Thursday, June 11, 2009
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Q&A: SHEILA BAIR
At FDIC, A Check On 'Free-For-All Markets'
Chairwoman Sheila Bair Discusses 'Common-Sense Regulation' And The Need For A Systemic Risk Council
"There's a difference between free markets and free-for-all markets."
-- Sheila Bair
What's it like being in charge of the agency charged with, among other things, insuring customer deposits and taking over insolvent banks in the midst of the largest financial crisis in eight decades? For starters, making sure the meltdown never repeats. To Federal Deposit Insurance Corp. Chairwoman Sheila Bair, that means "common-sense regulation" that includes a panel of regulators with "ownership of the system."
Bair spoke with National Journal's Julie Kosterlitz about the job in early June. Edited excerpts follow. Visit the Insider Interviews archives for more in the series.
NJ: Did you have any idea what kind of a job you were signing up for when you came on in 2006?
Bair: [No, but] we started seeing the problems early. I was only here a couple of months when our economists and our examiners were writing briefings on the deterioration we were seeing in mortgage lending standards as well as the more general problem of the underpricing of risk.
NJ: Did you think things would get this bad?
Bair: No, I didn't. We were trying to avert this; that's one of the reasons why we started calling for wide-scale, systematic loan restructuring early on. I don't know, if we'd gotten started on this earlier, if it would have helped; I kind of think it would have. I think the thing fed on itself....
I think we're starting to hit the bottom. In California, it looks like the housing market is stabilizing there, though again, the issue in California now is the economy.... We have more stress in areas where there was less of a housing boom but there's economic deterioration, in the northeast.
NJ: You used to teach college courses about these sorts of things. If you were distilling the central lessons of this crisis for your students, what would you say?
Bair: I would say that you need some common-sense regulation of the financial markets. We just got too carried away, mainly because there was just so much credit out there, and that was truly an asset bubble.... You need regulators who are independent. You don't want to overregulate, you don't want to be prescriptive, but you know, just things like making sure banks are making loans that people can repay -- that's not hard. There's a difference between free markets and free-for-all markets. I'm at heart a capitalist, I'm a lifelong Republican; I believe in market mechanisms and the self-correcting nature of the market. But unbridled greed does not create market efficiency -- that creates abuse. We need some common-sense rules of the road, and government needs to be the enforcer. We got away from that, and we're getting back to basics now.
NJ: Would you include the FDIC and yourself in that description?
Bair: I would include everybody. This agency, before I got here, had gone through tremendous downsizing, deep cutbacks in our supervisory staff, streamlined examination processes -- which we did away with. But it wasn't just the FDIC.
NJ: Do the basic outlines of the administration's proposed regulatory overhaul make sense?
Bair: There is, among functional regulators, a balkanized process that has created some regulatory gaps, or some lack of accountability. And so I think putting all the major regulators together in a systemic risk council and giving them ownership of the system and a mandate to identify and prevent risk to system; giving them rulemaking authority, and the ability to collect and share information and override other agencies' rules when they create systemic risk -- I think those are important authorities to have.
NJ: You've heard the counter-argument -- that committees are unwieldy, especially in a crisis.
Bair: Our board has three different regulators represented on it... and we get decisions. If you have an odd-numbered commission and rule by majority vote, you can make decisions real easily. Back on October 13th and 14th, we were in a room with the Treasury and the Fed, and we put together a huge debt guarantee program in two days; and we got the final rules out in matter of weeks.
There are checks and balances, and robust discussions, and I think that's a healthy thing. Vesting it all in one regulator that can just do what it wants without being subject to APA [Administrative Procedure Act] procedures, and sunshine rules and independent auditing -- all the kinds of things that we have -- is not a good thing.
NJ: This job must be hell on family life. Are your kids grown?
Bair: No -- they're 9 and 16. It is difficult. It's probably the biggest challenge of the job.... They've been good about it. My husband's a saint. He's filled in the gaps a lot, and he has a challenging career of his own. He's the senior vice president for government relations for a group called the American National Standards Institute.
NJ: Are you putting in 16-hour days? Twenty-five-hour days?
Bair: It varies, and it has gotten better. Last fall it was really awful, and even the earlier part of this year -- weekends and all-nighters. It's a lot easier when you're 28. I certainly didn't think that was going to be what I was getting into. I thought this was going to be a very 9-to-5 job. My big issue was the Wal-Mart bank application.... My job would be a lot harder if it weren't for all the excellent staff. I'm a manager that believes in delegation.
NJ: What do you think in your background best prepared you for this role?
Bair: The fact that I had worked in all different areas of the financial services industry: I'd done derivatives, regulation at the CFTC [Commodity Futures Trading Commission], securities at the stock exchange, and got started with banks and insurance companies, too, at the Treasury.
NJ: Patricia McCoy, a fellow Kansan who teaches banking law at the University of Connecticut School of Law, argues that you're a product of an old-fashioned Kansas Republican tradition of "fiscal conservatives who really give a damn about the welfare of ordinary men and women."
Bair: That's flattering -- I like that. Depositor protection and protecting the insurance fund is at the top of our list, and pretty much everything we do feeds into that.
I am a populist. I am a lifelong Republican from southeast Kansas, and as a journalist you'll probably be familiar with the [Kansas newspaper editor] William Allen White strain of populist politics and journalism; that runs strong where I'm from.
I am a fiscal conservative. As much as we have expanded our guarantees and taken the steps we felt needed to take -- but we think we've done that in a fiscally prudent way. We've charged premiums and we've reserved against possible losses. We have maintained our industry funding even though we're nearly two years into this crisis now; we still have not borrowed a penny from Treasury, and I'm hoping we can avoid that. I take pride in that.
NJ: Did you set out intending to go into financial services?
Bair: I taught law for a year after law school, and then I got job as a civil rights attorney with the old Department of Health, Education and Welfare.... When I went to work for [Sen. Bob] Dole in the '80s, I was his counsel on the Senate Judiciary Committee, so I still did a lot of civil rights, constitutional law, and criminal law -- that kind of thing. Then I realized that you couldn't make much money doing that. [Laughs]. I never wanted to be rich, but I did want to be financially secure.
NJ: You've written two children's books about money matters. What will your next children's book be about?
Bair: I have no time right now, but I'd like to write one on abuse of credit -- maybe a funny book that shows how people can get in over their head on credit. Not so funny, but with kids you've got to make it a little amusing or get they get bored to tears....
I have a half-finished biography of Charlie Ponzi that I would like to dust off. So many of the financial schemes are just Ponzi variations, and when the Madoff thing hit, I thought, "Oh my gosh, I should really finish this." I don't have time now.... People just need to understand what it is and what to watch out for. Charlie Ponzi, just like Bernie Madoff, started out thinking he was doing his friends a favor. By taking their money and giving them fat returns, he thought he was doing the public good.