Sheila Bair’s five-year term as Chairman of the Federal Deposit Insurance Corporation (FDIC) ends today, Friday, July 8th. During her tenure, Bair racked up an impressive list of achievements. Notably, even with the recent wave of bank failures, Bair managed to use only the industry-supplied deposit insurance fund (DIF), and not taxpayer dollars to shut down and sell off hundreds of insolvent banks.
Reflected in her vigilance over the DIF was the broader view that financial institutions, their leaders and investors (and not the public) should bear the losses from their failures. This perspective appeared to inform her other policy choices. Indeed, her final accomplishment was the FDIC board’s unanimous approval on Wednesday of a new rule to claw back banker pay. The rule permits the FDIC acting as liquidator, to demand the return of two years of pay from senior executives and directors who were substantially responsible for the bank’s collapse.
Also, Bair was a leading voice for establishing international limits on bank borrowing, with a total-assets-to-equity leverage ratio. Supplementing the easily-gamed risk-weighted measures, this simple leverage ratio could help block bank efforts to game the system with poorly designed or misused mathematical models. Bair fought successfully to expand the FDIC’s authority through the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. As a result, instead of choosing between a taxpayer-funded-bailout and a Lehman-style-chaotic bankruptcy, there is a third choice. The FDIC has the power to bring into receivership, liquidate and shutdown failing bank holding companies and certain other systemically important nonbank financial firms. There are legitimate questions as to whether this “orderly resolution” authority will be used effectively, if at all. However, it’s existence encourages the ongoing debate over whether we still need to break up the banks in terms of lines of business to make them no longer too big or too interconnected to fail.
Perhaps the most admirable of her accomplishments was her ability to maintain clarity and dignity amid accusations that she was not a “team player.” When that “team” scored points at the expense of the American people, in my view, her resistance deserves a badge of honor. The so-called team players who serve in public office do us no favors when they are “just following orders” of misguided leaders.
Bair was early to see the threat of predatory lending. From a previous position as Assistant Secretary of Financial Institutions at Treasury, before departing for a short term in academia, she tried in 2002 to end those practices and met substantial resistance. Indeed, she would later testify before the Financial Crisis Inquiry Commission (“FCIC”) of the grave consequences of Alan Greenspan’s failure as Chairman of the Fed to use its authority under the Home Ownership and Equity Protection Act (HOEPA), to ban bad underwriting practices at both banks and “nonbank” institutions. According to the FCIC report:
“This was a missed opportunity, says FDIC Chairman Sheila Bair, who described the ‘one bullet’ that might have prevented the financial crisis: ‘I absolutely would have been over at the Fed writing rules, prescribing mortgage lending standards across the board for everybody, bank and nonbank, that you cannot make a mortgage unless you have documented income that the borrower can repay the loan.’” (emphasis added).
Also, Bair advocated strenuously for loan modifications to help prevent an avalanche of foreclosures. Bair’s performance reminds us that people matter, not just the institutions which they inhabit.
In addition to being a public servant, Bair is also a former colleague from the University of Massachusetts, Amherst. While our paths overlapped, for about eighteen months, given that we were in different departments, I had only a few occasions to converse with her. However, I benefited greatly from her presence. Bair enriched our community with her interest in corporate governance and her contacts. While a faculty member, in 2005, Bair brought Senator Paul Sarbanes to visit and address a class of MBA students and also the wider University. And, after she rose to be listed by Forbes magazine as the second most powerful woman in the world, Bair returned, including to speak about the financial crisis and also to deliver a commencement speech. Not an academic by trade, Bair was welcomed by Isenberg School of Management, Dean Tom O’Brien. Though he refused to take credit for his foresight, O’Brien had a knack for attracting original thinkers and rising stars to our school and supporting their efforts. In addition to Bair, for example, he brought in Nassim Taleb who taught at UMass for a year, during which time he worked on his soon-to-be-acclaimed book, The Black Swan.
With Bair goes one of the three “New Sheriffs of Wall Street” featured on the cover of Time magazine May 13, 2010. The cover photo mirrored one from a decade earlier. The now iconic and ironic February 15, 1999 Time cover portrayed the “Committee to Save the World.” In that image, Alan Greenspan stood smiling assuredly front and center, flanked by a twinkle-eyed Robert Rubin and a seemingly annoyed Lawrence Summers. The subtitle of the article promised “The inside story of how the Three Marketeers have prevented a global economic meltdown – so far.” Missing from that photo, quite unfortunately, was someone who could have actually help prevent a global economic meltdown – Brooksley Born, whom we have discussed, here. Born would resign from the CFTC a few months after the Time article.
On last year’s cover, SEC Chairman Mary Schapiro appeared in the center spot where Greenspan had posed. Professor Elizabeth Warren, then head of the Congressional Oversight Panel on the TARP and Sheila Bair took the places inhabited by Rubin and Summers. The subtitle identified the trio as “The Women Charged with Cleaning up the Mess.” Just as the Three Marketeers were not able to save the world, and indeed created quite a mess, the New Sheriffs, cannot on their own clean it all up. And certainly not without the ongoing support of the Congress. Administration and other financial regulators.
After all, the build up and burst of the housing bubble was not a weekend-long frat party. Greenspan had more than twenty years to wreak havoc. In his own estimation, under oath last year, he volunteered that he was wrong thirty percent of the time. Two decades of leadership with that ratio proved disastrous. And though Rubin and Summers were not each fixtures as Treasury Secretaries and other Administration roles for that long, they did manage to champion the most damaging acts of financial market deregulation in the past century. These included the gradual erosion and ultimate repeal in 1999 through Gramm-Leach-Bliley of the Glass-Steagall Act’s separation of commercial from investment banking. Also included was the passage in 2000 of the Commodity Futures Modernization Act, which fostered the explosion of credit default swaps. Both of those took place after the photo was snapped.
Sadly, one member of the sheriff-cleanup-crew is moving on. Yet, she leaves our country, the financial system, and my former University far better than she found them.