As chairman of the Federal Deposit Insurance Corporation during the financial crisis, Sheila Bair earned both fans and foes for her stance against big banks and her early warnings about the housing bubble. No longer in government, Bair remains a voice for reform in the industry. In Bull By the Horns: Fighting to Save Main Street From Wall Street and Wall Street From Itself, the former regulator describes the financial crisis and its aftermath as she saw it. She also outlines her prescriptions for reform, which include breaking up the megabanks, raising capital requirements, and abolishing the Office of the Comptroller of the Currency. Bair recently spoke with U.S. News about her objections to bank bailouts, who she thinks is responsible for the financial crisis, and how America can avoid another downturn. Excerpts:
What did you hope to accomplish with this book?
The crisis was part of history. A lot of things had been written, some of them particularly inaccurate when it came to the FDIC's role, so I wanted to set the record straight and make sure people understood just how important the agency was to making sure Main Street families—that their money was saved and that they never had to worry about that, and we were successful with that. I think that's a tremendous accomplishment given everything that was going on. I wanted people to understand that there were major policy disputes about some of the approaches we took. I think that's important to know going forward because we don't ever want to do bailouts again. I also want to elicit greater public support in the cause of reform.
What's inaccurate about the portrayal of the FDIC's role?
There was an overarching accusation that we were too focused on the FDIC and not enough about system stability, and that's just nonsense. The FDIC was at the center of system stability. We had to make sure the FDIC had enough resources to protect insured depositors; that was our central role and one we did very well. I think also there were attacks on me about being difficult and not a team player, misleading things about what was going on with Wachovia. Those are all factual inaccuracies.
Who and what caused the economic crisis?
Greed and shortsightedness were the two overarching causes. I think the securitization market fed all these unaffordable mortgages that enabled originators to escape any accountability or responsibility. If the mortgage later turned sour it was all being passed off to investors, and then that problem was compounded by ratings agencies handing out AAA ratings on securitizations that were backed by poor-quality mortgages. All these trillions of dollars in derivatives that were written based on the performance of the mortgages magnified the losses but they also, I think, gave investors a false sense of security. So investors, instead of doing their own due diligence, were happy to get the fat returns off of these subprime mortgages. The banks took a lot of risk on these mortgages and mortgage-based securities products and they did not have enough capital if those risks turned bad, which they did.
What responsibility do regulators bear?
Regulators are not in charge of running banks for managers. The managers, the executives of the board, ultimately bear responsibility for this. That said, there were a lot of regulatory failures here. The Fed had the power to set mortgage lending standards for all mortgage originators, bank and nonbank. We did have some mortgage lending standards that applied to insured banks but we didn't for originators outside of insured banks. The Fed had the authority to do that; they just flat out didn't. Congress bears some responsibility for this for passing a law that barred any market regulation of derivatives.
In your book, you're pretty critical of the bank bailouts.
We have a market-based economy. Do you get bailed out if you get in trouble with your mortgage? No. You file for bankruptcy. The government doesn't bail you out. The small businesses don't get bailed out. When people have business models where the market assumes that the government is always going to step in, it creates incentives to take risks because the people who are running those institutions know that they'll get all the benefit of the upside and then they can put the downside on the government.