Bull by the Horns

by Sheila Bair

  In addition to terminating the ring fence, Citi wanted to raise only $15 billion in new common equity to repay its $20 billion in TARP. I pushed back hard. “Sorry, this is all about compensation,” I said to Dan Tarullo in a December 10 email. “I’m not going to be jammed on hasty negotiations so they can pay their execs more money.” But as usual, we were isolated in our opposition, and it was clear to me that the Fed would approve Citi’s exit without us. So, aided by Jason Cave and John Corston, we negotiated the best deal we could. We were able to get the common equity offering up to $17 billion, with a commitment to sell another $2.5 billion if the offering was oversubscribed. Citi did not reach the $2.5 billion for lack of investor interest, so the Fed required that it issue additional trust-preferred shares. Treasury also agreed to keep Citi under compensation restrictions for another year. The FDIC kept the $3 billion in preferred securities that Citi had paid us for agreeing to take $10 billion in exposure on the ring fence. Given the FDIC’s continued exposure to Citi on the debt guarantee program, I insisted that we keep those securities, which pay an 8% dividend, until all of Citi’s guaranteed debt expires.

  Citi blamed Wells Fargo for its failure to raise the full amount, essentially accusing Wells of timing its own offering to interfere with Citi’s capital-raising efforts. (Wells had no problem raising its $12.25 billion in new common equity.) Ironically, Wells was not in a hurry to exit TARP and I think would have been willing to keep the capital and repay it over time, dollar for dollar, through retained earnings. However, the Treasury and Fed had pressured all of the institutions, including Wells, to exit the program, which meant that they were all going to the market at about the same time, competing with one another.

  The special inspector general for TARP (SIGTARP) conducted a thorough review of the TARP exits and justifiably criticized the regulators for easing the terms of the 1-for-2 guidance, as well as pressuring the banks all to exit at the same time. However, it commended the interagency process, finding that “interagency sharing of data160, vigorous debate among regulators, and hard-won consensus increased the amount and improved the quality of the capital that SCAP institutions were required to raise to exit TARP. . . . FDIC, exposed through its deposit insurance fund and its emergency lending program, was by far the most persistent in insisting that banks raise more common stock. The checks-and-balances that resulted from this interagency coordination helped to ensure that the nation’s largest financial institutions were better capitalized upon exiting TARP than prior to TARP.”

  That was a prime example of why we needed more than a regulator. If it had not been for the FDIC, there is no doubt in my mind that the Fed and OCC would have settled for substantially less capital raising from all of the institutions.

  Not that it was a happy relationship. SIGTARP’s original report contained numerous quotes of my emails pushing back against the other regulators on TARP repayment. SIGTARP reluctantly agreed to delete a number of them at the insistence of the Fed’s general counsel, while noting in its report that “exclusion of such information161 unnecessarily inhibits transparency, and is a missed opportunity to shed additional light on transactions that involved billions of dollars in taxpayer money.” I agree and thus have included in this chapter some of my excluded quotes.

  We demanded, and got, significantly more capital from the banks, but the banks also got what they wanted. By January, they were announcing bonuses that rivaled the amounts they had paid before the crisis. It made me wonder whether all of the bailout measures had been to protect the system or make sure those guys didn’t have to skip their bonuses. As John Reed, the well-regarded former CEO of Citigroup, stated at the time, “There is nothing162 I’ve seen that gives me the slightest feeling that these people have learned anything from the crisis. They just don’t get it. They are off in a different world.”

  The year 2009 put me at the center of many battles with the larger banks. I knew I was making myself unpopular, but I was astonished to read a major article in The New York Times on October 11, 2009, that Citigroup Chairman Richard Parsons had hired Richard Hohlt, a Washington lobbyist with a checkered reputation whose job, according to anonymous sources at Citi, was to “blunt” the pressure we were putting on Citi to improve its management and operations. As the story recounted, Hohlt is infamous in Washington for the role he played as the well-paid point man for the savings and loan industry in the 1980s. He was a key player in beating back regulators’ efforts to effectively deal with the S&L debacle, which ultimately cost the taxpayer hundreds of billions of dollars. William Black, the lead congressional investigator of the savings and loan mess, was quoted in the article as saying “It is singularly obscene that any recipient of taxpayer assistance through the TARP program during the current financial crisis would hire one of the most infamous lobbyists in the world to represent them.”

  Hohlt denied that he was hired to “lobby” the FDIC, which was technically true, but beside the point. Citi had a very competent Washington, D.C., office. In any event, we were dealing directly with the board and senior management. Hohlt had no sway with anyone at the FDIC (just the opposite, in fact). He would have added nothing to the mix. People such as Rick Hohlt have other skills. One is to create trouble for government regulators by feeding negative stories and information to Hill staff and reporters. Being a “background source” for Washington-based media was one of Hohlt’s fortes, as The New York Times noted. For instance, during the perjury trial of Vice President Cheney’s aide, Scooter Libby, Robert Novak, who wrote the column “outing” Valerie Plame, testified that he gave the column to Hohlt prior to its publication. Hohlt, in turn, gave it to Karl Rove, the White House political director. So here was an institution (Citi) that had received $45 billion in TARP capital from the government and had issued about $70 billion in FDIC-guaranteed debt using its funds to hire a well-known hired gun to “blunt” the FDIC. In addition to his relationship with Citi management, Hohlt had another ax to grind with us: he had been a longtime lobbyist for Washington Mutual and even told the The New York Times that he had lost thousands of dollars in WaMu stock when it failed.

  A few months later, Andrew received a provocative call from Keith Epstein and David Heath of the Huffington Post Investigative Fund, which operates independently of the much-better-known Huffington Post news blog led by Arianna Huffington. They were working on a story163 that suggested I had received special treatment from Bank of America in securing two mortgages from that bank during the same time I was working on BofA’s “rescue.” Andrew was aghast, as was I. I didn’t know what the heck they were talking about.

  As I explained in earlier chapters, when Scott and I moved the family to Washington in 2006, we were not certain that it would be a permanent move. So we signed a three-year lease for a house in the D.C. area while renting out part of our home in Amherst to help pay the bills. We are not wealthy people, having spent most of our careers in government or the nonprofit sector. It was financially challenging for us to keep up the mortgage on the Amherst property while also paying rent in the expensive D.C. market. When the lease came due in July 2009, we decided to make the move permanent. Thus we started looking for a house to buy in D.C. and put our Amherst house on the market. Unfortunately, we could not find a buyer for our Amherst house, and after months of looking, the only house we could find to accommodate our needs in Washington had a million-dollar price tag (which in D.C. is not viewed as that expensive). To afford the mortgage on the D.C.-area house, we needed to reduce our monthly payments on the Amherst house, so we decided to refinance out of our fifteen-year mortgage into a thirty-year mortgage.

  My husband worked with our real estate broker in finding financing for the D.C.-area house. (I stayed completely out of these discussions.) Since it was a jumbo loan, she advised us that financing was readily available only from the bigger banks and gave Scott the names of loan officers at both BofA and Wells Fargo. We already had a banking account at BofA, reflecting a customer relationship that went back
to the 1980s. BofA and Wells were offering comparable deals, so Scott went with BofA. At the same time, we contacted our local lender in Amherst, Florence Savings Bank (FSB), and asked if it would refinance our fifteen-year mortgage into a thirty-year loan, explaining that we still used part of the house as a second home for weekend trips and summer vacations. The Florence Savings Bank loan officer confirmed in writing that it could refinance the house as a second home, but at that time, it was offering only variable-rate financing.

  We wanted a fixed-rate loan, so Scott went to the BofA loan officer, explaining again that we used part of the Amherst house as a second home, and asked if BofA could refinance the Amherst mortgage as well. It was obvious that the Amherst house was not our primary residence, as BofA was also financing the purchase of our primary home in the D.C. area. Both loans were considered prime, low-risk mortgages. We could have easily secured comparable financing from a number of lenders. My husband and I have high FICO scores and have always paid our mortgage on time. We were putting more than 20 percent down on the D.C.-area house and had built up 70 percent equity in the house in Amherst. If anything, we were doing BofA a favor by taking our business to it, not the other way around.

  The FDIC has strict rules forbidding FDIC officials from owning bank stocks, but it does not restrict us from getting credit cards or mortgages from insured banks; pretty much everyone has a credit card and mortgage. We are forbidden from getting those loans from FDIC-regulated banks, which are mostly the smaller, state-chartered community banks. Hence, FDIC officials go to national banks or thrifts, where we have no primary supervisory responsibilities. Of course, all of our banking relationships, including loans, credit cards, and deposit accounts, are publicly disclosed each year in annual financial reports. The two mortgages were to be disclosed in the next reporting cycle.

  The mortgages did not violate the ethics rules, and they were both clearly consistent with the market rates being provided by other lenders at the time. So where was the story? There wasn’t one.

  The first tack the reporters tried to take was that it was simply inappropriate for me to do business with BofA when I was involved in “negotiating the bank’s bailout.” They overlooked the fact that BofA had received its bailouts long before my husband had started looking for a mortgage for us. In any event, Hank Paulson, as recommended by BofA’s primary regulators, not the FDIC, had decided to invest $45 billion in TARP funds and provide other government support. I had resisted BofA’s second bailout. I thought it was unnecessary, and I was proven right.

  Then the reporters tried to argue that it was inappropriate for me to have been negotiating the terms of BofA’s TARP repayment, having gotten two mortgages from the bank. They also tried to make something of a short courtesy call on me from one of BofA’s executives, Gregory Curl. This type of “meet and greet” is held all the time in Washington. No business was conducted. In any event, the mortgages were approved and locked in well before the meeting occurred and before we had any inkling that BofA wanted to repay its TARP.

  The idea that I might be handing out favors to BofA because I had gotten two market-rate mortgages from it was laughable. Anyone familiar with the record knows that I fought tooth and nail for BofA to raise much more capital than the other regulators would have required. If I had recused myself, I shudder to think what the outcome on its TARP repayment might have been. With both approaches, the reporters tried to make it look as if I were leading the charge to help BofA, while the facts clearly showed just the opposite.

  In addition, the idea that BofA was giving us any special deal was ridiculous. On the contrary, we experienced the same kind of problems with BofA’s mortgage operation as have many other customers. It lost our paperwork, pulled me out of an important meeting a day before we were supposed to close to get additional documentation, and then, when we and the sellers arrived at the settlement table, the officers didn’t have all the papers necessary to close and we had to reschedule. About a year later, as mortgage rates plummeted, we tried to refinance. The bank charged us $700 to lock in a rate and then let the clock run out before the paperwork was done. It kept our $700, and we never got our refi.

  The reporters focused a lot on the fact that BofA had erroneously designated our house in Amherst as a primary residence on our mortgage. They argued that by doing this, we had received a more favorable interest rate. My husband clearly told the BofA representative that part of the house in Amherst was being rented and we used the other part as a second home. The proof of insurance we gave the bank clearly showed that it was partially rented. It had to know that it was not our primary residence because it was financing the D.C.-area house, which was. When our IG looked at it, he found that the Amherst mortgage complied with established market guidelines and published rates. Actually, the rate BofA had given us was 5.62%, when the average for a thirty-year loan at the time was 5.26%. That was a paperwork error, and in fact, we paid a rate that was higher than the average rate.

  The reporters could not have known any of that personal financial information about me without a professional investigation of our mortgages and family circumstances. I seriously doubt that on a whim they had just started looking at my home finances. Someone had had to dig deeply to find out that we owned two houses, that we had recently taken out two mortgages, that BofA had erroneously designated our Amherst house as our primary residence (we didn’t even know that), and that we were renting part of our house to tenants. I have to assume that someone with expert knowledge of the mechanics of mortgage finance dug the information up, contrived a way to interpret it in the worst possible way, and provided it to them. I can only speculate where the story came from. I am happy to report that no other media outlet would touch it. It died a quick and well-deserved death.

  CHAPTER 19

  The Senate’s Orwellian Debate

  After the House passed its financial reform bill at the end of 2009, the effort moved to the Senate, where we were still engaged with Senator Dodd and his staff on the single regulator. It was a frustrating dialogue with Senator Dodd. We shared the same goals of wanting a stronger, more independent prudential supervisor for the nation’s largest banks. Yet we were completely at odds as to how it should be done. Since his bill technically abolished the OCC, he truly felt that the new agency—to be called the Financial Institutions Regulatory Agency (FIRA)—would provide better oversight. Our fear was that the new agency would just be the OCC with a new name, except that we would no longer have a seat at the table to keep an eye on it.

  The OCC staff was gleeful at the prospect of getting the FDIC and Fed out of bank supervision, and we strongly suspected that they were behind the scenes supporting this. Indeed, so enamored were some of the Dodd staff with consolidating power in the new, morphed OCC that at one point they actually proposed giving it the job of consumer regulator as well. In a truly strange twist, an alternative was proposed by Senator Richard Shelby, who suggested making the FDIC the new consumer regulator. We continued to strongly and vocally support the creation of a new, independent consumer agency. (Though I must say, if the Senate had decided to keep consumer regulation with an existing bank regulator, I think it is obvious that we would have been a more vigilant protector of consumer rights than a renamed OCC.)

  After extensive discussions with Dodd and his staff, we finally convinced them to leave regulation of state-chartered institutions with us. Indeed, according to a draft his staff gave us on March 13, he proposed to give us primary responsibility over all state-chartered institutions with less than $50 billion in assets and their holding companies, taking that authority away from the Fed. For institutions with more than $50 billion, the new FIRA would have authority over both the insured bank and its holding company. In that draft, the Fed would end up with nothing.

  The Fed pulled out all the stops to keep its supervisory authority over holding companies intact. Senator Dodd, working with Senator Corker, then developed another proposal that would have given the Fed supervisory re
sponsibilities over the largest twenty-five bank holding companies, with the rest divided up by size between us and the FIRA. But at that point the OCC and large institutions were starting to lose interest, and the community banks weighed in heavily in support of keeping the Fed’s authority intact. Many smaller, state-chartered community banks had long-standing relationships with the Fed’s regional banks, whose only real function was bank supervision. If the Fed lost its supervisory authority, the Fed regional banks would have had nothing to do.

  I had no interest in trying to wrestle turf from the Fed. My priority continued to be ending too big to fail, and we were still butting heads with both the Fed and the Treasury, which wanted the government to have the flexibility to bail out failing institutions. I saved my influence for that issue. Dodd finally relented and dropped the FIRA proposal completely.

  I had my hands full with resolution authority. Dodd’s office was being heavily lobbied by Tim and Michael Barr for more flexibility to do bailouts, but Rahm Emanuel had told me that the administration would not work against the resolution fund, so I assumed that we were at least safe there. In addition, Dodd was consulting with us, as well as Mark Warner and Bob Corker, in writing the resolution sections of the bill. My staff spent numerous weekends at the negotiating table with those three Senate offices. One of the real advantages the FDIC enjoyed was the excellent reputation of its professional staff. We offered technical assistance in drafting legislation and amendments that no other agency could offer. Our team was trustworthy and fast. When we drafted something, congressional offices knew there was no hidden agenda; they were getting what they asked for. The same did not always hold true of the other agencies. That gave us a real advantage in knowing what the important priorities were for the key players.