Shiela Bair, who just stepped own as head of the Federal Deposit Insurance Corporation (FDIC), is one of the unsung heroes of the financial crisis and its aftermath. She was above all a voice for fairness that the dominant players – like Treasury Secretaries Hank Paulson and Timothy Geithner and Federal Reserve Chairmen Alan Greenspan and Ben Bernanke – generally treated as “difficult” and chose to ignore.
In last Sunday’s New York Times Magazine, economics reporter Joe Nocera details how very different the outcome might have been for the country had her common sense views been heeded. This modern-day tragedy has needlessly inflicted great suffering on millions of Americans, and the end is not yet in sight.
Long before the financial meltdown and the bank bailout – driven by a corrupt mortgage market and the toxic subprime mortgage con game – Bair was warning that this was a huge financial time-bomb. It ought to be reined in. The powers that be did not listen.
When the crisis hit, she championed “market discipline” – meaning that shareholders and bond holders (the one’s whose investments are supposed to be at risk) should not be favored over depositors and the taxpayers. “Why did we do the bailouts?” she told Nocera. “It was all about the bondholders.” And protecting bank profits. But “they’re supposed to take losses.”
Once the full blown crisis hit – despite repeated assurances from the “boys club” that it could be “contained” -- Bair also objected to the way in which the bailout was done. She advocated in vain for using the long-standing FDIC practice, when a bank fails and must be “wound down,” of modifying contracts (including bonus payouts to bank executives) as needed. Such outrages as the huge multi-billion-dollar bailout package for the insurance giant A.I.G. followed by a bonus package of $165 million to the executives who created the disaster would not have happened. Likewise, she maintained that the investment banks who held contracts with A.I.G. should also have to “take a haircut” and not receive 100 percent of their insurance contracts with A.I.G. The most notorious example was Goldman Sachs, which received $12 billion in taxpayer money. These avoidable actions still fester for many of us.
Again, when the banks began an orgy of mortgage foreclosures, because it was cheaper than loan modifications and there are also incentive fees that encourage the practice, Bair (a moderate Republican, believe it or not) advocated that a $50 billion chunk of the bailout package should be devoted to creating incentives for loan modifications to help stabilize the housing market. The fund was created, but the old boys club and the banks found all sorts of objections to using it, and only a fraction of the money has been spent as intended. Now, after millions of foreclosures in a deeply depressed housing market, the banks have come to recognize that this practice has been self-defeating, and they have belatedly become more receptive to loan modifications. Score one more for Sheila Bair.
Finally, we will have Sheila Bair to thank if we are able to avoid another big bank bailout in the future. It was Bair who sold President Obama and the Congress on the idea that even “too big to fail” banks could be “wound down” if they failed; the FDIC has had a lot of successful experience with this process. This policy has now been written into the Dodd-Frank financial reform law, but whether or not it will actually be used depends on the politicians of the future. Will they have any backbone when the time comes?
In the Great Depression, everybody shared the pain. That was Sheila Bair’s instinct in the Great Recession, and it would have been much fairer. Instead, this time around the banks, wealthy investors and our corporate CEOs have come out of the crisis largely unscathed, and it is the rest of us who are still suffering the consequences. It didn’t have to be this way. It might have been prevented if our politicians and regulators had not been myopic and morally obtuse.
Now a group of ideological fanatics in the Congress, with an apparent death wish, seem bent on making matters much worse with the debt ceiling issue. They may well succeed.