by Sheila Bair
A May 2010 issue of Time magazine dubbed Elizabeth Warren (left), Mary Schapiro (center), and me “The New Sheriffs of Wall Street.” I was somewhat amused that I was being called a “new” sheriff. Mary and Elizabeth came to office with the Obama administration, while I had been around nearly four years and had the battle scars to prove it. Reprinted with permission of TIME Magazine. Copyright © 2010, May 24
After a long and contentious battle, the financial regulation bill known as Dodd-Frank was signed into law on July 21, 2010. I was honored to stand beside Ben Bernanke and my friend Elizabeth Warren, who had championed the creation of what would later become the Consumer Financial Protection Bureau, as the president spoke and greeted us. Dodd-Frank is a good, albeit imperfect law. Many of its provisions were watered down as a result of industry lobbying and, in some instances, at the behest of Timothy Geithner and his surrogates. Bloomberg/Getty Images
At my first meeting of the Financial Stability Oversight Council on September 30, 2010, expectations were high. I was joined by Ben Bernanke and Timothy Geithner—a potentially powerful alliance—but for all of the pomp and circumstance, the council still has not lived up to its promise. Brendan Hoffman/Getty Images
Here I am with my beloved family—my husband, Scott Cooper, and my son and daughter, Preston and Colleen—at my farewell party one day before I left office. Few people realize what incredible personal sacrifices public officials make to meet the demands of their jobs. A few months earlier, I had attended my son’s high school graduation dinner. It broke my heart that I hardly knew any of his friends or teachers. Scott made substantial sacrifices to attend all the parental events that I missed. Because of him, our kids never resented their absentee mom but rather took pride in my work. FDIC file photo
Notes
Chapter 1: The Golden Age of Banking
1. For whatever reason: Speculation at the time was that Diana’s nomination had run into stiff opposition by members of the Banking Committee who had strong ties to the National Rifle Association. Diana was, and still is, the companion of New York City Mayor Michael Bloomberg, who had antagonized the NRA with tough gun regulation in the city.
2. In June 2006: 2001, 2002, and 2006 FDIC budget information is available at http://www.fdic.gov/about/strategic/report/index.html.
3. That pervasive attitude: In the 1980s and early 1990s, about 750 savings and loans failed from a combination of inadequate regulation, high-risk lending, and steep spikes in interest rates. The deposit insurer of those institutions, the Federal Savings and Loan Insurance Corporation, went bankrupt. The agency was abolished, and its insurance functions were transferred to the FDIC.
4. John Bovenzi: John was a valued adviser, but he was controversial with many FDIC employees because of his role in the staff cutbacks that took place before I arrived. He left about half-way into my tenure.
Chapter 2: Turning the Titanic
5. Office of Thrift Supervision: The 2010 Dodd-Frank financial reform law abolished the OTS and provided that the head of the new Consumer Financial Protection Bureau would serve on the FDIC board instead.
6. CAMELS: Bank examiners use a CAMELS system to evaluate the risk profile of banks. CAMELS consists of six components: Capital, Asset quality, Management, Earnings, Liquidity, and Sensitivity to market risk. Each component receives a score of 1 to 5, and based on these scores, the bank is given a composite rating of 1 to 5. Banks with CAMELS of 1 and 2 are generally viewed as safe. Banks rated 3 warrant additional examiner attention, and banks rated 4 or 5 are put on a special list of troubled banks kept by the FDIC and are viewed as being at risk of failure. However, historically, only about 20 percent of banks put on the troubled-bank list actually do fail.
7. by the end of 2006: FDIC, “Quarterly Banking Profile, Fourth Quarter 2006,” www2.fdic.gov/qbp/2006dec/qbp.pdf, p. 1.
8. “given the insignificant risks”: Steve Barlett to Sheila Bair, letter re deposit insurance assessments, October 7, 2006.
9. “The banking industry”: ABA press release, “New Deposit Insurance Premium Rates Far Too High, Says ABA,” November 2, 2006. No longer available online.
Chapter 3: The Fight over Basel II
10. Basel Committee: In 2010, the Basel Committee membership was substantially expanded to encompass the G20 nations, bringing in China, India, and other developing nations.
11. “loss-absorbing”: In addition to capital requirements, banks are also required to hold reserves against losses that are “estimable and probable” on loans and other assets. Under accounting rules, loan-loss reserves must be tied to expected losses, and bank managers must be able to provide specific information to support their analysis of expected loss, e.g., a large employer may close a plant in a community the bank serves. In contrast, there are no accounting limitations on the amount of capital a bank can hold. Thus it is available to absorb unexpected losses.
12. the FDIC fought: Though the FDIC was alone among regulators in opposing Basel II, we did receive support from some in the academic community, most notably Wharton’s Richard Herring, one of the nation’s foremost academic experts on bank regulation. See “The Rocky Road to Implementation of Basel II in the United States,” Atlantic Economic Journal, November 2007, pp. 411–429. See also “Implementing Basel II: Is the Game Worth the Candle?” in Basel II and the Future of Banking Regulation, ed. Harold Benink, Jón Daníelsson, and Charles Goodhart, special issue of Financial Markets, Institutions & Instruments, vol. 14, no. 5, 2005.
13. Even as Europe later plunged: See, e.g., Barclays Capital Research, “Can You Trust Risk Weightings at European Banks?” April 6, 2011.
14. one of the Fed’s regional banks: The Federal Reserve System is made up of a central governing body, the nine-member Federal Reserve Board, and twelve regional banks spread throughout the country. The regional banks are responsible for the supervision of banks and bank holding companies located in their regions. Thus the New York Fed was responsible for the oversight of the big New York bank holding companies, including Citigroup and JPMorgan Chase. As previously discussed, the FDIC-insured banks owned by these holding companies weres regulated by the OCC.
15. I reluctantly agreed to issue: FDIC, “Risk Based Capital Rules: Notice of Proposed Rulemaking on Modifications to the Risk-Based Capital Framework (Basel IA),” December 26, 2006, www.fdic.gov/news/news/financial/2006/fil06111.html.
16. our staff analysis showed: Jason Cave, email to Sheila Bair re, Basel II Strategy Bullets, May 16, 2007.
17. Indeed, our studies showed: FDIC, staff note to the Basel Committee, “Stocktaking on Supplementary Measure of Capital Adequacy,” October 2006.
18. a speech I gave: FDIC, “Remarks of Sheila Bair, Chairman, Federal Deposit Insurance Corporation; Before the Basel Committee on Banking Supervision; Merida, Mexico, October 4, 2006,” www.fdic.gov/news/news/speeches/archives/2006/chairman/spoct0406.html.
19. That action by the SEC: MIT’s Andrew Lo has argued that the SEC’s actions were not responsible for investment banks taking on additional leverage after 2004. See “Reading About the Financial Crisis: A21-Book Review” (January 9, 2012), www.papers.ssrn.com/sol3/papers.cfm?abstract_id=1949908. He bases his argument on the fact that prior to the SEC’s 2004 rulemaking, there were no capital requirements that applied to an entire securities firm; thus there was nothing for the SEC to “lower.” (Lo acknowledges that the SEC did have capital rules for the broker-dealer subsidiaries of these firms, which it also loosened.) Lo’s views, which are based on statements made to him by SEC staff responsible for the agency’s adoption of the Basel II rules, ignores the detrimental impact that bad regulations can have on market discipline. Indeed, when the SEC had no consolidated capital standards applying to securities firms, the market demanded higher capital levels of those firms. However, once the SEC created the illusion of government capital oversight, the market deferred to the weak government standards and tolerated higher levels of leverage at them. This is clearly an instance where no regulatio
n would have been better than bad regulation. Lo also ignores the fact that the SEC’s actions allowed these firms to escape tougher capital rules used by the Federal Reserve Board.
20. “If anything goes wrong”: Kevin Drawbaugh, “US SEC Clears New Net-Capital Rules for Brokerages,” April 28, 2004, http://securities.stanford.edu/news-archive/2004/20040428_Headline08_Drawbaugh.htm.
21. had replaced Sue Bies: Sue resigned from the Fed in March 2007.
Chapter 4: The Skunk at the Garden Party
22. CRE loan balances had grown: Mark Carlson and Gretchen C. Weinbach, “Profits and Balance Sheet Developments at U.S. Commercial Banks in 2006,” http://www.federalreserve.gov/pubs/bulletin/2007/pdf/bankprofit07.pdf, July 2007, table on p.A40.
23. the quality and performance: CRE delinquency rates were highest among institutions with assets above $100 billion during the crisis, and lowest among those with less than $1 billion in assets. See email from Chris Newbury, FDIC, to Sheila Bair, re CRE Charts and Data (May 4, 2012).
24. By the end of 2006: Mortgage Bankers Association Press Release, “Delinquencies and Foreclosures Increase in Latest MBA Delinquency Survey (March 13, 2007), www.mortgagebankers.org/newsandmedia/presscenter/50974.htm Report.
25. In the end, we compromised: Board of Governors of the Federal Reserve System, “Federal Financial Regulatory Agencies Issue Final Statement on Subprime Mortgage Lending,” June 29, 2007, www.federalreserve.gov/newsevents/press/bcreg/20070629a.htm.
26. Insured thrifts actually grew: Office of Thrift Supervision, “Fourth Quarter 2007 Thrift Industry Report Graphs and Tables,” February 20, 2008, www.ots.treas.gov/_files/127400.pdf.
27. “There was an explosion”: Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, January 2011, http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf, p. xvii.
28. a “careful review”: “Subprime and Predatory Mortgage Lending: New Regulatory Guidance, Current Market Conditions, and Effects on Regulated Financial Institutions: Hearing Before the Subcommittee on Financial Institutions and Consumer Credit of the Committee on Financial Services, U.S. House of Representatives,” March 27, 2007, www.docstoc.com/docs/19817420/SUBPRIME-AND-PREDATORY-LENDING-NEW-REGULATORY-GUIDANCE-CURRENT-MARKET-CONDITIONS-AND-EFFECTS-ON-REGULATED-FINANCIAL-I, p. 18.
29. “The mind-set was”: Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report, p. 96.
Chapter 5: Subprime Is “Contained”
30. However, the effort met: See, e.g., B. Applebaum, “Do Homeowners Need Protection from Lenders?,” The Washington Post, June 6, 2006.
31. Bachus was forced: Author’s interview with Congressman Barney Frank, February 7, 2012.
32. “field preemption”: Under the U.S. Constitution, federal laws may preempt contrary state laws. Typically, this occurs when a state law takes a contrary position on a specific matter lawfully addressed in a federal law. So-called field preemption is rarer and occurs when federal law addresses a broad category of matters and is said to “preempt the field” against any state laws that address that category. In bank regulation, the OTS and OCC have argued that federal standards on credit and underwriting standards preempt all state laws on those subjects.
33. And prior to 2006: Average ninety-day delinquency rate from 1979 to 2006. See C. Mayer, K. Pence, and S. Sherlund, “The Rise of Mortgage Defaults” (November 2008) www.federalreserve.gov/pubs/fed/2008/200859/200859pap.pdf.
34. So far, the major banks: Donal Griffin, “Bad Home Loans Top $72 Billion in ‘Colossal Failure,’ ” February 8, 2012, www.bloomberg.com/news/2012-02-08/faulty-loans-top-72-billion-as-banks-seek-legal-deal-mortgages.html.
35. They held more than $4 trillion: FDIC 2006 Quarterly Banking Profile, Fourth Quarter, 2006, available at fdic.gov/qbp/2006dec/qbp.pdf.
36. By mid-2007: Board of Governors of the Federal Reserve System, “Speech: Chairman Ben S. Bernanke at the Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structure and Competition, Chicago, Illinois,” May 17, 2007, www.federalreserve.gov/newsevents/speech/bernanke20070517a.htm.
Chapter 6: Stepping over a Dollar to Pick Up a Nickel: Helping Home Owners, Round One
37. Loan servicing has become: The top five servicers are Bank of America, Wells Fargo, JPMorgan Chase, Citigroup, and GMAC.
38. “The fact that a loan”: Nomura Fixed Income Research, “Modify This!—Policymakers Are Wrong to Push for Loan Modifications to Help Defaulted Borrowers,” June 22, 2007, www.scribd.com/doc/19606927/Nomura-Modify-This-Policy-Makers-Are-Wrong-to-Push-for-Loan-Modifications-to-Help-Defaulted-Borrowers.
39. “conflicts between different classes”: Nomura Fixed Income Research, “Sub-prime Mortgage Loan Servicing and Loss Mitigation,” May 18, 2007, www.securitization.net/pdf/Nomura/SecRealEstate_18May07.pdf.
40. bond investors took a beating: See, e.g., Al Yoon, “Investors Sour on Subprime Bonds,” The Wall Street Journal, January 7, 2012, http://online.wsj.com/article/SB10001424052970204331304577144803354669424.html.
41. Following our efforts: United States Senate Committee on Banking, Housing, and Urban Affairs, “Dodd Unifies Industry Members, Consumer Representatives to Help Preserve American Dream of Home Ownership,” May 2, 2007, http://banking.senate.gov/public/index.cfm?FuseAction=Newsroom.PressReleases&ContentRecord_id=e4507b48-341e-423b-8221-e994e25323ba&Region_id=&Issue_id=.
42. issuing guidance: Board of Governors of the Federal Reserve System, “Federal Regulators Encourage Institutions to Work with Mortgage Borrowers Who Are Unable to Make Their Payments,” April 17, 2007, www.federalreserve.gov/newsevents/press/bcreg/20070417a.htm.
43. I do not think that the other regulators: In May of 2012, OCC was cited by the Treasury Department’s inspector general for numerous deficiencies in its examination of the big banks’ mortgage-servicing operations. Specifically, the Treasury IG found that “OCC examination procedures during the period 2008 through 2010 were not sufficient in scope or application to identify significant weaknesses in national banks’ foreclosure documentation and processing functions. During this time OCC did not consider foreclosure documentation and processing to be an area of significant risk and, as a result, did not focus examination resources on this function.” See Office of the Inspector General, US Treasury Department Audit Report, OIG-12–054 Audit Report, “Safety and Soundness: OCC’s Supervision of National Bank’s Foreclosure Practices,” May 31, 2012.
44. “These guys will step over”: Another reported source of opposition to loan modifications was hedge fund managers and other investors who had “shorted” the housing markets. This means that they had placed large financial bets on something called the ABX index, which tracked defaults on subprime mortgages contained in a select number of securitization pools. The more such mortgages defaulted, the more profit for those who had shorted the index. To the extent that loan modifications reduced the number of defaults, ABX shorts would lose money. See, e.g., “Bear Stearns at Center of New Subprime Firestorm,” June 7, 2007, www.housingwire.com/news/bear-stearns-center-new-subprime-firestorm.
45. “Frankly, I’m frustrated”: FDIC, “Remarks by FDIC Chairman Sheila Bair at Clayton Holding Inc. Investor Conference—New York, NY,” October 4, 2007, www.fdic.gov/news/news/speeches/archives/2007/chairman/spoct0407_2.html.
46. “The mortgage crisis is growing”: Sheila C. Bair, “Fix Rates to Save Loans,” op-ed, The New York Times, October 19, 2007, www.nytimes.com/2007/10/19/opinion/19bair.html.
47. I received editorial endorsements: “Moving Ahead on Mortgages,” editorial, The New York Times, October 28, 2007, www.nytimes.com/2007/10/28/opinion/28sun1.html; “Mortgage Meltdown,” editorial, The Wall Street Journal, October 24, 2007, http://online.wsj.com/article/SB119318185110369077.html.
48. “there’s been a realization”: Cheyenne Hopkins, “Modification: Tentative Steps Toward a Regulatory Consensus,” American Banker, November 27, 2007, www.americanbanker.com/issues/172_231/-337575-1.ht
ml.
49. Our efforts to convince: Ibid.
50. But the agreement: Ibid. See also “Gov. Schwarzenegger Works with Lenders to Help Homeowners Avoid Foreclosure,” November 20, 2007, www.highbeam.com/doc/1P3-1386790921.html.
Chapter 7: The Audacity of That Woman
51. Citi and others were forced: Shannon D. Harrington and Elizabeth Hester, “Citigroup to Consolidate Seven SIVs on Balance Sheet (Update3),” December 13, 2007, www.bloomberg.com/apps/news?pid=newsarchive&sid=aT0Ix2iDnZRk.
52. There were thirteen such institutions: The thirteen were Fremont Bank, Countrywide, IndyMac, Downey, WaMu, National City Corp., AmTrust Bank, Westernbank, Flagstar Bank, E*Trade, BankUnited, Merrill Lynch, and Colonial Bank. With the exception of E*Trade, all of these institutions have either failed or been acquired by other institutions.
53. The local press in Seattle: See, e.g., Bill Virgin, “Bank Depositors Stay Calm amid Turmoil,” Seattle Post-Intelligencer, April 2, 2008, www.seattlepi.com/news/article/Bank-depositors-stay-calm-amid-turmoil-1269064.php.
54. About 90 percent: See, e.g., Offices of Inspector General, Department of the Treasury, Federal Deposit Insurance Corporation, “Evaluation of Federal Regulatory Oversight of Washington Mutual Bank,” April 2010, http://fdicoig.gov/reports10%5C10-002EV.pdf.
55. “This is something”: Sheila Bair, email to John Reich, April 3, 2008.
56. analysts’ commentary included: Institutional Risk Analytics, “Is WaMu the Next Bear Stearns?,” April 8, 2008, http://marketpipeline.blogspot.com/2008/04/is-wamu-next-bear-stearns.html.