Bull by the Horns

by Sheila Bair

  From November 7 to 10, we communicated by phone and email. I pitched him on our loan modification proposal. (He had been highly supportive91 of our efforts.) I offered my agency’s help92 with the transition and also took the liberty93 of suggesting that Mr. Obama make Paul Volcker his first secretary of the Treasury. I thought at the time (and still do) that some of the key decision makers during the 2008 crisis were too close to Wall Street leaders and that we needed more independent perspectives to deal with the substantial problems confronting the financial sector. We needed someone with gravitas, someone like Volcker who could stand up to those CEOs. The immediate crisis was over, but much cleanup work remained. Now was the time to start imposing some accountability on financial institutions’ management and force the institutions to clean up their balance sheets, even if that meant that they needed to realize substantial losses.

  I never heard back from John, but a few weeks later, Obama announced his choice of Tim Geithner to become Treasury secretary. It was like a punch in the gut. I did not understand how someone who had campaigned on a “change” agenda could appoint someone who had been so involved in contributing to the financial mess that had gotten Obama elected. Tim Geithner had been the bailouter in chief during the 2008 crisis. If it hadn’t been for my resistance and the grown-up supervision of Hank Paulson and Ben Bernanke, we would have spent even more money bailing out the financial bigwigs and guaranteeing all their debt. As president of the NY Fed, Tim had been responsible for regulating many of the very institutions whose activities had gotten us all into trouble.

  The only explanation I could think of was that Bob Rubin had pushed him. Rubin had been a major fund-raiser for Obama’s general election campaign. Indeed, as subsequent economic appointments were announced, they were a veritable hit parade of individuals who had served in Bob Rubin’s Treasury. Lawrence Summers, his deputy, who would go on to serve as Treasury secretary, would head the National Economic Council; Gary Gensler, his colleague at Goldman Sachs who had later served as his undersecretary at Treasury, would head the CFTC94; and Michael Barr, who had served as a lower-level deputy assistant secretary, would serve as Summers’s lieutenant. (Barr would later be appointed to my old job as assistant secretary for financial institutions at Treasury.) Without a team of his own, this new, inexperienced president was turning to officials in the former Clinton administration to staff his own administration. In certain areas, that made great sense, particularly at the State Department with the appointment of Hillary Clinton as secretary of state. But it made no sense to turn to the Bob Rubin team to implement much-needed reforms in the financial sector. President Clinton himself said95 that Rubin was wrong in urging deregulation of derivatives. Notably, Gensler, at least, has now become a strong advocate for derivatives regulation.

  Obama also announced that Rahm Emanuel, a congressman from the Chicago area, would serve as White House chief of staff. Several months before, Rahm had reached out to me in his capacity as an Illinois congressman to express support for my efforts on loan modifications and, in classic Chicago-style semantics, to assure me that he “had my back.” Rahm had also worked in the financial sector, but in Chicago, not New York, and I did not view him as one of the Rubin clique.

  So I called him to let him know that I was willing to stay but that I was also willing to go if that was what the president wanted. Though the FDIC is an independent agency and I had a fixed term extending to 2011, I had no desire to continue serving against the president’s wishes. I would be hopelessly compromised if I did not have the president’s support to continue in my job. Rahm was very reassuring, telling me that he would talk with Larry and Tim, but the whole tenor of the conversation was that the new administration wanted me to be part of its team.

  A few days later, on December 4, a story was leaked to a Bloomberg reporter that “Timothy Geithner96, President-elect Barack Obama’s choice for U.S. Treasury Secretary, is seeking to push FDIC Chairman Sheila Bair out of office.” The second paragraph cited Geithner as arguing that “Bair isn’t a team player and is too focused on protecting her agency rather than the financial system as a whole.” It attacked me for having weakened Citigroup by refusing to block the Wells acquisition of Wachovia and “holding out for concessions” during the November Citigroup bailout. As a clear warning shot to me, the story went on to say that “Even if Bair remains at the FDIC, the Obama economic team has decided that she won’t play a central role in policy.”

  I decided to reach out to Tim to see if he would at least tell me to my face that he was trying to oust me. I had a business trip already scheduled to New York the following day, so I sent him an email asking if he would have some time to get together. To try to take some of the edge off, I also let him know that my nine-year-old daughter, Colleen, would be traveling with me. Would it be possible, I asked, for her to have a tour of the New York Fed’s famous vaults, where they stored one of the biggest caches of gold in the world?

  He readily agreed to the meeting and the tour for Colleen. It was chilly and overcast when Colleen and I went to the NY Fed’s mammoth stone building in the heart of Wall Street late on the morning of December 5. The coldness and sterility of the architecture served as an intimidating backdrop for a homeless person who was rummaging through a trash can on the corner. The scene seemed an apt metaphor for the bailout strategies: reinforcing the biggest and most powerful while leaving the little guys to fend for themselves. Colleen and I were promptly ushered through the NY Fed’s elaborate security systems and taken upstairs to separate receiving areas. She was guided to a room with a television, while I was taken to a small anteroom outside of Tim’s office, which he entered after a few minutes. He would not meet with me in his office. A bad sign, I thought.

  The meeting was short. As politely as possible, I referenced the press leaks that he wanted to force me out. I asked him if he could discuss his concerns with me. He talked in generalities about the need for everyone to support the system, not individual agencies, but we didn’t really get into the meat of the issues between us and nothing was really resolved. Tim seldom engaged with me directly, the main exceptions being when he was advocating for Citi and needed my help. (For instance, he had apparently railed against our decision to close WaMu but had never said a word to my face.) He was polite but unwilling to have much of a substantive discussion, so after fifteen minutes or so, there wasn’t much else to say. I left to join my daughter for the gold tour.

  Whoever was responsible, leaking the Bloomberg story turned out to be a stupid thing to do. Though obviously the strategy was to weaken my hand by portraying me as an unwanted holdover, the strategy backfired. Without any prodding from me, Senate Banking Committee Chairman Chris Dodd and House Financial Services Committee Chairman Barney Frank immediately wrote a vigorous letter to the president-elect on my behalf. Frank was famously quoted as saying “We have several regulators up in the tree house with a ‘no girls allowed’ sign.” I waited several weeks without hearing anything back from Rahm. Then on Wednesday, January 7, 2009, the president-elect all but endorsed my retention by answering a question about housing policy during a CNBC interview by responding “I do think that the FDIC and Sheila Bair have had the sense of urgency about the problem that I want to see.” On Thursday, January 8, The Wall Street Journal ran an article titled “FDIC’s Bair Gets Nod to Stay, Address Housing Mess,” citing Mr. Obama’s quote and congressional sources.

  As the question of my future was resolved, we entertained a steady stream of Obama transition team members who came to visit us about our operations and programs, including our ideas on foreclosure prevention. They included Shaun Donovan, who eventually became the secretary of housing and urban development, and Michael Barr, who had been asked by Larry Summers to come up with a loan-restructuring program. Larry also asked to meet with me. We were happy that they were reaching out, but at the same time, we had the impression that they were going through the motions because of the president’s public embrace of our efforts. M
y guess is that behind the scenes, Larry and Tim were working hard to make good on the leaked threat that I would have no real role in or influence on policy.

  My skepticism was heightened by the tenor of some of the questions the transition team asked about our IndyMac program. They were obsessed with the “high redefault rates” at IndyMac, even though none of our IndyMac loan mods had redefaulted. We had operated the program for only three months. It was true that the loan mods tried by the IndyMac management before we took over had had very high redefault rates, but that was because the bank had mostly raised payments, similar to the redefaulting loans in the OCC study. When we took over IndyMac, there were thousands of “modified” loans that had redefaulted and had been delinquent for several months. We tried to salvage them, but for most, it was too late. The new mods that met the parameters of our program, those modified within three months of delinquency and reduced to a 31 percent DTI ratio, did perform in accordance with our redefault predictions. We gave Summers’s people97 studies that showed low redefault rates when payments were meaningfully reduced, but they kept focusing on “high redefault rates” at IndyMac, even though, as we told them repeatedly, at that point the redefault rate was zero.

  Daniel Tarullo, a professor of law at Georgetown University, also came by for a long visit, not to talk about housing policy but rather to discuss our opposition to Basel II. It was not a perfunctory meeting but rather a sincere desire on his part to be briefed on our concerns and analysis showing that Basel II would result in precipitous drops in capital levels at most of the major U.S. banks. As an academic, Dan had been a leading critic of the Basel II advanced approaches. I truly rejoiced. Finally, I would have an ally in the new administration in resisting that idiotic approach to bank capital. No longer would the FDIC and I be fighting alone. I was very pleased when the president announced that Dan would be nominated to serve on the Federal Reserve Board of Governors. Dan would later play a pivotal role in changing the whole dynamic of the Basel Committee away from letting banks set their own capital to setting much stronger capital standards. Not only was he an ally in domestic discussions, he also redirected the Fed so that at last the Fed and the FDIC would be aligned.

  Unfortunately, though, the new administration’s economic team was much more aligned with the previous one when it came to helping troubled home owners.

  CHAPTER 13

  Helping Home Owners, Round Three

  Geithner was nominated and confirmed by the Senate on January 26, 2009, by a vote of 60 to 34. Most Republicans voted against him due to his failure to pay Social Security and Medicare taxes for several years. A few Democrats also opposed him because of his perceived favoritism to the big financial institutions and his weak record as a regulator when he headed the NY Fed. Once ensconced in office, and to his credit, Tim initiated an aggressive series of meetings with the heads of the major agencies as well as senior White House economic staff (Larry Summers, Michael Barr, and Christina Romer, the new head of the Council of Economic Advisers). Other attendees included Mary Schapiro, the new head of the SEC (due to delays in Senate confirmation Gary Gensler, the new head of the CFTC, would later join in May); Ed DeMarco, the acting head of the FHFA; the regulator of Fannie Mae and Freddie Mac; John Dugan, the holdover head of the OCC; William Dudley, Tim’s choice to succeed him as the head of the New York Fed; Ben; and me.

  The meetings were useful in the sense that they pulled everyone together to discuss financial stabilization measures, as well as the need for legislative reforms to strengthen the financial regulatory structure. However, they were not the “real meetings.” As per usual, key decisions were made by Tim, Larry, Ben, and their key staffs, working behind the scenes. Separately, we were in continued dialogue with Larry Summers and Michael Barr on a loan modification program. Given the outreach and President Obama’s supportive public statements, I was hoping we would reach consensus on a meaningful program that could have a real impact on foreclosure rates.

  But the Bush free-market economists who had stymied our efforts were still working at the Treasury and, amazingly, had the ear of Larry and Tim. On February 3, an article was leaked to Bloomberg quoting Geithner ally John Dugan describing in detail “administration discussions” on loan mod programs, mentioning our insurance guarantee program but also the payment subsidy approach that Phil Swagel had proposed, which we knew was administratively unworkable. The article was remarkable in that John Dugan was the cited source, even though I was unaware that he had had any role in the loan modification discussions nor should he have had, given his unabashed championship of large national banks and disingenuous efforts just months earlier to manipulate redefault data to undermine support for loan workouts.

  After seeing the article, I contacted Larry Summers and was not reassured by what I heard. Yes, the White House was leaning toward pursuing the same plan that Phil Swagel had proposed during the Bush administration. I requested a meeting and contacted Michael Barr in a panic, pleading for help. Michael had a good reputation on consumer issues, and I thought he would respect the views of our two top experts, Rich Brown, our chief economist, and Mike Krimminger, my chief legal adviser, on why, from both the economic and legal/operational standpoints, that program wouldn’t work. Unfortunately, in that case as well as others later, Michael would be working against us.

  Larry met with me on Friday, February 6, along with Michael and Larry’s senior adviser, Diana Farrell. I laid out our concerns about the Swagel payment subsidy plan and told him that I would not publicly criticize them if they decided to go down that route, but that I would also not support it. I told him point-blank that the program had been devised to make it look as though the administration was doing something with the smallest amount of money possible. At most, the program would result in $8 billion worth of subsidy payments and have no meaningful impact on countering the countervailing economic incentives that were driving millions of borrowers into foreclosure.

  He listened politely, but clearly his mind was already made up. However, I did detect discomfort when I mentioned the low dollar amount the program would likely provide to foreclosure prevention, as well as my refusal to support them publicly if they launched this program. Clearly, my only leverage with Larry was the new president’s respect for my commitment to foreclosure prevention and desire that I be a part of the program development team (even if Larry and Tim wanted to exclude me). Obviously, the president of the United States was not going to be happy with an $8 billion program that I refused to support.

  Larry suggested that we continue the discussions. I asked Mike Krimminger to work with Michael and Diana to see if we couldn’t achieve some meeting of the minds. Unfortunately, Larry and his staff were much more willing to throw additional money at the program than they were willing to revisit its basic structural flaws. They agreed to allot $5 billion to a much narrower and more complex version of our insurance program, while sweetening other subsidies to reach a total price tag of $48 billion. They allotted $21 billion for the Bush program interest subsidy, another $10 billion for a principal reduction program, as well as $12 billion to pay servicers to help cover their additional administrative costs. We were horrified by the administrative complexity of the program. We knew from our experience with IndyMac that the servicing operations were bare bones, with poorly trained and compensated staff. The program had to be simple, or the servicers wouldn’t be able to operationalize it. But Summers and Barr didn’t want to hear that. We were equally horrified to learn that they were going to put Fannie Mae and Freddie Mac in charge of the program. That was akin to putting the fox in charge of the chicken coop. Fannie and Freddie were the biggest holders of the Triple-A subprime mortgage-backed securities. Every interest rate that was reduced for a distressed borrower could potentially eat into their returns. They were hopelessly conflicted.

  Larry and I met again in his office on Presidents’ Day, February 16. Again, I ran down our concerns, but I also realized that that was the best I was going to be a
ble to do. I asked if they would at least set up an oversight board where I could serve and help with program implementation. He said no, but they would be willing to set up quarterly advisory meetings. He also said that the president wanted me to join him when he announced the program, implying that he had already achieved sign-off. The tables were turning: if I refused to participate, I would be turning the president down.

  So, notwithstanding our concerns, I agreed. On February 18, 2009, I went to Phoenix to join the president, along with Tim and HUD Secretary Shaun Donovan, to announce the loan mod program, named the Home Affordable Mortgage Program (HAMP), as well as another program to make refinancing more broadly available to borrowers whose mortgage was for more than their house was worth, so-called underwater mortgages. Even while I was traveling to the announcement, Mike Krimminger was continuing to negotiate with Michael Barr in a last effort to have a fuller test of our simpler insurance program. Unfortunately, as was often the case, our program was never implemented and the Treasury’s more complex program became the only approach allowed.

  At the Phoenix announcement, the president was masterful in announcing the program, though I cringed as he threw out what I considered to be wildly inflated numbers on the programs’ impact. The Treasury and White House staff had told him that 3 million to 4 million borrowers would be helped under the program. Even with our own, more aggressive proposal, we had estimated the number of successful modifications at 2.1 million tops.

  Tim, Shaun, and I all flew commercial aircraft to the event, though the president asked us to fly back with him on Air Force One. It had to be awkward for Tim as I joined him on the plane, sitting in the same area that was reserved for senior administration staff. The space was furnished with overstuffed beige leather chairs and glossy wood tables. Paper place mats, napkins, and cardboard coasters, all embossed with the presidential seal and the name Air Force One, were scattered about, and yes, I took a few as souvenirs and stuffed them into my purse (for the kids, of course). About halfway through the flight, after a gourmet lunch had been served, I settled in with a copy of Peter Bernstein’s Against the Gods: The Remarkable Story of Risk, sipping a Diet Coke and popping nuts out of a small Air Force One china bowl.