Bull by the Horns

by Sheila Bair

  57. So they are the first: Shareholders, of course, usually take a complete loss in an FDIC resolution. By the nature of their investment, they are stuck—that is, unlike debt-holders, they have no right to be repaid at a certain point, which is why regulators say that equity capital has “loss-absorbing” capability. Similarly, long-term bondholders are stuck until their debt reaches its maturity date. That is another reason it is dangerous to delay a bank closing: The longer regulators wait, the more debt matures and is withdrawn, shifting the costs of failure onto the FDIC and uninsured depositors instead of bondholders.

  58. “glad to talk”: Sheila Bair to John Reich, email re W, August 6, 2011; John Reich, email to Sheila Bair re W, August 6, 2011; Sheila Bair, e-mail to Donald Kohn re W, August 6, 2011; Donald Kohn, email to Sheila Bair re W, August 6, 2011.

  59. “significant support”: Richard Kovacevich, letter to Sheila Bair, September 20, 2008.

  Chapter 8: The Wachovia Blindside

  60. In Fed We Trust: David Wessel, In Fed We Trust: Ben Bernanke’s War on the Great Panic (New York: Crown, 2009), p. 222.

  61. “extraordinary actions”: Ben Bernanke, email to Sheila Bair, September 30, 2008.

  Chapter 9: Bailing Out the Boneheads

  62. stood at $2.7 trillion: FDIC Quarterly Banking Profile, Fourth Quarter 2008. www2.fdic.gov/qbp/2008dec/qbp.pdf.

  63. But the word I got back: Email exchange among Sheila Bair, David Nason, and Keith Hennessey, October 1, 2008.

  64. “Do you want to discuss”: Email exchange between Jesse Villarreal and Christal West, October 8, 2008.

  65. “It is the policy”: Christal West, email to Sheila Bair, October 8, 2008.

  66. On the following Friday: Sheila Bair, email to Henry Paulson, Ben Bernanke, and Timothy Geithner re Discussion Draft—systemic risk actions, October 10, 2008.

  67. “have also committed”: Board of Governors of the Federal Reserve System, “Joint Statement by Treasury, Federal Reserve, and FDIC,” October 14, 2008, www.federalreserve.gov/newsevents/press/monetary/20081014a.htm; David Barr, email to Michele Davis re JOINT Statement 10-14-draft (October 13, 2008).

  68. “Our best available information”: Sheila Bair, email to Henry Paulson and Ben Bernanke, October 9, 2008.

  69. the big banks still pulled back: Loan balances at banking organizations with assets greater than $100 billion fell by 11.4 percent during the crisis, in comparison with banks with less than $1 billion in assets, whose balances grew by 3 percent. Smaller institutions also consistently maintained capital ratios 2 to 4 percent higher than the largest institutions. See following note.

  70. Throughout the crisis: Christopher Newbury, email to Sheila Bair re Information on loan growth and capital, December 16, 2011.

  Chapter 10: Doubling Down on Citi: Bailout Number Two

  71. Indeed, in 2007: See, e.g., “Citigroup’s Vanished Dividend,” November 24, 2008, http://blogs.wsj.com/marketbeat/2008/11/24/citigroups-vanished-dividend/.

  72. A few months later: David Enrich and Jenny Strasburg, “Citigroup to Close Hedge Fund; Blow to CEO,” The Wall Street Journal, June 12, 2008, http://online.wsj.com/article/SB121323783398666999.html.

  73. “If they go down”: Henry M. Paulson, Jr., On the Brink: Inside the Race to Stop the Collapse of the Global Financial System (New York: Business Plus, 2010), p. 409.

  74. Financial Crisis Inquiry Commission: The FCIC was a special commission created by Congress to investigate the causes of the financial crisis. Its report, issued in January 2011, can be found at http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_full.pdf.

  75. “Is that the standard now”: Transcript of FDIC Board of Directors meeting, November 23, 2008, http://c0181567.cdn1.cloudfiles.rackspacecloud.com/2008-11-23%20Transcript%20of%20FDIC%20Board%20of%20Directors%20meeting,%20closed%20session.pdf, p. 21.

  76. “[W]hat is your supervisory strategy?”: Ibid., pp. 22–23.

  77. “Why there’s been”: Damien Paletta, “FDIC Chief Raps Rescue for Helping Banks over Homeowners,” The Wall Street Journal, October 16, 2008, http://online.wsj.com/article/SB122411533644338623.html.

  78. Ben Bernanke personally intervened: Email exchange between Sheila Bair and Ben Bernanke re Interagency statement, November 9, 2008.

  Chapter 11: Helping Home Owners, Round Two

  79. “use loan guarantees”: Emergency Economic Stabilization Act of 2008, section 109, available at www.govtrack.us/congress/bills/110/hr1424.

  80. had initiated conversations: Neel Kashkari, email to S. Bair re Insurance, October 7, 2008; Richard Brown, email to Neel Kashkari re Proposal-Guaranty Program to Encourage Loan Modifications, October 7, 2008.

  81. “Eliminating even all foreclosures”: White House briefing paper, “Housing Policy Options,” Principals meeting, October 27, 2008.

  82. According to RealtyTrac: “Foreclosure Activity Increases 81 Percent in 2008,” January 15, 2009, www.realtytrac.com/content/press-releases/foreclosure-activity-increases-81-percent-in-2008-4551.

  83. Home prices were already down: Henry Blodget, “U.S. House Price Decline Could Be Worse than Great Depression, Economist Shiller Says,” September 4, 2008, http://finance.yahoo.com/tech-ticker/article/53094/U.S.-House-Price-Decline-Could-Be-Worse-than-Great-Depression?tickers=^gspc,fre,fnm.

  84. I communicated my concerns: Sheila Bair, email to Henry Paulson re Questions on the Interest Share Proposal, October 30, 2008.

  85. We continued our discussions: Sheila Bair, email to Henry Paulson re More on Loan Mods-plus our cost estimate, November 5, 2008.

  86. Even the American Bankers Association: Edward Yingling, letter to Henry Paulson and Sheila Bair, December 11, 2008.

  87. The OCC press office: In the first quarter of 2009, the OCC released a second report differentiating between loan mods that reduced payments and those that did not. To his credit, John Dugan acknowledged to me that “the evidence supports the premise that significantly reduced monthly payments have a much lower re-default rate” and that “less than half of the mods in 2008 reduced monthly payments.” John Dugan, email to Sheila Bair, April 2, 2009.

  88. Duhigg had all: Charles Duhigg, “Fighting Foreclosures, F.D.I.C. Chief Draws Fire,” The New York Times, December 10, 2008, www.nytimes.com/2008/12/11/business/11bair.html?pagewanted=all.

  89. I liked Martin Feldstein’s program: Professor Feldstein’s proposal took the same general approach as the HOP loans program we had proposed in early 2008 to provide lower interest, deferred payment loans to borrowers to pay down principal on unaffordable loans, with the government having priority for repayment from foreclosure sale proceeds if the borrower defaulted later on.

  90. Rather, it was being driven: I think Hank truly wanted to launch a comprehensive loan modification program. He later told me that he had been caught between two administrations. Congress had given him only $350 billion of TARP money. He believed he needed the support of the Obama administration to get congressional support to release the second $350 billion installment of TARP. He felt he needed at least $350 billion for financial institution stabilization, so he was reluctant to commit substantial money to loan modifications unless it was combined with a takedown of the second $350 billion installment. However, the Obama team refused to work with the Bush team to take down the additional TARP funds (presumably because it wanted to offer its own program). Thus a decision on loan modifications stayed in limbo for several months. Ironically, when the Obama team did finally launch a program, it was the one that we had previously advised Paulson against because it was too operationally complex and the incentives were too weak to have an impact.

  Chapter 12: Obama’s Election: The More Things Change . . .

  91. He had been highly supportive: John Podesta, email to Sheila Bair re Keynote Invitation, October 5, 2008.

  92. I offered my agency’s help: Sheila Bair, email to John Podesta re Congrats, November 7, 2008.

  93. also took the liberty: Sheila Bair, email to John Pode
sta re My Vote for Volcker, November 10, 2008.

  94. would head the CFTC: Unlike Geithner, Summers, and Rubin, Gensler very publicly renounced his deregulatory views in the Rubin Treasury Department and has worked hard at the CFTC to provide better oversight of the derivatives markets.

  95. President Clinton himself said: E. Harris, “Clinton: I Was Wrong to Listen to Wrong Advice Against Regulating Derivatives,” ABC News.

  96. “Timothy Geithner”: Robert Schmidt, “Geithner Seeks to Push FDIC’s Bair Out After Clashes (Update1),” December 4, 2008, www.bloomberg.com/apps/news?pid=washingtonstory&sid=aTFflUwD.Qbg.

  97. We gave Summers’s people: Email exchange between Michael Krimminger and Sarah Aronchick re FDIC Loss Sharing Proposal, November 28, 2008.

  Chapter 13: Helping Home Owners, Round Three

  98. In the spring of 2011: See, e.g., “Statement of Neil Barofsky, Special Inspector General, Troubled Asset Relief Program, Before the House Committee on Financial Services, Subcommittee on Insurance, Housing and Community Opportunity,” March 2, 2011, http://financialservices.house.gov/media/pdf/030211barofsky.pdf.

  99. “scary redefault numbers”: “Executive Summary of Economic Policy Work,” December 15, 2008, www.documentcloud.org/documents/285065-summers-12-15-08-memo.html#document/p1, p. 35.

  Chapter 14: The $100 Billion Club

  100. The Dow Jones Industrial Average: See, e.g., Eric Dash and Jack Healy, “Stocks Plunge as Geithner Announces New Bailout Plan,” The New York Times, February 11, 2009, www.nytimes.com/2009/02/11/business/11markets.html?pagewanted=all.

  101. Ironically, Citi and other: See, e.g., Colin Barr, “Bank Stress Tests Cause More Stress,” February 18, 2009, http://money.cnn.com/2009/02/18/news/stress.test.fortune/.

  102. “[T]he capital needs”: Board of Governors of the Federal Reserve System, “Joint Statement by the Treasury, FDIC, OCC, OTS, and the Federal Reserve,” February 23, 2009, www.federalreserve.gov/newsevents/press/bcreg/20090223a.htm.

  103. He was quoted: Alan Rappeport, “Buffett Hits Out at Stress Tests,” Financial Times, May 3, 2009, www.ft.com/cms/s/0/e7734cc8-3822-11de-9211-00144feabdc0.html#axzz1vHPV1iQV.

  104. In one situation: Jason Cave, email to Sheila Bair re stress test update, April 5, 2009 (citing FDIC examiner analysis).

  105. The result: John Corston, email to Jason Cave re Possible Concerns with potential below the line adjustments to the CAP stress testing, May 1, 2009; email exchanges among Daniel Frye, Robert Burns, Jason Cave, and Sheila Bair re Latest Stress Test Results, May 3, 2009.

  106. I issued a separate statement: FDIC, “Statement by FDIC Chairman Sheila C. Bair on Stress Tests,” May 7, 2009, www.fdic.gov/news/news/press/2009/pr09067.html.

  107. with Ben Bernanke’s help: Email exchanges among Sheila Bair, John Dugan, and Ben Bernanke re Capital Bogey, April 21, 2009.

  108. I was fearful: Sheila Bair, email to Timothy Geithner re Monday, March 21, 2009.

  109. The column started snidely: Andrew Ross Sorkin, “ ‘No-Risk’ Insurance at F.D.I.C.,” The New York Times, April 6, 2009, www.nytimes.com/2009/04/07/business/07sorkin.html.

  Chapter 15: The Care and Feeding of Citigroup: Bailout Number Three

  110. The institution continued: Email exchange between Sheila Bair and Jason Cave re Citi Update, January 10, 2009.

  111. The ratings agencies: Moody’s press release, January 16, 2009 “Moody’s Places Citigroup’s ratings (snr at A2 and Prime-1) under review for possible downgrade,” as corrected January 21, 2009, www.moody’s.com/research/correction-to-text-jan-16-2009-release-moody’s-places-citigroup—PR_171191.

  112. We had also hoped: Email exchange among Jason Cave, Lee Sachs, and Sheila Bair Re Press release, February 26, 2009.

  113. Treasury agreed to convert: U.S. Department of the Treasury, “Treasury Announces Participation in Citigroup’s Exchange Offering,” February 27, 2009, www.treasury.gov/press-center/press-releases/Pages/tg41.aspx.

  114. included 305 banks: FDIC, “Quarterly Banking Profile First Quarter 2009,” www2.fdic.gov/qbp/2009mar/qbp.pdf.

  115. Jason notified me: Jason Cave, email to Sheila Bair re OCC-Citi, January 21, 2009.

  116. were actually raising capital: Specifically, the holding company was issuing debt and then using the money to buy common stock from the bank. That made it look as if the bank’s capital ratios were going up, but it was all coming from funds borrowed through our debt guarantee program.

  117. The following day: Sheila Bair, email to Donald Kohn, John Dugan, and William Dudley re Citi, February 22, 2009.

  118. I would later read: Ron Suskind, Confidence Men: Wall Street, Washington, and the Education of a President (New York: HarperCollins, 2011), p. 212.

  119. The next day: Sheila Bair, email to Michael Krimminger and Jason Cave re Citibank, March 10, 2009.

  120. On May 26, 2009: Sandra Thompson, letter to William Rhodes, May 26, 2009.

  121. William Rhodes: Pandit was the CEO of Citigroup, the organization that included Citibank as a subsidiary. Rhodes served as the CEO of the bank. However, Rhodes had little real authority over the bank. That was one of the problems.

  122. Then, on June 5: Damien Paletta and David Enrich, “FDIC Pushes Purge at Citi: Bair Wants to Shake Up Management, Sought to Cut Rating of Bank’s Health,” The Wall Street Journal, June 5, 2009, http://online.wsj.com/article/SB124417114172687983.html#mod=todays_us_page_one.

  123. they were put to rest: Bradley Keoun and Alison Vekshin, “Citigroup Gains Geithner Backing as Pandit Bucks Bair,” June 8, 2009, www.bloomberg.com/apps/news?pid=newsarchive&sid=alp4yE9HJBtI.

  124. That was acknowledged: Email exchanges between Sheila Bair and Mike Bradfield re Citigroup Disclaimer, June 7, 2009.

  125. Throughout the ensuing negotiations: Email exchange between Sheila Bair and William Dudley re Citi, June 25, 26, and 28, July 14, 2009.

  126. to run the bank: Regrettably, after my departure from the FDIC, both Grundhofer and McQuade announced they were leaving Citi, depriving it of much needed commercial banking expertise.

  127. At the end of July: Rita Proctor, email to Sheila Bair re Parson’s Request for a Meeting, July 31, 2009.

  128. When the “independent consultant” report: Email exchange between Sheila Bair and Jason Cave re Meeting with EZI, October 8 and 9, 2009.

  129. until we found out about it and objected: Email exchange between Sheila Bair and Mike Bradfield re Citi-EZI Engagement Letter, August 5 and 6, 2009.

  Chapter 16: Finally Saying No

  130. The charge was: SEC, “SEC Charges Steven Rattner in Pay-to-Play Scheme Involving New York State Pension Fund,” November 18, 2010, www.sec.gov/news/press/2010/2010-224.htm.

  131. I had half jokingly told him: Sheila Bair, email to Henry Paulson re GM, December 17, 2008.

  132. a “comfort letter”: Timothy Geithner and Ben Bernanke, letter to Sheila Bair, March 19, 2009.

  133. On May 20, 2009: GMAC, “GMAC Financial Services Announces Key Capital and Liquidity Actions,” May 21, 2009, http://media.gmacfs.com/index.php?s=43&item=331.

  134. Then, in March: Saskia Scholtes, Francesco Guerrera, and Joanna Chung, “Debt Wait for GMAC and CIT,” Financial Times, March 31, 2009, www.ft.com/intl/cms/s/0/d44090e6-1d53-11de-9eb3-00144feabdc0.html#axzz1vHPV1iQV.

  135. I finally told Lee: Sheila Bair, email to Lee Sachs re CIT, July 12, 2009.

  Chapter 17: Never Again

  136. On Sunday: Edmund L. Andrews and Peter Baker, “A.I.G. Planning Huge Bonuses After $170 Billion Bailout,” The New York Times, March 14, 2009, www.nytimes.com/2009/03/15/business/15AIG.html.

  137. On March 19: Opening Statement of Chairman Christopher J. Dodd, “Modernizing Bank Supervision and Regulation,” Hearings Before the Senate Committee on Banking, Housing, and Urban Affairs (March 19, 2009) Hearing Transcript, Senate Banking Committee. See also email from Paul Nash to Sheila Bair Re Congress Daily Report on Today’s Hearing (March 19, 2009, Congress Daily).

  138. They had alre
ady given: Email exchange between Sheila Bair and Paul Nash re Draft Resolution Language, March 24, 2009.

  139. On March 25: U.S. Department of the Treasury, “Treasury Proposes Legislation for Resolution Authority,” March 25, 2009, www.treasury.gov/press-center/press-releases/Pages/tg70.aspx.

  140. “Everybody should have”: FDIC, “Remarks by FDIC Chairman Sheila Bair to The Economic Club of New York; New York, New York,” April 27, 2009, www.fdic.gov/news/news/speeches/archives/2009/spapr2709.html.

  141. But I also made: Sheila Bair, email to Rahm Emanuel re Regulatory Reform, May 27, 2009.

  142. “I don’t believe”: Robert Schmidt and Rebecca Christie, “Geithner Signals Openness to Council of Regulators in Shift,” June 9, 2009, www.bloomberg.com/apps/news?pid=newsarchive&sid=aSo.cw4af510.

  143. “UST [U.S. Treasury] would vest”: Michael Krimminger, email to Sheila Bair re Treasury White Paper, June 21, 2009.

  144. “a comprehensive regulatory reform plan”: “President Obama to Announce Comprehensive Plan for Regulatory Reform,” White House press release, June 17, 2009, www.whitehouse.gov/the_press_office/President-Obama-to-Announce-Comprehensive-Plan-for-Regulatory-Reform.

  145. “codifying TARP”: Paul Nash, email to Sheila Bair re Treasury White Paper, June 22, 2009.

  146. “For big banks”: Darrell Delamaide, “Political Posturing Plays Increasing Role in Regulatory Reform Debate,” November 6, 2009, www.finreg21.com/news/political-posturing-plays-increasing-role-regulatory-reform-debate?page=3.

  147. But the idea quickly ran: See, e.g., Bill Swindell, “Congress Daily: Dodd’s Plan for Single Bank Regulator Runs into Frank,” September 23, 2009, www.financialservicesforum.org/index.php/forum-in-the-news/83-dodds-plan-for-single-bank-regulator-runs-into-frank-.html.

  148. However, earlier in the year: FFIEC, “FFIEC Statement on Regulatory Conversions,” July 1, 2009, www.ffiec.gov/pdf/pr070109_statement.pdf.

  149. As I wrote in an op-ed: Sheila C. Bair, “The Case Against a Super-Regulator,” op-ed, The New York Times, August 31, 2009, www.nytimes.com/2009/09/01/opinion/01bair.html.

  150. The company’s assets: See, e.g., Linda Sandler, “Lehman Enters Final Bankruptcy Phase as Judge Approves Plan,” December 6, 2011, www.bloomberg.com/news/2011-12-07/lehman-enters-final-bankruptcy-phase-as-judge-approves-plan-2-.html; Anthony Bond, “Lehman Gets Permission to Exit Bankruptcy Three Years after Catastrophic Collapse,” Daily Mail, December 7, 2011, www.dailymail.co.uk/news/article-2070992/Lehman-gets-permission-exit-bankruptcy-years-catastrophic-collapse.html.