One Woman Against the Washington Machine

Sheila Bair tried to tell it all: How Washington let Wall Street sacrifice the people on the altar of greed. Nobody wanted to hear it.

Dafna Maor
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Dafna Maor

She was the only woman in a room full of powerful men.

Sheila Bair also felt she was the only one with the best interest of the public in mind.

The others weren't villains. They were the leaders of the greatest economy in the world. But Bair, chairwoman of the Federal Deposit Insurance Corporation, felt she had to fight them tooth and claw to get the government to do what she thought it should do.

"With institutions like Citi, there should at least have been a serious discussion about taking them through some kind of bankruptcy process," she told TheMarker Magazine in an exclusive interview.

Nearly five years after Lehman Brothers' collapse, Bair sheds fresh light on what happened behind closed doors in the higher echelons of government. Taxpayers were short-changed, she asserts; the U.S. government knowingly helped wealth gaps widen in America; and, she sums up, the global economy is based on a model that doesn't work.

"We didn't impose enough accountability on the financial institutions that caused this crisis. We didn't do enough to help home owners," she admits.

Bair chaired the FDIC, a bureaucratic backwater if ever there was one, from 2006 to 2011. Its responsibilities include guaranteeing depositor accounts, shoring up the banking system, and liquidating banks that failed. In 2008 Forbes crowned her "the second most powerful woman in the world."

Looking back, it's easy to see that U.S. housing prices had risen too high and people were taking mortgages they couldn't afford. Meanwhile instead of reining in the lending, bankers were repackaging dodgy mortgages in dubious securities and selling them on to unwary investors.

"But nobody really looked inside to check if those mortgages keep performing," she explains (and they didn't). "The compensation was all upfront. They had a saying in the mortgage industry 'IBG-YBG' – I'll be gone, you'll be gone."

Leading lambs to risk

Back in 2001, as a senior treasury official, Bair tried to persuade subprime lenders to adopt a code of "best practices" and independent monitoring. No go. She tried to alert the Federal Reserve chairman, Alan Greenspan, about the trouble in the subprime market, to no avail.

"A lot of these subprime loans were horribly abusive. They were marketed to poor people who didn't understand the product and a lot of them – 75% of them - were refinanced products, so you weren't even expanding home-ownership. You were taking low-income folks who had safe 30-year fixed mortgage and moving them into toxic, higher-risk, adjustable rate subprime mortgages."

In 2012, Bair published a book on the crisis, called "Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself." It didn't make her friends in Washington.

Writing it brought back her anger, Bair recalls; "We didn't impose enough accountability on the financial institutions that caused this crisis. We didn't do enough to help home owners," she admits.

By year-end 2009 bankers were paying themselves big bonuses again even though economic growth was tepid at best, she admits, and income inequality is just getting worse. "I personally think that a lot of that is due to the bailout and the monetary policy that followed, which was also very profitable for the very large financial institutions," Bair says.

Heads should have rolled. The big bad finance institutions should have been taken through some kind of bankruptcy process, she says.

Economy and banks, not the same thing

When Obama was elected president, Bair, a Republican, expected to move on. He asked her to stay, but she doesn't spare his administration her lash either.

The Obama administration positions itself as speaker for the 99%, but it too is following policies very friendly to Wall Street, she feels. "This is my core disagreement with Tim Geithner. Economic health and banks' health are two separate things! Banks are means to an end. They are not an end in and of itself, which is how we treated them in the bailout.

"My gosh, this notion that the investor class creates jobs and that's why we give them lower tax rates – that's just nonsense. You can't find credible academic research to support the hypothesis that giving investors tax breaks creates jobs."

Moreover, America doesn't have enough jobs but continues to tax wage income at a much higher rate than investment income, she adds.

"Income inequality is getting a lot worse here. Real wage has declined for everybody, except for the very richest Americans. All that is driven by monetary policy."

People need to make it on their own, but opportunities should be equally available, Bair says: The real role of government is to create the conditions for equal opportunity, not to protect people that already have a lot of money.

Ultimately, the real error lies in the notion that America should have a debt-driven economy. "It's not sustainable," Bair argues.

"Most people don't want to take high risk investment. They want safe securities. But with interest rates so low, with those securities, you can't even keep pace with inflation – it gives you economic incentive to spend it as opposed to saving it. And I think that is intentional. I think that is what the Fed wants.

"For sustainable economic growth you need to have a sustainable wage increase and we have not had that. There are a lot more investment dollars now, but they're just going to a bunch of financially-engineered products," Bair claims. "We need to grow our manufacturing base, we need to produce more and consume less by getting people to shift their mindset."

An Occupy Wall Street activist places tape on a boarded-up house: Sheila Bair tried to warn that home prices were out of control.Credit: Reuters
Sheila Bair, chairwoman of the FDIC, 2009. Credit: Bloomberg