Bull by the Horns

by Sheila Bair

  I grew up on “Main Street” in rural Kansas. I understand—and share—the almost universal outrage over the financial mess we’re in and how we got into it. People intuitively know that bailouts are wrong and that our banking system was mismanaged and badly regulated. However, that outrage is indiscriminate and undirected. People feel disempowered—overcome with a defeatist attitude that the game is rigged in favor of the big financial institutions and that government lacks the will or the ability to do anything about it.

  The truth is that many people saw the crisis coming and tried to stop or curtail the excessive risk taking that was fueling the housing bubble and transforming our financial markets into gambling parlors for making outsized speculative bets through credit derivatives and so-called structured finance. But the political process, which was and continues to be heavily influenced by monied financial interests, stopped meaningful reform efforts in their tracks. Our financial system is still fragile and vulnerable to the same type of destructive behavior that led to the Great Recession. People need to understand that we are at risk of another financial crisis unless the general public more actively engages in countering the undue influence of the financial services lobby.

  Responsible members of the financial services industry also need to speak up in support of financial regulatory reform. All too often, the bad actors drive the regulatory process to the lowest common denominator while the good actors sit on the sidelines. That was certainly true as we struggled to tighten lending standards and raise capital requirements prior to the crisis. There were many financial institutions that did not engage in the excessive risk taking that took our financial system to the brink. Yet all members of the financial services industry were tainted by the crisis and the bailouts that followed.

  As I explain at the end of this book, there are concrete, commonsense steps that could be undertaken now to rein in the financial sector and impose greater accountability on those who would gamble away our economic future for the sake of a quick buck. We need to reclaim our government and demand that public officials—be they in Congress, the administration, or the regulatory community—act in the public interest, even if reforms mean lost profits for financial players who write big campaign checks. Our government is already deeply in debt because of the lost revenues and stimulus measures resulting from the Great Recession. Financially, morally, and politically, we cannot afford to let the financial sector drive us into the ditch again.

  I am a lifelong Republican who has spent the bulk of her career in public service. I believe I have built a reputation for common sense, independence, doing the right thing for the general public, and ignoring the special interests. Many of my positions have received editorial endorsements ranging from The Wall Street Journal to The New York Times, from the Financial Times to The Guardian to Mother Jones. My most cherished accolade during the crisis came from Time, which, in naming me to its 2008 “100 Most Influential People” list, called me “the little guy’s protector in chief.” I’ve always tried to play it down the middle and do what I think is right.

  I want to explain why we are where we are in this country and how we can find ways to make it better. Our current problems are as bad as anything we have faced since the Great Depression. The public is cynical and confused about what it has been told concerning the financial crisis. In this book, I have tried to help clear away the myths and half-truths about how we ran our economic engine into the ditch and how we can get our financial and regulatory system back on track. We need to reclaim control of our economic future. That is why I wrote this book.

  Sheila Bair, April 2012

  CHAPTER 1

  The Golden Age of Banking

  I woke at 5 A.M. to the sound of a beeping garbage truck working its way down the street, noisily emptying rows of metal trash cans. I had fallen asleep four insufficient hours earlier. My eyes opened at the sound of the commotion; my mind was slow to follow. The room was pitch black, save for tiny rectangles of light that framed the bedroom windows where the thick shades didn’t quite line up with the window frames.

  I was disoriented. This was not my home. My own image came into focus, staring back at me from a full-length mirror that stood just a few feet from my bed. My mind cleared. I was in my good friend Denise’s basement apartment on Capitol Hill, the one she used four times a year to show a line of women’s designer clothing that she sold to her friends and colleagues. The rest of the time the apartment stood empty, and she had offered me its use.

  Full-length mirrors were everywhere, used by her customers to view themselves when they tried on the colorful array of suits, dresses, and casual wear. For the month I would stay in this apartment, I found it somewhat disquieting to constantly be confronting my own image. At least the mirrors were slenderizing, the silver backings molded no doubt for that purpose to help sell the clothes.

  I carefully navigated out of bed and gingerly shuffled across the parquet wood floor of this foreign room until I found the light switch on the wall. As I flipped it on, the room jarringly transformed from near blackness to glaring fluorescent light. I found a coffeemaker on the counter of the apartment’s tiny efficiency kitchen, as well as a pound of Starbucks, helpfully left by Denise. I made a full pot of coffee and contemplated a long walk on the Mall to fill the time. I still had two hours to kill before driving to my first day of work as chairman of the Federal Deposit Insurance Corporation.

  What a strange turn of events had brought me here. Four years ago, after nearly two decades in mostly high-pressure government jobs, I had left Washington with my family in search of a career that would provide a better work-life balance. I had worked as legal counsel to Senator Robert Dole (R–Kans.). I had served as a commissioner and acting chairman of the Commodity Futures Trading Commission (CFTC) and then headed government relations for the New York Stock Exchange (NYSE).

  In 2000, I decided, “enough.” I resigned my well-paying position with the NYSE and opted for a part-time consulting arrangement that gave me plenty of time to spend with my eight-year-old son, Preston, and one-year-old daughter, Colleen, whom my husband, Scott, and I had just adopted from China. But in early 2001, I was contacted by the new Bush administration, which convinced me to go back into the government as the assistant secretary of financial institutions of the U.S. Treasury Department. At the time, the financial system was in a relative state of calm, and the Bush folks assured me that I would have a nine-to-five existence at Treasury with no travel and plenty of time in the evenings and weekends for the family. The job had an interesting portfolio of issues but nothing of crisis proportions—issues such as improving consumer privacy rights in financial services and deciding whether banks should be able to have real estate brokerage arms.

  Then came the 9/11 terrorist assault, followed by the collapse of Enron. What had started out being a nine-to-five job became a pressure cooker as I was tasked with heading a coordinated effort to improve the security of our financial infrastructure, strengthen protections against the illicit use of banks for terrorist financing, and help reform corporate governance and pension abuses to address the outrageous conduct of the Enron management. Nine to five became 24/7.

  I completed my major projects and in the summer of 2002 said farewell to Washington. My husband and I moved to Amherst, Massachusetts, a serene and idyllic New England college town. He commuted back and forth from D.C.; I took a teaching post at the University of Massachusetts. The arrangement worked perfectly for four years, with adequate income, great public schools, and most important, a flexible work schedule with plenty of time for the family.

  Then, in the early part of 2006, came a second call from the Bush administration: would I be interested in the chairmanship of the FDIC?

  The FDIC was created in 1933 to stabilize the banking system after runs by depositors during the Great Depression forced thousands of banks to close. By providing a rock-solid guarantee against bank deposit losses up to the insurance limits ($100,000 when I assumed office in 20
06; now $250,000), the agency had successfully prevented runs on the banking system for more than seven decades. I had worked with the agency during my Treasury days and had also served on an advisory committee it had set up on banking policy.

  In addition to its insurance function, the FDIC has significant regulatory authorities. For historical reasons, we have multiple federal banking regulators in the United States, depending on whether the banks are chartered at the federal or state level. In 2006, we had four bank regulators: two for federally chartered banks and two for state-chartered institutions. The Office of the Comptroller of the Currency (OCC) chartered and supervised national banks, which includes all of the biggest banks. The Office of Thrift Supervision (OTS), which was abolished in 2011, chartered and regulated thrifts, which specialize in mortgage lending. The FDIC and Fed worked jointly with the state banking regulators in overseeing the banks that the states chartered. If the state-chartered bank was also a member of the Federal Reserve System, it was regulated by the Fed. Those that were not members of the Federal Reserve System—about five thousand of them, the majority—were regulated by the FDIC.

  The FDIC was also a backup regulator to the Federal Reserve Board, the OCC, and OTS, which meant that it had authority to examine and take action against any bank it insured if it felt it posed a threat to the FDIC. Importantly, in times of stress, the agency had sole power to seize failing insured banks to protect depositors and sell those banks and their assets to recoup costs associated with protecting insured deposits.

  The Bush administration had vetted Diana Taylor, the well-regarded banking superintendent of the state of New York, to replace Donald Powell, a community banker from Texas who had been chairman since 2001. Don had left the FDIC some months earlier, leaving Vice Chairman Martin Gruenberg to be the acting chairman. It was an awkward situation. By statute, the FDIC’s board had to be bipartisan, and by tradition the opposing party’s Senate leadership had a strong hand in picking the vice chairman and one other board member. Marty was popular and well regarded but was essentially a Democratic appointee, having worked for Senate Banking Committee Chairman Paul Sarbanes (D–Md.) for most of his career. Understandably, the Bush administration was anxious to install one of its own as the chairman.

  For whatever reason1 Diana’s nomination did not proceed, and the Bush people were looking for a known quantity who could be confirmed easily and quickly. They viewed me as both. I had worked for Bush 43 at the Treasury Department and Bush 41 as one of his appointees on the Commodity Futures Trading Commission. In fact, I had been promptly and unanimously confirmed three times by the Senate (President Bill Clinton had reappointed me to the CFTC). That was due, in no small measure, to my early career with Senator Bob Dole, who was much loved in the Senate. Certainly, I had built my own relationships and record with senators, but Dole’s afterglow had always helped ensure that I was well treated during the Senate confirmation process.

  It was a difficult decision to make. We were happy in Amherst, and the family was reluctant to move. It was an ideal existence in many ways. We lived in a 150-year-old house across the street from the house where Emily Dickinson had lived and scribbled her poems on scraps of paper at a desk that overlooked our home. As I was a bit of an amateur poet myself, her house served as my inspiration when I wrote a rhyming children’s book about the virtues of saving money. Our home stood two blocks from the village green. The kids and I walked everywhere—to school, to work, to shop. We hardly even needed a car. The people were friendly. The schools were good. Why should we move?

  On the other hand, I was a government policy person at heart, and I thought—as I had when I took the Treasury Department job—that the FDIC position had an interesting portfolio of issues. For instance, Walmart had filed a controversial application for a specialized bank charter, exploiting a loophole in long-standing federal restrictions on commercial entities owning banks. In addition, Congress had recently authorized the FDIC to come up with a new system for assessing deposit insurance premiums on all banks based on their risk profile. Those were not exactly issues that would make the evening news, but as a financial policy wonk, I found them enticing.

  So I agreed to accept, and, as expected, the confirmation process went quickly. The Bush people were eager for me to assume office, which didn’t leave my husband and me enough time to find a new house and move the family. So here I was, living in a friend’s borrowed apartment, while Scott, Preston, and Colleen stayed behind in Amherst until I could find us a place to live.

  After downing my first cup of coffee, I thought better of the Mall walk—it was starting to rain. Instead, I made a mad dash to the drugstore to buy papers. I was drenched by the time I got back to the apartment. I plopped down on the living room couch, my wet skin sticking unpleasantly to the black leather upholstery. I dug into the papers in accordance with my usual ritual: The Wall Street Journal first, followed by The New York Times, then The Washington Post, finished off with the Post’s crossword puzzle. With my sleep-deprived brain, I didn’t make it far on the puzzle. I regretted that I would be exhausted for my first day at the office.

  It was really pouring rain by the time I left the apartment. I ran a half block to where I had parked our beat-up white Volvo sedan the night before, ruining my leather pumps in the process. I turned on the ignition and pressed “play” on the CD player, which held a Celtic Woman disc given to me by my kids for the trip. The soothing sounds of “Orinoco Flow” filled the car—a fitting song as I navigated flooded streets to reach the FDIC’s offices at 550 17th Street N.W., a stone’s throw from the White House. (Perhaps as an omen of things to come, the rains that day reached torrential levels, forcing the unprecedented closing of the Smithsonian museums and other government buildings.) The guard at the entry to the FDIC’s parking garage raised a halting hand to signal that I should stop for the customary trunk search but then waved me on when he recognized my face from the photo that he—and all of the other security guards—had been given of the new FDIC chief.

  I parked the car and headed for the small executive elevator that the FDIC reserved for its board members and their guests. I was already familiar with the FDIC building from my service on its advisory committee, so I was able to find my sixth-floor office with no difficulty. As I walked in the door, I was greeted by Alice Goodman, the longtime head of the FDIC’s legislative affairs office. I had not yet had a chance to fill key staff positions, such as chief of staff, so I had asked Alice to serve temporarily as my acting deputy, to help me start learning and mastering the FDIC’s organization, sift through the meeting requests, and organize the office. Alice had quite ably worked on my Senate confirmation and was willing to take a temporary detail to the Office of the Chairman. Soon I would hire Jesse Villarreal, who had worked for me at the Treasury Department, to serve as my permanent chief of staff.

  Also helping out was Theresa West, a cheery, conscientious woman who was on detail from another division to serve as an administrative assistant. I was amazed that there was no secretary permanently assigned to the chairman’s office. At the Treasury Department, the secretaries were the backbone of the organization, providing continuity and institutional memory to the political appointees, who came and went. Later, Brenda Hardnett and Benita Swann would join my office to provide crucial administrative support through most of my FDIC tenure.

  The morning was spent on administrative necessities, such as filling out tax and benefit forms and other paperwork. Midway through the morning, Theresa suggested that we go to the security office so I could be photographed for my ID badge. We took the elevator to the basement and entered a small office staffed by a single young woman who was intently talking on the phone. As Theresa announced that the chairman was there for her ID photo, I was astonished to see the young woman hold up an index finger and continue talking on the phone. I was even more amazed to have to stand there for some time longer as the young woman finished what was clearly a personal call. Embarrassed and stammering, Theresa tri
ed vainly to take charge of the situation through throat clearing and stern looks, but the woman just kept talking. I weighed my options. I could escalate by ordering the woman to terminate her phone call—reports of which would no doubt spread like wildfire throughout the agency—or I could let it go. I chose the latter.

  What I didn’t realize at the time—but was soon to discover—was that this employee’s disaffection was only the tip of the iceberg for much wider issues of employee cynicism and anger caused by years of brutal downsizing. In the summer of 2006, FDIC employee morale problems ran deep through the agency. They would become a major preoccupation and challenge for me during my first several months at the FDIC.

  In June 20062, the agency employed about 4,500 people with a billion-dollar operating budget. Since the 1990s, the agency’s staff had been shrinking as the workload from the savings and loan crisis subsided. In 1995, the number of FDIC staff stood at 12,000. By 2001, that number had shrunk to 6,300. By the time I arrived, it had shrunk by another 1,800. There was no doubt that some of the downsizing had been necessary. However, in hindsight, the staff and budget reductions had gone too far. And it soon became clear to me that the layoffs—or “reductions in force,” as the government calls them—had been carried out in a way that, rightly or wrongly, had given rise to a widespread impression among employees that decisions were based on favoritism and connections with senior officials, not on merit or relevance to core functions.