From June 2006 to June 2011 Sheila Bair served as Chairman of the Federal Deposit Insurance Corporation – in which position for a time she held the fate of America in her hands. The FDIC is not normally a high-profile agency. But beginning in August 2007 it was our flood-wall against waves of financial panic, our source of confidence that whatever happened on Wall Street working Americans would not lose their deposits and the payments system would not fail. Chairman Bair was the custodian of that confidence.
Who is Sheila Bair? We were young contemporaries on Capitol Hill, she the protegée of Senator Robert Dole, a conservative of another age. Later she served in the Treasury, and then went to the University of Massachusetts in Amherst to teach, before President Bush asked her to replace an FDIC nominee whose confirmation had run into problems. There is here no trace of power-hunger or greed. Sheila Bair is best seen as capable, hard-working, successful – yet in these and other respects essentially an ordinary officer of the state.
Bull by the Horns is the story of financial calamity seen from the perspective of this public servant, rendered from detailed notes. We learn with whom she met, what was said, what decisions taken, and how things turned out. She begins with the battles over deregulation of the banks (Basel II), with the gathering sub-prime storm, and proceeds through the disaster: WaMu, Wachovia, Citigroup, Bank of America, AIG, Citigroup again. And then the battles of the aftermath, over among other things Dodd-Frank, Basel III and the robosigning frauds. This is a book for aficionados of infuriating detail.
Yet beneath the froth of facts courses an epic struggle. It pits Sheila Bair and the civil servants of the FDIC on one side and… who… on the other? Not the bankers who dominate the tale of an Andrew Ross Sorkin; not the mortgage crooks portrayed by Bethany McLean and Joseph Nocera; not the short-sellers celebrated by Michael Lewis; not Matt Taibbi’s Goldman Sachs. No. On the other side of the struggle, we mainly find other high officials. And first among them, the President of the Federal Reserve Bank of New York and then Secretary of the Treasury, Timothy Geithner.
Geithner emerges in these pages bit by bit, meeting by meeting. The key difference between him and Bair is first stated on page 99:
“He did not want creditors, particularly bondholders, in those large, failing financial institutions to take losses. I did. For years, those poorly managed institutions had made huge profits and gains from their high-flying ways, and large institutional bond investors had provided them with plenty of cheap funding to do so. … the implied assumption [was] that if anything went wrong, the government would bail them out. But we do not have an insurance program for big bond investors. They are sophisticated and well heeled and can fend for themselves. There is no reason for the government to protect them.”
It was not merely bond investors that Geithner determined to protect. As Bull by the Horns unfolds, it emerges that there was one company, above all, around which his policies were built. Citigroup. Here for example is Bair’s account of a crucial meeting, over whether Wells Fargo or Citi would take over Wachovia:
“During the Friday evening call, Tim Geithner was apoplectic. He wanted us to object to the Wells transaction and support Citi in making an enhanced bid… which was a huge stretch for it. It was amazing to me that Tim wanted us to take that additional exposure when there was another offer on the table that required no government support. He used that familiar saw: if we didn’t support Citi, it could destabilize the system. I was incredulous.” (p. 105)
Or when in early 2009 the government confronted the need to restructure Citi – including the weakness of its CEO, Vikram Pandit, a man with no commercial banking experience. In Treasury’s press release “There was no mention of dealing with Citi’s trouble assets, nor was there a hint of management changes. It was unbelievable to me how little Treasury was asking of the institution to right itself.” (p. 167). Bair was prepared at least to discuss putting Citi through receivership, using the powers already vested in the FDIC by law.
Not that Geithner helped only Citi. There was the day in 2008 that Paulson, Bernanke and Geithner (then still at the NY Fed) tried to get Bair to guarantee all the liabilities of the banking system, ambushing her in Paulson’s office with a prepared statement.
“It was overreach of the worst sort, and there was no doubt in my mind that Tim Geithner was the instigator. For months, he had been arguing that the federal government should guarantee all the debt of the U.S. financial system, but no one had taken him seriously – until now.” (p. 111.)
No wonder that, as she writes, that when “a few weeks later, Obama announced his choice of Tim Geithner to become Treasury Secretary. It was like a punch in the gut. 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.” (p. 142.)
Not that Geithner always won. When he lost, it could be interesting:
“On Friday, July 31 , he summoned all of the major agency heads to his conference room and proceeded to give us an expletive-laced tongue-lashing about talking to people on the Hill. The arrogance and disdain he showed for the agency heads, who also included Ben Bernanke and Mary Schapiro, was astonishing… I patiently listened to his rant and then pointedly told him that the problem was one of his own making…” (p. 191).
This is the Secretary of the Treasury? Later as the cleanup went on, Bair writes, “I couldn’t think of one Dodd-Frank reform that Tim strongly supported. Resolution authority, derivatives reform, the Volcker and Collins amendments, he had worked to weaken or oppose them all.” (p. 229).
To be sure, Geithner isn’t alone. The leaders of the Office of Comptroller of the Currency and the Office of Thrift Supervision were disasters. Steven Rattner, the car czar, “clearly thought that he was entitled to whatever help he wanted from the FDIC…” (p. 177) On housing Larry Summers carried water for the “free market economists” of the Bush Treasury (p. 147) and sought to freeze Bair out of the policy process – as not a team player. Some team! Most of them were protegés of Robert Rubin, who also hand-picked Pandit for Citi and was, in Bair’s words, “indifferent to his culpability.” (p. 122).
What’s happened here? We can see: the money-power in American government has been handed over to a coterie of boys – boys who work for other boys, to whom the public purse is what the truffle is to the pig. Bair does not quite say this, but, really, she doesn’t need to.
Not everyone in high office should be tarred with this brush. Henry Paulson and Ben Bernanke retain Bair’s respect. Elizabeth Warren is an ally; Barney Frank is someone she has “always liked and respected.” There are others. Yet overall, Sheila Bair’s strength in crisis came from the government’s professionals – the people who know their mission, do their jobs, live on their pay, and expect no greater rewards. She is in spirit very much one of them.
And for that reason, it is an honor – a great honor – to host this event, and to welcome Sheila Bair, former Chairman Extraordinary of the Federal Deposit Insurance Corporation, to Firedoglake.
James K. Galbraith served as Executive Director of the Joint Economic Committee of the US Congress in the early 1980s; he teaches at the University of Texas at Austin and is the author, most recently, of “Inequality and Instability: A Study of the World Economy Just Before the Great Crisis.” (more…)