Bull by the Horns

by Sheila Bair

  So, in consultation with my staff, I decided to challenge them a bit on their attitude toward regulation. Rich Brown, our chief economist, who was also a fantastic speechwriter, worked with me to craft an artful speech that politely but firmly told them that good regulation was in the interests of responsibly managed banks by protecting them from the lax practices of the risk takers. Many once well-run banks had ended up succumbing to bad mortgage-lending practices because of competitive pressure from the shadow sector. If regulators had stepped in earlier, many of the abuses could have been prevented. We wrote in the speech:

  We need to get past272 rhetoric that implies that, when it comes to financial services, the best regulation is always less regulation. We need to stand together on the principle that prudential standards are essential to protect the competitive position of responsible players from the excesses of the high-fliers. And I would very much like to hear from the industry a constructive regulatory agenda that would use the provisions of Dodd-Frank to fix the problems that led to the crisis and help to protect consumers and preserve financial stability in the years ahead.

  Based on research showing that the general public had a very low view of bankers, the speech stated:

  I would like to propose to you a radical-sounding notion. And it is that increasing the size and profitability of the financial services industry is not—and should not be—the main goal of our national economic policy.

  . . . in policy terms, the success of the financial sector is not an end in itself, but a means to an end—which is to support the vitality of the real economy and the livelihood of the American people.

  The speech concluded:

  Every one of your branches prominently displays the FDIC seal. It is a symbol of public confidence that assures the public that their money is safe if your institution should fail. But that seal also carries with it the expectation of your customers that they will be treated fairly and protected from unsuitable loan products and hidden service charges.

  That public trust is sacred, and it is the very foundation of the long-term success of your industry.

  It was a good speech, honest and heartfelt, designed to appeal to the better instincts of the industry. I wasn’t sure about the reaction I would get, but what I said in the speech needed to be said.

  I was actually nervous when I arrived at the Washington hotel where the conference was being held. As I’d given scores of speeches throughout my tenure at the FDIC, the butterflies I’d used to have when speaking in public had long since passed. But that time, I knew I was taking a risk. I was hoping that the group would listen to me and carefully consider what I was saying. But some of the points in the speech would obviously make them feel uncomfortable. As I entered the conference room, CNBC’s Larry Kudlow was just wrapping up his remarks. I like Larry. I’ve known him for years, and I have appeared on his show several times. But he is not a fan of regulation, and he was whipping up the audience with antigovernment sentiments. He would be a difficult act to follow.

  As I approached the podium, I started to lose confidence. For a moment I thought about scrapping the speech and just talking off the cuff. But no, I said to myself, I was going to do this. I wiped my moist palms on the skirt of my suit and took a sip from the water glass that stood on the podium. The crowd became silent. I read the speech word for word.

  The applause at the end of the speech was weak and scattered. Audience members were casting glances at one another. I began taking questions, and they were clearly hostile. I was disappointed that almost all of the questions focused on our efforts to curb the excessive fees that were being charged bank customers when they overdrew their accounts. Alarmed about the thousands of dollars some customers were paying each year on overdrafts, we had issued a policy stating that overdraft fees should not exceed six in a twelve-month period and that if a bank customer was overdrawing his or her account more often than that, the bank should offer a less costly alternative for overdraft protection, such as linking the account to a lower-cost line of credit. All too many banks were reaping fat fees by charging financially strapped customers $35 each time they overdrew their account, even if the overdraft was just a few dollars. We also told banks that they could not sequence overdraft checks to maximize fees. When a customer wrote several checks that came through the bank on a single day, some banks would purposefully clear the largest check first, to create a negative balance. Then they would charge an overdraft fee for each of the smaller checks that they paid after the largest one. The guidance said that that practice had to stop.

  I had been hoping for a discussion about the broader role of banks in supporting the economy, the lessons of the crisis, how we could work together for commonsense rules that would give all of us a more stable, productive financial system. Instead, I received a lot of heckling from bankers focused primarily on their narrow interests in maintaining fat overdraft fees. I later learned that the ABA leadership had whipped them up prior to the speech to confront me on the issue. It was disheartening. I had been expecting much better from the group.

  CNBC filmed the combative heckling I received, and it went viral on the Web. Ironically, unpopular bankers bashing a regulator made me a hero. The speech received much more media play than it would have if I had received a civilized response.

  The reception I had at the ICBA was completely different. My speech to the ICBA emphasized many of the same themes but also recognized the more constructive role the ICBA had played during the debates over Dodd-Frank as well as how it had tried to work with us in curbing overdraft fee abuses. In contrast to the ABA, which was run by a professional lobbyist, the ICBA was run by a community banker, Cam Fine. Cam is one of the most reputable, credible, and effective advocates for community banks in Washington. He is a big reason why so many of Dodd-Frank’s new rules expressly exempt smaller institutions, as is appropriate. The ICBA also played a role in increasing the deposit insurance limits and shifting the premium burden more toward the megabanks. Fine did not have a conflicted membership, as did the ABA. Those were all provisions that clearly benefited smaller banks and will strengthen their competitive position over time.

  The ICBA convention was held in a cavernous hall in the San Diego Convention Center. Thousands were in attendance. I was tired and jet-lagged, having arrived late the night before, but I was determined to give a good speech. The small banks, like so many others, had been the victims of the crisis, not its cause. They had struggled to serve communities ravaged by the Great Recession, even as they kept lending during the crisis. Though we had also had our disagreements, I wanted to pay them tribute for the remarkable courage and perseverance they had shown in weathering the terrible financial storm.

  ICBA Chairman James MacPhee, the chief executive of Kalamazoo County State Bank in Schoolcraft, Michigan, gave me a very warm introduction, calling me a champion of community banks. I began my speech273 with a personal anecdote about growing up in a small town in southeast Kansas. When I was small, I used to love going to the local bank with my dad every Friday afternoon when he deposited checks from his medical practice. I was always fascinated with the large, steel vault that stood against the back wall of the bank lobby. One day, as we were waiting in the line for the teller, I saw that the vault door was open a crack, so I sneaked back to take a peek. Expecting to see mounds of cash, I instead saw rows of safety deposit boxes. I went running back to my dad, shouting, “There’s no money in the bank!,” which caused the bank president to hurry out of his office to assure everyone that their money was safe. “Ironic,” I said, “that a six-year-old who nearly instigated a bank run that day would later become Chairman of the Federal Deposit Insurance Corporation.”

  The anecdote drew huge applause, and after that, it was a lovefest. My remarks were frequently interrupted by applause, and I received two standing ovations.

  Feeling generous after the ICBA speech and not wanting to depart office on a sour note with anyone, I asked Jesse to reach out to Frank Keating’s office
to see if he would like to meet. Jesse contacted Wayne Abernathy, whom I knew well from his years as the staff director of the Senate Banking Committee. Working with Wayne, Jesse had tentatively arranged a meeting for Keating and me, but we decided to cancel it when Keating took public shots at me again in an interview with Barbara Rehm of American Banker. Rehm asked Keating whether he regretted the reception I had received at the ABA, contrasting it to the support I had received at the ICBA. His response, I kid you not:

  Quite truthfully274 I thought everyone handled themselves very well. . . . Nobody booed and nobody hissed. Sheila Bair came in and was, how do I say it diplomatically, aggressive to say the least in her prepared remarks, which rather puzzled me. These are regulated people who pay your salary. . . .

  No one gave her a standing ovation because no government official should ever be given a standing ovation, in my judgment. I feel very strongly about that. We are servants of the served.

  Frightening, but that is how a lot of industry lobbyists see the role of regulators. We do not have our jobs to serve the public. The banks pay our salary, so we work for them—not the taxpayers, not the customers—the banks. And gosh forbid that anyone would ever thank us for the job we are doing.

  I was also asked to speak to the National Press Club to provide farewell remarks to the media with which we had so closely worked over the years. I gave a speech about what I thought to be a core problem in today’s American culture, not just our financial system but our political system as well. Again working with Rich, we crafted a wonderful speech on the theme of “short-termism,” or the tendency to make decisions based on our immediate needs or desires without regard to the long-term consequences. Short-termism was rampant during the crisis, with loan originators, securitizers, ratings agencies, financial executives, and derivatives deal makers all being paid up front for loans and complex securities that had no hope of performing over the longer term. Today our government is also stuck in the vise of short-termism, with action (or more likely inaction) being based on short-term reelection prospects instead of the long-term needs of the nation’s economy. As I stated:

  In a world275 obsessed with instant gratification and lightning-round debates, we are in dire need of leadership, both public and private, that will champion patience and sacrifice now in return for a brighter and more stable future for us and our progeny.

  I followed the speech with an op-ed in The Washington Post, and I frequently warn against short-termism in my public speeches. It really is the common theme that impedes the proper functioning of both our financial and our political systems. Many of the reforms regulators are now trying to put into place will eat into the short-term profits—and share prices—of some large financial institutions, but they will provide a much more stable system over the long term. Yet short-term profit motives drive the relentless lobbying against commonsense measures such as higher capital standards. Similarly, we are borrowing trillions of dollars to finance increasingly generous public benefits and entitlement programs, while at the same time keeping our taxes at historically low levels. We can keep it up for a time, but eventually we will pay the price—or, more correctly, our kids will pay the price through reduced benefits, higher taxes, and the risk of uncontrollable inflation.

  My final farewell party was everything I’d hoped for. Hank Paulson, now engaged in philanthropic work at Johns Hopkins University, reached out to me to wish me luck and offered to help me once I left the government. Notwithstanding our ups and downs, Hank and I had a good working relationship. It’s easy to second-guess now, and to be sure, looking back, I wish we had done some things differently. The important point is that in the fall and winter of 2008, we had to do something, as the system was potentially “on the brink,” as Hank says in his book. Hank showed leadership and took decisive action when the nation needed it. And I think history will treat his actions well.

  I told him I wanted him, Ben, and Tim to attend my farewell party. Even though there were tensions among us, we were the four who had locked arms and gotten the nation through the crisis of 2008. I wanted one last reunion before I stepped down. He readily agreed and even persuaded Tim to come and speak at the ceremony. Ben also readily agreed. And in a surprise gesture, President Obama sent an emissary, his close friend and adviser Valerie Jarrett, who delivered a message from him.

  We invited my old boss Senator Bob Dole and his wife, Elizabeth, as well as a number of other current and former members of Congress. I was very glad to see Senator Paul Sarbanes there, as well as several former FDIC chairmen, including Don Powell and William Isaac. We included all of the agency heads, past and present, including the ones I had butted heads with, such as John Dugan and John Walsh. And of course, hundreds of FDIC staff were there. We also invited several bankers and consumer group representatives who had worked with us over the years, including PNC’s Jim Rohr.

  Marty opened the program with touching remarks about our years together. He had been through the wars with me, and I was so pleased to see that President Obama would nominate him to succeed me as chairman. Next was Valerie, who jokingly referred to John Reich’s famous email referring to the “audacity of that woman.” Obama, she said, whose second book had been entitled The Audacity of Hope: Thoughts on Reclaiming the American Dream, had known immediately that he would like me. As dictated by protocol, Tim, as Treasury secretary, went next, drawing a good laugh when he told the crowd that notwithstanding what they might have heard, he had not been the author of that email. He downplayed our disagreements and paid tribute to the outstanding job the FDIC had done during the crisis. It was a smart, classy move on his part.

  Ben, with his own droll sense of humor, went next. Noting that we had assumed our respective chairmanships in the same year, he said he appreciated my “creativity and courage” and joked that perhaps the NY Fed—which has published comic books for kids about financial matters—should publish a comic book about me, because I was “truly a woman of steel.” He laughed about all of our midnight calls during the crisis and said he would miss my thoughtful insights, though with a twinkle in his eye, he commented that he was sure I would still be speaking out in my next position.

  Finally Hank wrapped up, joking about the disagreements we had had over foreclosure prevention and telling people that I had felt so strongly about it, I had once tracked him down at Camp David and interrupted a meeting with the president to press him on approving a loan modification program. He acknowledged that we had frequently disagreed—sometimes vocally—but said he admired my sincerity, integrity, and intensity. He said that I “always came to play” and that I was the kind of person who would “not let a day go by without doing something to make a difference. That was Sheila.”

  I, of course, spoke last, with four very hard acts to follow. I drew a laugh when I said I was going to make it short because I didn’t want to start crying and ruin my reputation as a toughie. I began with a tribute to my family and apologized for all of the things I had missed over the past five years. I recounted how I had attended my son’s high school graduation dinner a few months earlier and had hardly known any of his teachers, his friends, or their parents. I reflected on how intense and insular the job had been and joked that when Preston had asked me what I thought of the Casey Anthony verdict, I’d asked, “Who’s he?” I apologized to Colleen for missing almost all of the mother-daughter days at her school, as well as her choir and orchestra concerts (she plays the oboe). And I thanked my husband, Scott, for going to every one of them in my stead. I have said it many times, but I am married to a saint. Because he took the extra time to fill in with family duties, neither of our kids resents the five years I was missing in action from so many parental duties.

  I also commented on the recent HBO movie Too Big to Fail, based roughly on Sorkin’s book of the same title, as well as Hank’s own memoir, On the Brink: Inside the Race to Stop the Collapse of the Global Financial System. I complimented my three amigos on the wonderful actors who had played them: Paul G
iamatti, Ben; Billy Crudup, Tim; and William Hurt, Hank. “What woman of my age doesn’t remember William Hurt in the movie Altered States?” I joked, referring to a 1980 movie in which Hurt had frequently appeared partly clad. Then I scratched my head and asked, “Who was that actress who played me during the ten seconds I was in the movie?” Then I added, “No matter, maybe they will make a real movie out of my book.”

  On a more serious note, I cautioned my fellow regulators about the need for writing clear, simple, easy-to-explain rules as part of financial reform, as well as engaging with the media to explain them publicly. I warned that the only way to counter industry lobbying against the rules was to make sure the public understood and supported them. “If the public does not support reforms, they will not succeed.” I reflected on all of the mistakes that had been made during the years prior to the crisis and the need for common sense to prevail in regulating the markets.

  Finally I paid tribute to the most important part of the audience, the FDIC staff, at which point the tears broke through, notwithstanding my resolve to contain them: “We’ve been through an incredible journey together. I’ve reached my port and I will be leaving you now, but I know you will carry on without me.”

  FOLLOWING THE PROGRAM, scores of FDIC staff and other attendees lined up to shake my hand. Many asked me to sign their programs and have their pictures taken with them. After about twenty minutes of that, I caught out of the corner of my eye a towering African-American gentleman waiting patiently in line. It was Citi’s Dick Parsons. I excused myself for a minute and walked back to the line to shake his hand and thank him for coming. I then returned to the head of the line and resumed the handshaking and picture taking.