Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself

There have been numerous books on the financial meltdown, and I have read a number of them. Some of the best among those I have read are in the form of an educated observer of the financial world providing the history about some particular institution that played a major role in creating the meltdown. The ones that come to mind are Fleckenstein's "Greenspan's Bubbles" (Federal Reserve), Michael Lewis' "The Big Short" (financial derivatives industry) and Gretchen Morgenson's "Reckless Endangerment" (GSEs).Sheila Bair's book is from a quite different perspective, that of a government regulator at a high enough position that she was able to wield a fair amount of influence on not only US Government policies but also international negotiations intended to deal with the ongoing crisis and to prevent its recurrence in the future.The heart of Bair's story about her serving at the helm of the FDIC begins in Chapter 2, "Turning the Titanic" in which she describes how she found that she had inherited a dysfunctional organization with low morale. Her first task was to straighten out management of the organization itself. According to her story, she achieved a dramatic turnaround, and she provided enough corroboration to leave little reason for doubt that she had indeed achieved that.A number of subsequent chapters discuss Bair's role in working with other regulators in dealing with policies such as mortgage standards and bailouts of the megabanks. If one believes Bair, which I do, some of the key regulators were little more than lackeys for the banking industry. In particular, the Office of Comptroller of the Currency (OCC), and Timothy Geithner, Secretary of the Treasury. Bair appears to have been largely a "lone wolf" arguing for more robust banking regulations. The other key player, Federal Reserve Chairman Ben Bernanke, comes across as somewhat mixed, but a little bit more on the good side than the bad. (aside: It is an obscenity that Tim Geithner still serves as Treasury Secretary)In the chapter "Stepping over a Dollar to Pick up a Nickel", Bair discusses the efforts to develop mortgage remediation programs. From her perspective, even though aggressive efforts by lenders to refinance salvageable mortages made a great deal of economic sense, on account of the large losses incurred in the foreclosure process, refinancing was largely paralyzed because of such factors as upside-down financial incentives associated with the tranche structure of mortgage derivatives (in which some stakeholders actually benefitted when the mortgage wound up losing more money), as well as a plethora of mortgages being owned by fly-by-night "servicers" without the staff to competently pursue the refinancing of individual mortages. Bair advocated for governmental intervention to perform refinancing en masse on apparently qualified mortgages, but was shot down by objections that without going through the conventional refinancing process on an individual basis, some of the "bulk" refinancing would be unjustified- e.g. go to "house flippers" or people who actually could easily pay their mortgage. Her assessment of the situation was the basis for her title to that chapter.A considerable amount of the book involved discussion of the particular efforts to bail out Citibank, apparently the worst of the megabanks. Tim Geither, whose "mentor and hero" Robert Rubin had been head of Citibank, appeared to have devoted a tremendous amount of his time at Treasury toward finding new ways to bail out Citibank, as well as to try to tailor new banking regulations to try to camouflage how sick the worst of the megabanks, Citibank and Bank of America, truly were.Bair covers a good deal on the negotiations associated with the development of the Dodd Frank financial reform bill. This was very enlightening to me, since I didn't know much detail about Dodd Frank but was skeptical based on claims that it didn't fix what mattered but added unnecessary nuisances to the banking industry. Bair makes a compelling case that it is, to the contrary, an essential piece of legislation which plugs many of the holes in the system exposed during the meltdown.She expresses exasperation at the Tea Party, which opposed the banking bailouts, but also was negative toward Dodd Frank. Much debate on Dodd Frank centered around whether it genuinely eliminated "Too Big to Fail". From this book I conclude that Bair overall makes a pretty strong case for her side.Although she does not expound on this in detail, I think this exposes a flaw in the Tea Party mentality. They appear to want a free market based financial system, along the lines of the Austrian school of economics, with the most prominent political exponent being Ron Paul. However you cannot pursue policies that were designed for one system when you are operating under another. Perhaps if you didn't have a Federal Reserve that doles out financial heroin in the form of zero interest rates, bankers wouldn't become leverage junkies. But that is nor our system.I think this gets at a fundamental problem with Alan Greenspan's role at the Federal Reserve. As head of about the most anti-libertarian organization that could possibly be conceived, the Federal Reserve, a quasi-governmental central bank that manipulates the financial system in an attempt to smooth out the ups and downs in the economy, he pursued libertarian policies with regard to banking regulations. It's like applying the rule of Football to a Basketball game.Although I have considerably changed my opinion of Dodd and Frank based on this book, I do believe there is a lot of evidence for them having played a negative role leading up to the financial crisis, but I now see them as mixed bags rather than villains as I had before. (or perhaps "reformed villains" is a fairer way to put it)This ties into some points made toward the end of the book regarding this same issue. In Bair's opinion, the problems associated with megabanks tend to be associated with their complexity, not their size. Thus, she believes that there is not a need to break up the large banks, but in some cases they may need to be restructured so that the divisions within the company line up with the specific lines of business it is engaged in.What appears to be the most important tool in Dodd Frank to eliminate the "too big to fail" problem is the requirement that the megabanks formulate a "living will" for how they would be broken up in an orderly manner if and when the company found itself in dire financial straits. I am inclined to believe that the extent to which the too big to fail problem has genuinely been resolved will be determined by whether the mega banks come up with bona fide living wills.Bair played a role in developing the banking standards known as Basil III. Earlier in the book, she discusses the Basil II European banking standards and how they were far too lax and contributed greatly to the European banking crisis. Bair emphasizes the importants of capital requirements for banks. She and her allies were able to turn the tide in Basil III against the advocates of lax banking standards, so we can hope that Basil III provides a more stable banking system in the future.While much of the book is about Bair's efforts to influence new regulations under development, in the chapter "Too Small to Save" she discusses some examples of the FDIC's actual bread-and-butter work, the orderly shutdown of failed banks.In the final chapters Bair gives her views on reforms of the financial system as well as US fiscal policy. A number of her views agree with ones I have come to believe, which naturally enhances her credibility as far as I'm concerned. Examples are: She disagrees with advocates of increased debt (no names, but it sounds like she is referring to Krugmanists), on the basis that further borrowing at current low (and thus supposedly benign) interest rates belies the fact that the bond market is a highly distorted one in which interest rates are artificially low for various reasons, and when the inevitable reversal of that trend occurs, the fallout will be all the worse the more debt there is. On fiscal policy, she dislikes the popular bipartisan "temporary holiday" on social security taxes (as an undermining of the revenue base for that important entitlement program, exactly my sentiment), and believes in broadening the tax base (e.g. eliminating the differential treatment of capital gains versus regular income, and even phasing out the mortgage interest deduction. I also support the latter, although it is one of cases where what is right will probably never prevail, because it is far too entrenched in the system.The general feeling I get from this book is that Sheila Bair very likely has the deepest understanding of our financial system of anyone alive, and perhaps also the best understanding of anyone alive about how to improve it. In addition, her writing style is outstanding. She covers dry technical topics as succinctly and readably as they can be, and has also included a goodly amount of material that is enjoyable to read on a human interest level. Her outstanding writing ability combined with her unique perspective on the financial crisis created by her tenure as head of the FDIC, makes it a safe bet that this will be recognized as one of a handful of classics that document the financial crisis of our time.

In 2008 Sheila Bair was a key player in the attempt to repair the damage to the economy caused by the financial debacle that led to the recession. Being in the "thick of things," as head of the FDIC, I felt it would be interesting to get her take on all of this.Bair begins by discussing the "golden years" prior to the crash and her beginning stint at the FDIC. She thought regulation too lax and found herself fighting a course of change at the agency. When the implementation of something called Basel II advanced approaches (this allowed banks to reduce capital standards) took hold in Europe, pressure was on to do the same in the U.S. Bair explains how she resisted this change and the large amount of pushback she received - fortunately, it was not implemented going into the upcoming financial crisis. It seemed that the Office of Thrift Supervision (OTS) and the Office of the Comptroller of the Currency (OCC) took positions that were advantageous to the larger institutions.She describes clearly the mentality that led to the crisis. For example, "hybrid ARMs were not being offered to expand credit through lower introductory payments; they were purposefully designed to be unaffordable, to force borrowers into a series of refinancing and the fat fees that went along with them." She observed that, by 2006, practices viewed as predatory in 2001 were now mainstream among the major mortgage lenders. The cause, in a word, was securitization. We are given an explanation of the tranche system and also how the government-sponsored enterprises (GSEs) -Fannie and Freddie - issued bonds at cheap interest rates and used the proceeds to buy mortgage-backed securities (MBS). Nice system. Use cheap debt to obtain money to buy risky, high-yield securities. She continues on explaining why foreclosing on mortgages was more profitable for the triple-A tranche investors than loan modifications, also noting "industry recalcitrance, regulatory squabbling, and Treasury indifference." Then there was the WaMu debacle - this too was a very interesting story. Following this, we learn of the Wells Fargo acquisition of Wachovia. Bair wonders if we overacted to the situation in bailing out the banks, noting how she was appalled how these bailed out institutions just months after receiving generous government assistance began paying out huge bonuses to their executives. "Were we stabilizing the system, or were we making sure the banks' executives didn't have to skip a year of bonuses?" Next on the list is the bailout of Citi. Citi was a sick bank, it received a large chunk of TARP capital, and was one of the most thinly capitalized of the big banks.It is interesting to follow Bair's description of the interactions between the FDIC, the Fed, and the OCC, during the decision making process. The FDIC and the others were often at odds. It makes me wonder whose interests were most important. What frustrated Bair was all the focus on making sure we're not unduly helping borrowers but then providing massive assistance at the institutional level. It appears the economists at the White House and Treasury were holding on to the "ideology of government laissez-faire and 'self-correcting' markets," but Bair knew the markets would not correct on their own. The securitization process created conflicting interests among owners of MBS and also the servicers of the loans who were responsible for the mitigation of loss through loan restructuring. Bair provides all the details.When the government did finally release a program to help homeowners called the Home Affordable Mortgage Program (HAMP), Bair became horrified to learn that Fannie Mae and Freddie Mac were in charge. They were the biggest holders of the Triple-A subprime MBS! "Every interest rate that was reduced for a distressed borrower could potentially eat into their returns," retorts Bair. She makes clear that the program was "designed to look good in a press release, not to fix the housing market." Was helping homeowners ever a priority one wonders. In discussing the Treasury's Capital Assistance Program, which involved stress testing the balance sheets of companies with assets in excess of $100 billion, it seemed that the Fed, Treasury, and OCC were not very "committed to forcing banks to sell bad loans and other investments." Here again they're bailing out big guys, but the little banks would be subject to the FDICs harsh terms if they failed. It seems that the Treasury just did not want to cede any authority over the cleanup to the FDIC.Being distressed at how the Fed lent trillions of dollars to large banks, hedge funds, and asset managers without any requirements of an explanation as to why the programs were needed, eligibility requirements, or who was profiting and by how much, Bair pushed for legislation that would include anti-bailout language - it seems the government still wanted the ability to provide bailouts. Such legislation managed to pass the house in December 2009. She further discusses the efforts to require banks to raise prerequisite equity before exiting TARP, as the government was pressuring all of the institutions to exit the program at the same time. Astonishingly, after exiting TARP and having restrictions lifted, she notes that the banks "were announcing bonuses that rivaled the amounts that they had paid before the crisis." Here again, she wondered if the bailout was more about making sure those guys didn't have to skip any bonuses, rather than protect the system. Bair was frustrated by the "lack of leverage in forcing more meaningful action to address the housing crisis." She provides some interesting information - for example, robo-signing by the loan servicers, who she claimed were underfunded and mismanaged by the major banks resulting in many loans going to foreclosure when it would have been less costly to just modify them.In the chapter "The Return to Basel," she discusses the push for a Basel III framework, which focused on improving the quality and quantity of capital held by the international banks among other things. We see here the dynamics between the Fed, FDIC, OCC, European nations and Japan. We then learn of the many small banks that she refers to as "too small to save." During her tenure, 365 small banks were closed - a casualty of the recession; in these cases, the shareholders are wiped out and the boards and senior management are fired. There is talk of loss-share agreements, the Puerto Rican crisis, and the controversial Shorebank resolution. Throughout this period, Bair couldn't help noticing the inability of members of Congress to "work together and make decisions for the benefit of the country" - a problem we are still witnessing.Bair closes by providing some recommendations for financial reform, such as maintaining the ban on bailouts, breaking up mega-institutions, requiring securitizers to retain risk, requiring an insurable interest for credit default swaps, imposing assessments on large financial institutions, keeping the consumer protection agency, restructuring the financial stability oversight council, abolishing the OCC (she notes that they failed miserably in maintaining the safety of the national banks it regulates), merging the SEC and the CFTC and giving them independent funding, ending the revolving door between government and industry, and reforming the senate confirmation process. She also lists some things to improve the financial system as a whole: abolish the GSEs (Freddie and Fannie), tax code reform, and reduce the national debt. She discusses these issues fully and they make a lot of sense to me.Bair concludes with a few thoughts of how things could have been different. The mortgage mess could have been averted by the Fed applying proper lending standards for bank and nonbank lenders. Congress should not have tied the hands of the CFTC, SEC, and state insurance regulators in imposing common sense regulatory controls on credit default swaps. Industry pressure resulted in lowering of capital standards, and regulators were barred from overseeing the derivatives market. She says, "This is why I have written this book. I wanted you to see the crisis through my eyes and experience the obstacles that stood in my way as I tried to push for reform measures that were so obviously needed." There is so much to recommend this book - just read it.

Sheila Bair does not like Tim Geithner the US secretary to the Treasury. In her account of her time as chair of one of several financial regulators that exist in the USA, she makes this abundantly clear. And her reasons are also made clear: Geithner was more interested in protecting big banks, their shareholders and creditors than people with mortgages. She is a republican(so a full on supporter of capitalism) and her argument is that those who profit should also bear part of the costs of the financial crisis. What happened was that the banks got bailed out , dividends and bonuses were still paid (from bail out money) and thousands of people lost their homes when, Bair seems to argue, they could have been saved by a more imaginative approach. Geithner, it seems, was not interested. Undoubtedly this is a partial approach that seeks to justify her role. But this doesn't make the book wrong or any less interesting as a insider's detailed account.BTW, I was put on to the book by James K Galbraith's "The End of Normal" which I thoroughly recommend as an account of post economic crisis analysis.

Sheila Bar's account of her time as Chairman of The Federal Deposit Insurance Corporation (FDIC) is arguably the best of the works recounting the government and financial regulatory authorities internal machinations and in-fighting during the worst economic crisis since the 1930's.It highlights and details the battles, often spiteful, rankerous and treacherous, fought primarily between the US Treasury led Treasury Secretary Tim Geithner, The Office of the Comptroller of the Currency, The Federal Reserve Bank, the FDIC, the now defunct Office of Thrift Supervision, the Securities Exchange Commission, and various Congressmen and Senators. In essence it seems that at one end of the battlefield was Tim Geithner fighting tooth and nail for the interests of big business, and being opposed by Sheila Bair and the FIDC seeking to protect the interests of the smaller commercial interests and the little guys particularly homeowners struggling with mortgage arrears and foreclosures. The others wandered about the battlefield vacillating from one camp to the other as the fancy took them frequently coming under the intense fire of Tim Geithners abrasive, and at times tirade of expletive laden verbal lashings , as well as dirty tricks such as deliberate leaks to the press.Certainly in reading this book one gets the clear impression that large chunks of the government championed by Geithner werte far more interested in preserving the status quo of the big banks and their mega-earning senior people than serving the broader interests of the American people. Bair's main concerns that the Treasury's mortgage modification program was never really designed to fulfill the administration' promise to help millions of homeowners, and the bailout landscape still showed favoritism towards Wall Street and the betrayal of Main Street,. She was also extremely concerned that the proposed bank capital increases to ensure better protection from banks failing in future economic meltdowns, were not sufficient and that the government was giving far too much weighting to the vested interests of Wall Street.Also interesting was the disclosure of the complex intertwined relationships that existed between some of the players involved in the shaping of policy and implementation. Seemingly the worst financial position of any of the major banks was that of Citibank which was in a far worse financial state than Lehman Brothers which was allowed to fail. Tens and tens of $billions of taxpayers money was on multiple occasions authorised by Geithner to be pumped into the ever grasping coffers of Citibank to stave off bankruptcy. Interestingly Geithner when Under Secretary at the Treasury for International Affairs was widely regarded as being the protege of Treasury Secretary Robert Rubin who went on to join Citigroup as a director and senior counselor serving temporarily as Chairman resigning from Citigroup in 2009. During his tenure at Citigroup he received more than $126 million in cash and stock up through and including Citigroup's bailout by the US Treasury. Not a bad reward for being an integral part of the top management that steered the company onto the rocks of virtual bankruptcy. The mind boggles at how much he would have received had the company been successful?In her final conclusions and recommendations for reducing the risk of another economic disaster are:-1. Raise Financial Institution's Capital Requirements beyond Dodd-Frank and Basel III requirements.2. Forever Ban Bailouts.3. Break Up the Mega-institutions.4. Require an Insurable Interest for Credit Default Swaps.5. Impose an Assesment or Tax on Large Financial Institutions.In an excellent and well reasoned finale Ms. Bair sets out a series of helpful suggestions on how to make the Regulators work better, and a section of proposals that will make the entire Financial System work more purposefully such as Abolish the Government Sponsored Enterprises like Fannie Mae and Freddie Mac, and stopping the Subsidizing Leverage (borrowings) Through the Tax Code.In conclusion Sheila Blair stresses the need to appoint strong independent people to regulate financial institutions and markets, people who understand that their regulatory obligation is to protect the public, not the large financial institutions. When Geithner testified before Congress shortly after becoming Treasury Secretary a congressman asked him about the effectiveness of regulation, and he proudly responded "I have never been a regulator, for better or for worse." Gobsmacking as he did not even understand that as the fundamental part of his job as president of the New York Fed was to regulate some of tha nation's largest financial institutions. Indeed, he seemed offended that the congressman asking the question thought he was a regulator. Without those supposedly regulating being unaware of those responsibilities is it, therefore any surprise that the 2008 financial catastrophe occured?This is an absolutely first class, informative, thought-provoking and highly interesting book.POSTSCRIPT: As in many books of this type there was extensive use of acronyms which required constant referral to either prior pages or the index at the end of the book. A book marker detailing all of the acronyms used would have been of tremendous use and made for a more continuous read.

The book was brought to my attention by the 5 star review by N Taleb (The Black Swan, Antifragile etc.) otherwise I would have missed it.Mrs Bair was chairmen of the FDIC during the great banking crisis of the late 2000s.I've read Michael Lewis' excellent books on the subject (The Big Short and Boomerang) and this complimented these very well.The difference to Lewis' books and the main reason this is a great book is that the author was right in the eye of the financial storm. As a Washington insider we get to find out that the causes and the responses to the crisis had a clear political dimension.And as Bair says "..it goes on...".I found I have a deeper understanding of current financial events as a result of reading the book.In other words, I read newspapers and can join the dots re: Basel III, banking reform proposals etc.Lastly, as a UK reader it was really interesting to get an outsiders view of our Governor of the Bank of England as well as comparisons to our FDIC equivalent - customers queuing outside Northern Rock to withdraw their cash would never have happened in the US.

Sheila for Geithner :The more you read the more angry you get . How on earth could this guy not only keep his job but teach European finance ministers how to run this ( admittedly messy ) Eurozone issue. Will Obama get this ?

What'd you expect