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Former FDIC Chief Shines Light On Banks’ Dark Chapter

The recently-published memoir from Sheila Bair is a must-read for bank regulatory policy wonks.

For others, including those primarily interested in the safety of their FDIC-insured deposits, it’s a tough slog but worth it nonetheless.

Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself offers Bair’s insider perspective on events during her tenure as FDIC chairman from 2006 to 2011.

She begins with the period of seemingly mindless “deregulation” that preceded the financial crisis (she sarcastically dubs it “the Golden Age of Banking”), then details the haphazard efforts of regulators to salvage our financial system in 2008-09 (“Bailing Out the Boneheads”).

She also addresses the subsequent battles over Dodd-Frank reforms (“The Final Stretch (or So I Thought)”).

Throughout, she directs particular venom at Timothy Geithner (New York Fed president before becoming Treasury secretary) and John Dugan (comptroller of the currency), two prime examples of “captive regulators” — officials too protective of the institutions they’re supposed to be regulating.

Bair clearly was a reluctant participant in the bailout process and had little voice in much that was done.

But she did sanction what I believe was a misuse of the FDIC and its deposit fund in the overall bailout package — the guarantee, under the so-called “systemic risk exception,” of debt of bank holding companies and other non-banks, like Goldman Sachs Group, Citigroup Funding, John Deere Capital and GE Capital.

Bair did succeed in imposing limitations on the guarantee program, against the wishes of many of her regulatory colleagues.

But, ultimately, the FDIC approved $330 billion of guarantees, in what its own lawyers considered a “stretch” of its legal authority.

Although no guarantee payment has been required, the program set a precedent that may be used to support future financial “rescue” proposals, notwithstanding Dodd-Frank’s explicit prohibitions on bailouts of failing institutions.

In addition to chronicling the financial crisis and its aftermath, the book contains useful insights on the nuts and bolts of FDIC operations, including how it prepares for a bank’s closure, and markets its assets and deposits.

Bair concludes with a recital of further reforms she believes should be pursued.

These include, among many others, raising capital requirements, abolishing Fannie Mae and Freddie Mac, taxing earned and investment income at identical rates, and reducing the national debt.

They’re essentially nonideological and middle-of-the-road proposals.

That’s why most make sense.

And why, probably, few, if any, will ever be implemented.

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Comments (2)
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  1. Earl said:
    on October 28th at 11:37 pm

    What does she consider as investment income? Capital gains? For some retirees on a budget (low incomes) low capital gain taxes as well as dividend and interest income is the difference between being comfortably retired and barely squeaking by.

  2. Charles Rechlin said:
    on October 29th at 08:43 am

    Good question, Earl. Her proposal would be to tax wages, salaries, interest, dividends and capital gains all at the same rate.