financial crisis, Bair was an early and consistent advocate for tougher regulation of large financial institutions, tighter mortgage lending, strong consumer protection standards, and aggressive foreclosure prevention measures. In recognition of her tireless advocacy of Main Street interests, she was the recipient of numerous awards, including the John F. Kennedy Profile in Courage Award and the Hubert H. Humphrey Award. She was twice named the second most powerful woman in the world by Forbes magazine, behind Germany’s Angela Merkel, and was also recognized by the Washington Post and Harvard University as one of seven of America’s Top Leaders.

  A lifelong Republican and Kansas native, Bair has spent most of her career in public service, including stints as a senior advisor to Senate Majority Leader Robert Dole and a top Treasury Department Official in the Bush Administration. She holds an undergraduate and law degree, and honorary doctorate, from the University of Kansas, as well as honorary doctorates from Amherst College and Drexel University.

  Bair currently resides in Chevy Chase, Maryland, with her husband, Scott Cooper, and two children, Colleen and Preston. She continues to work on financial policy issues at the Pew Charitable Trusts and writes a regular column for Fortune magazine. She also chairs the Systemic Risk Council, a private sector group dedicated to effective reform of the financial system, whose members include former Federal Reserve Board Chairman Paul Volcker and former Treasury Secretary Paul O’Neill.

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  Photographs

  On June 26, 2006, I was sworn in as the nineteenth Chairman of the Federal Deposit Insurance Corporation. I decided to pass on the big, formal ceremonies that frequently accompany a swearing in, opting for a low-key event with career FDIC staff. Delivering the oath of office is Robert Feldman, the FDIC’s corporate secretary, and holding the Bible is Alice Goodman, who headed the FDIC’s legislative affairs division. FDIC file photo

  On September 19, 2008, I rang the opening bell at the New York Stock Exchange to celebrate our seventy-fifth anniversary. I was accompanied by FDIC staff whom we selected by lottery. It was an auspicious date. Coming only days after the collapse of Lehman Brothers and the implosion of AIG, markets were in free fall, and the confidence of the financial system was being tested. A few hours earlier, I had been on the phone with Henry “Hank” Paulson, negotiating the terms of an emergency program Treasury was putting together to protect money market funds, which were facing massive withdrawal requests. FDIC file photo

  On October 13, 2008, CEOs of the nation’s largest banks were summoned to the Treasury to meet with me, Hank Paulson, Ben Bernanke, Timothy Geithner, and other regulators. The message was simple: the banks were instructed to accept $125 billion in capital investments from the government. While some were reluctant to accept, others, like Citi CEO Vikram Pandit (on right, with Morgan Stanley head John Mack on the left) were quite happy to take the money. Citi would later need two more bailouts to avert failure in spite of the $25 billion it agreed to accept that day. Mark Wilson/Getty Images

  On October 14, 2008, we lined up to announce financial stabilization measures, including debt guarantees and capital investments in the nation’s largest banks. From left to right, Treasury Secretary Hank Paulson, Federal Reserve Chairman Ben Bernanke, me, then New York Federal Reserve President Timothy Geithner, Comptroller of the Currency John Dugan, Securities and Exchange Commission Chairman Christopher Cox, and Director of the Office of Thrift Supervision John Reich. Mark Wilson/Getty Images

  As the crisis deepened, Congress became increasingly anxious about addressing what went wrong. Here I am testifying with Hank Paulson and Ben Bernanke at a November 18, 2008, hearing of the House Financial Services Committee where committee members were highly critical of Treasury’s refusal to address mortgage restructuring as provided in the TARP legislation. My relationship with Hank, while often productive, was severely strained by our disagreements over the need for a loan modification program. Chip Somodevilla/Getty Images

  I presided over the FDIC through the banking crisis, which proved to be one of the most tumultuous periods for the seventy-five-year-old agency. When the crisis hit we were immediately catapulted into the roles of fire chief and rescue squad. This picture, taken for a Financial Times article, featured me unwittingly standing in front of a giant eagle crest in the lobby of the FDIC. While I may have looked like an avenging angel, Robert Kuttner painted a less celestial image of me in the American Prospect, calling me “the skunk at the picnic” for my disagreements with my colleagues over what I considered to be lax regulation and overly generous bailouts. Brandon Thibodeaux

  In September 2009, former President Bill Clinton asked me, along with JP Morgan Chase CEO Jamie Dimon, to participate in a panel discussion on the state of the banking industry. Dimon managed his bank well during the crisis, though in 2012 his bank would stumble badly on complex derivatives bets made by an errant trader. But in 2009, he was the king of the roost, with a fat, profitable balance sheet, while I was dealing with the challenge of maintaining reserves adequate to handle an increasing number of bank failures. My grimace was in response to his boast that he thought the FDIC was “creditworthy” and would be happy to lend to us any time. Bloomberg/Getty Images

  Here I am at a conference on small business lending, hosted by the FDIC. Small businesses were among the many victims of the 2008 crisis. Big financial institutions, with their highly leveraged balance sheets, pulled back drastically on small business loans. Community banks—which provided about 40 percent of bank small business lending—did a better job, but they also had to pull back as the economy deteriorated and loan losses grew. At the conference, I was joined by Ben Bernanke (to my right), Senator Mark Warner (D–Va.); Tom Donohue, the head of the U.S. Chamber of Commerce; and moderator Steve Liesman from CNBC (far left). FDIC file photo

  Sitting next to President Obama at an April 10, 2009, meeting at the White House. The president held several meetings with all the major financial regulators
early in his term, but I don’t think Treasury Secretary Timothy Geithner (left) and NEC Director Lawrence Summers (center) liked us having access to him. By the time the summer of 2009 rolled around, the meetings had mostly stopped. Bloomberg/Getty Images

  During the crisis, famed personal finance guru Suze Orman volunteered to help us reassure the public on the safety of FDIC insured deposits. Orman donated substantial personal time to our public education campaign, including appearing in four televised public service announcements (PSAs). When I arrived at the New York studio we used for filming the PSAs, she offered me the use of her hair stylist to pretty up before the shoot. After a considerable amount of clipping and blow-drying, the stylist gave me a mirror so that I could see the masterpiece. My hair was identical to Suze’s, except that the part was on the opposite side. My kids called it my “Suze-do.” Courtesy of Suze Orman

  In 2009, I was honored to receive the Kennedy Library’s Profiles in Courage Award from Caroline Kennedy. My then eight-year-old daughter, Colleen, accompanied me to the ceremony. She had read picture books about Caroline growing up in the White House and riding a pony on the White House lawn. She had envisioned a young Caroline and was surprised to meet the grownup one. Public Domain

  Here I am testifying before the Senate Banking Committee in July 2009, proposing the creation of a systemic risk council, with SEC Chairman Mary Schapiro and Federal Reserve Board Governor Dan Tarullo. The SEC supported the council but the Fed initially resisted it. Congress did eventually approve the creation of a council, but it lacked the teeth I had originally envisioned. Chip Somodevilla/Getty Images