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‘They should have let Bear Stearns fail”

“Our job is to protect bank customers, not banks”

Mega Banks ratings are too high: “she went so far as to send a letter to Standard & Poor’s, the credit-ratings agency, suggesting that its ratings of the big banks were too high because they reflected an expectation of government support. If a too-big-to-fail bank got into trouble, she wrote, the F.D.I.C. would wind it down, not bail it out.

“Had the federal government emphasized mortgage modification early on, it could have prevented a lot of pain and might have helped stabilize the economy a lot sooner.”

Sheila Bair’s Bank Shot


‘They should have let Bear Stearns fail,” Sheila Bair said.

It was midmorning on a crisp June day, and Bair, the 57-year-old outgoing chairwoman of the Federal Deposit Insurance Corporation — the federal agency that insures bank deposits and winds down failing banks — was sitting on a couch, sipping a Starbucks latte. We were in the first hour of several lengthy on-the-record interviews. She seemed ever-so-slightly nervous.

Long viewed as a bureaucratic backwater, the F.D.I.C. has had a tumultuous five years while being transformed under Bair’s stewardship. Not long after she took charge in June 2006, Bair began sounding the alarm about the dangers posed by the explosive growth of subprime mortgages, which she feared would not only ravage neighborhoods when homeowners began to default — as they inevitably did — but also wreak havoc on the banking system. The F.D.I.C. was the only bank regulator in Washington to do so. During the financial crisis of 2008, Bair insisted that she and her agency have a seat at the table, where she worked — and fought — with Henry Paulson, then the treasury secretary, and Timothy Geithner, the president of the New York Federal Reserve, as they tried to cobble together solutions that would keep the financial system from going over a cliff. She and the F.D.I.C. managed a number of huge failing institutions during the crisis, including IndyMac, Wachovia and Washington Mutual. She was a key player in shaping the Dodd-Frank reform law, especially the part that seeks to forestall future bailouts. Since the law passed, she has made an immense effort to convince Wall Street and the country that the nation’s giant banks — the same ones that required bailouts in 2008 and became known as “too big to fail” institutions — will never again be bailed out, thanks in part to new powers at the F.D.I.C. Just a few months ago, she went so far as to send a letter to Standard & Poor’s, the credit-ratings agency, suggesting that its ratings of the big banks were too high because they reflected an expectation of government support. If a too-big-to-fail bank got into trouble, she wrote, the F.D.I.C. would wind it down, not bail it out.

As an observer of the financial crisis and its aftermath, I have frankly admired most of what she tried to do. She was tough-minded and straightforward. On financial matters, she seemed to have better political instincts than Obama’s Treasury Department, which of course is now headed by Geithner. She favored “market discipline” — meaning shareholders and debt holders would take losses ahead of depositors and taxpayers — over bailouts, which she abhorred. She didn’t spend a lot of time fretting over bank profitability; if banks had to become less profitable, postcrisis, in order to reduce the threat they posed to the system, so be it. (“Our job is to protect bank customers, not banks,” she told me.) And she was a fierce, and often lonely, proponent of widespread mortgage modification, for reasons both compassionate (to help struggling homeowners stay in their homes) and economic (fewer foreclosures would help the troubled housing market recover more quickly).

I thought something else as well: with her five-year term as F.D.I.C. chairwoman drawing to a close — her last day was July 8 — she never really got her due. The rap on her was always that she was “difficult” and “not a team player.” There were times, in Congressional testimony, when she disagreed with her fellow regulators even though they were sitting right next to her. Her policy disputes with other regulators were legion; in leaked accounts, Bair was invariably portrayed as the problem. In “Too Big to Fail,” for instance, the behind-the-scenes account of the financial crisis by the New York Times business columnist Andrew Ross Sorkin, Bair is described as one of Geithner’s “least favorite people in government.” As Paulson, Geithner and the Federal Reserve chairman, Ben Bernanke, raced to bail out banks and companies like A.I.G., Bair resisted, fearing that they were being overly generous by putting the interests of bondholders over those of taxpayers. I couldn’t help recalling that the last female financial regulator to be labeled difficult was Brooksley Born, the head of the Commodity Futures Trading Commission in the mid-1990s. Fearful that derivatives were becoming a threat to the financial system, Born wanted to regulate them but was stiff-armed by Alan Greenspan and Robert Rubin.

It wasn’t just that the men controlled the narrative; it was also that Bair was a classic Washington policy wonk, far more comfortable discussing the fine points of regulation than backroom politics. Interviewing her could be an exercise in frustration. She was only too happy to talk about capital requirements, say, but even off the record she wouldn’t tread where most journalists, myself included, wanted her to go — into the boardrooms at Treasury and the Fed where decisions were hashed out. In 2009, The New Yorker published a short profile of her in which she refused to be drawn out about one of the many bureaucratic fights over too-big-to-fail. Her response was classic Bair: “It’s a very difficult task to try to balance all the different perspectives and come up with a package,” she said diplomatically, “and every compromise is going to have people who are unhappy about various parts of it.” You can almost hear the author sighing.

Not long ago, I approached her with the idea of doing an extended exit interview. I thought it was important to get her perspective on the last five years. I also thought, to be honest, that her impending retirement might loosen her tongue a little. After thinking it over, she agreed to talk to me, with the stipulation that nothing be published until she left office.

And so there we were, talking about Bear Stearns, the investment bank whose near failure marked the beginning of the crisis. Even knowing that her views of the financial crisis were at odds with many of the others who were involved, I was taken aback: I had never heard anyone involved in the crisis criticize the government’s decision to help Bear Stearns avoid certain bankruptcy.

For a moment, Bair seemed a little surprised, too, by the words that had tumbled out. She took a sip of her latte and looked straight ahead, deep in thought.

“Do you really think they should have let Bear fail?” I asked.

When she put her drink down, her hesitation was gone. “Let’s face it,” she said. “Bear Stearns was a second-tier investment bank, with — what? — around $400 billion in assets? I’m a traditionalist. Banks and bank-holding companies are in the safety net. That’s why they have deposit insurance. Investment banks take higher risks, and they are supposed to be outside the safety net. If they make enough mistakes, they are supposed to fail. So, yes, I was amazed when they saved it. I couldn’t believe it. When they told me about it, I said: ‘Guess what: Investment banks fail.’ ”

I first met Sheila Bair in November 2005, during one of her rare breaks from government service. A longtime aide to Bob Dole, the Republican senator from Kansas — Bair grew up in the small town of Independence, Kan., and attended the University of Kansas — she had also been a commissioner on the Commodity Futures Trading Commission and an assistant secretary in George W. Bush’s Treasury Department. In 2002, she left Treasury to join the faculty of the University of Massachusetts, Amherst, where she taught regulatory policy at the business school. Three years later, she invited Senator Paul Sarbanes, the former chairman of the Senate Banking Committee, to speak to her class. His visit to Amherst happened to coincide with a column I was writing about him. I sat in on the class.

At the time, all I really knew about Bair’s background was that she was a Republican. Which kind quickly became clear. She and Sarbanes, a Democrat from Maryland, obviously shared a great deal of mutual respect and affection, despite spending their lives on different sides of the aisle; she turned out to be a member of that dying breed, the Republican moderate. In our recent talks, she described herself as someone who believes in “regulations that reinforce economic incentives.” That came through, too; she praised Sarbanes’s signature law, Sarbanes-Oxley, which established new accounting rules to combat corporate fraud — and which most Republicans still denounce nearly a decade after its passage.

Because I was living nearby at the time, I would bump into her occasionally. Sometime late in the spring of 2006, she and her husband invited me to dinner; toward the end of the evening, she pulled me aside and told me that she was about to be nominated to be the chairwoman of the F.D.I.C. The offer came out the blue, she said, and though she was reluctant to move her family back to Washington, she didn’t feel she could say no. The Bush administration had planned to nominate Diana Taylor, the former New York State superintendent of banks — and also Mayor Michael Bloomberg’s girlfriend — but then decided not to. The administration needed a Republican who could gain a quick confirmation. Bair fit the bill.

Arriving at the F.D.I.C. that summer, Bair found an agency that was floundering. “There hadn’t been any bank failures in a long time,” she said. “We were in this so-called golden age of banking, regulation had fallen out of favor and the F.D.I.C., which had a reputation as a tough regulator, had fallen on hard times.” Its budget had been slashed, employees had been let go and morale was terrible. Except for a 10-second handshake, she never even spoke to Henry Paulson her first year or so in office.

Alone among the regulators, though, the F.D.I.C. began to home in on subprime lending. By 2006, the subprime industry was running amok, making loans — many of them fraudulent, with hidden fees and abusive terms — to just about anyone with a pulse. Most subprime loans had adjustable interest rates, which started low but then jumped significantly after a few years, making the monthly payments unaffordable for many homeowners. The lenders didn’t care because they sold the loans to Wall Street, which bundled them into mortgage-backed bonds and resold them to investors.

Curbing subprime-lending abuses should have been the job of the Federal Reserve, which has a consumer division. But the Fed chairman, Alan Greenspan, with his profound distaste for regulation, could not have been less interested. The other bank regulators, the Office of the Comptroller of the Currency, which oversees national banks, and the Office of Thrift Supervision, which regulates the savings-and-loan industry, should have cared, too. But their responses to the growing problem were at best tepid and at worst hostile. (The O.C.C. actually used its federal powers to block efforts by states to curb subprime abuses.) By the time Bair got to Washington, the O.C.C. had spent a year devising “voluntary subprime guidance” for the banks it regulated, but it had not yet gotten around to issuing that guidance.

The F.D.I.C. jumped into the breach. Bair knew the issue well, because during her time at Treasury, when the industry was much smaller, she tried, unsuccessfully, to get the subprime lenders to agree to halt their worst practices. Now she was hearing that things had become much worse. Bair instructed the F.D.I.C. to buy an expensive database that listed all the subprime loans in the mortgage-backed bonds that Wall Street was selling to investors. She was shocked by what she saw. “All the practices that we looked at back in 2001 and 2002, which we thought were predatory — things like steep payment resets and abusive prepayment penalties — had gone mainstream,” she said.

By the spring of 2007, she was holding meetings with industry executives, pushing them to raise their lending standards and to restructure — that is, modify — abusive mortgages so homeowners wouldn’t lose their homes when the housing bubble burst and large numbers of loans were bound to default. “There is nothing unusual about this,” she told me. “Restructuring is one of the tools the banking industry has at its disposal.”

One thing she learned from those meetings was that the mortgage servicers, generally divisions of the big banks, had the legal right in most cases to modify mortgages they managed for the investors who owned mortgage bonds. They just didn’t have the will. After doing some arm-twisting, Bair felt she had extracted a commitment that the mortgage servicers would do so.

She also pushed the O.C.C. to issue its voluntary guidance, even though it would help only marginally. The vast majority of subprime loans were issued by institutions outside the regulated banking system, out of the reach of the O.C.C. or the F.D.I.C. But those nonbanks depended on the regulated banks for their own financing. As a way to get at the unregulated lenders, Bair came up with the idea of applying the government’s subprime guidance to any company that was financed by a regulated bank. The banks, she says, “fought us tooth and nail.” She lost.

At the same time, she was fighting a rear-guard battle on another critical banking issue — so-called capital requirements, the amount of capital banks must hold as a cushion against losses. Banks always want their capital requirements to be as low as possible, so they can take more risks, which can enable them to make more money — and reap bigger bonuses for executives. In 2004, an international group called the Basel Committee on Banking Supervision proposed rules that would allow banks to hold capital on a “risk-weighted” basis, meaning that assets with lower risk would require less capital. (As it turned out, triple-A-rated mortgage bonds stuffed with bad subprime mortgages were considered very low risk under the Basel proposal. That is why so many banks loaded up on them in the years leading up to the crisis.) To make matters worse, the Basel II accords, as they were called, permitted banks to evaluate their assets with their own internal risk models.

Most European countries quickly adopted Basel II. In the United States, the Federal Reserve was strongly in favor of doing so, too, as was the O.C.C. But the F.D.I.C., fearing that lower capital requirements and the self-selection of risk models would increase the risk of bank failures, opposed Basel II. This meshed perfectly with Bair’s own instincts, and once she arrived at the F.D.I.C., she became the standard-bearer in opposing the new rules. The Fed, in particular, pushed her to sign on; it didn’t need the F.D.I.C.’s approval, but it is politically important for all the regulators to be aligned when instituting such an important change. Instead, Bair conceded, “we dragged it out and dragged it out.” She dragged it out so long, in fact, that the financial crisis arrived before Basel II was ever implemented in the United States.

Foot-dragging is not the sort of bureaucratic tactic that draws praise or even much notice. But I’ve long believed that her opposition to Basel II has been a hugely underappreciated factor in helping to save the financial system when the crisis came. The European banks, lacking adequate capital, were crushed by the financial crisis. Big banks in places like Ireland and Iceland collapsed. Germany doled out hundreds of billions of dollars to shore up its banks. Even today, banks in Europe are in far worse shape than they are in the U.S. American banks didn’t have enough capital, either, but they had a lot more than their European counterparts, and for all their ongoing problems, they are much healthier institutions today.

By the summer of 2007, the subprime bubble had burst. Just as Bair expected, the default rate on subprime mortgages was rising quickly. Looking ahead, it wasn’t hard to see that all those adjustable-rate mortgages written in 2006 and early 2007 were going to reset in a year or two. During the bubble, when housing prices were rising, homeowners avoided the higher rates by refinancing. Now that was no longer possible. Disaster loomed, as millions of Americans would no longer be able to make their mortgage payments. Yet only the F.D.I.C. seemed to take this possibility seriously — and to fear the consequences. Paulson and Bernanke, for their parts, maintained that the damage from the bursting of the subprime bubble would be “contained,” as they liked to put it.

That fall, Mark Zandi of published a survey of mortgage servicers. “It showed that like 1 percent of those reset mortgages were being restructured,” Bair said. “They would just push people into foreclosure.” Bair was furious and felt that she had been lied to. All those promises made in the spring turned out to be nothing more than “happy talk,” in her words.

So she turned her attention to the Treasury Department, hoping to persuade Paulson and others to put the weight of Treasury — an agency with far more clout than the F.D.I.C. — behind her push for mortgage modification. Although there were sporadic efforts at Treasury to do something for homeowners, they never seemed to gain any traction.

There are certainly arguments against modifying mortgages. One is that doing so creates moral hazard — if some people struggling to stay in their homes get lower monthly payments, then everybody will want a similar deal, and they’ll stop making their mortgage payments even when they can afford them. Another is that many people in default will end up redefaulting on a modified mortgage. A third rationale is that the foreclosure process itself is necessary for any eventual recovery of the housing market. Lastly, designing a mortgage-modification plan that works for a large number of people is excruciatingly difficult, maybe even impossible. I have heard all these arguments from Treasury officials over the years.

In the cool light of day, however — with two million Americans having already lost their homes and another two million in serious default, and with one out of every five homes worth less than the homeowner’s mortgage — this thinking has been shown to be horribly shortsighted. Had the federal government emphasized mortgage modification early on, it could have prevented a lot of pain and might have helped stabilize the economy a lot sooner.

Bair, however, has always thought there were other reasons behind the general resistance to modifying mortgages. The government, she said, “thought maybe I was overstating the problem and that it wasn’t going to be that big a deal.” As for those in the industry, she added: “I think some of it was that they didn’t think borrowers were worth helping. There was some disdain for borrowers.”

In October 2007, she made a calculated decision to go public. In an op-ed article in The New York Times, she called on mortgage servicers to reset adjustable-rate mortgages en masse. “These borrowers would still be required to make their monthly payments,” she wrote, in an implicit response to the moral-hazard argument. She concluded: “Avoiding foreclosure would protect neighboring properties and hasten the recovery.”

Although she made no mention of the Treasury Department, everyone in the bureaucracy knew that it was her real target. It was now official: Sheila Bair was difficult.

That reputation was only made worse by the financial crisis.

The essential brief against her was that she refused to adopt the all-hands-on-deck mind-set required to deal with the unfolding emergency. At every step along the way, whenever she was asked to participate in one rescue program or another, she balked. As Sorkin put it in “Too Big to Fail,” the other regulators viewed her as parochial and small-minded and thought her “only concern was to protect the F.D.I.C., not the entire system.”

When I asked Bair about the charge that she cared only about the interests of her agency, she scoffed. “First of all,” she said, “protecting bank depositors is important. So is protecting the taxpayer.” As she saw it, there were too many times when she was the only one trying to do both. (When I spoke to Paulson, he defended Bair’s work during the crisis: “Sheila came to play every day,” he said. As for the criticism that she cared only about bank depositors, he added, “That was her job.”)

“They always had the view that the F.D.I.C. was not in the same league as Treasury and the Fed,” she told me. “As a result, we were rarely consulted. They would bring me in after they’d made their decision on what needed to be done, and without giving me any information they would say, ‘You have to do this or the system will go down.’ If I heard that once, I heard it a thousand times. ‘Citi is systemic, you have to do this.’ No analysis, no meaningful discussion. It was very frustrating.”

Too often, she felt, their requests were excessive, putting taxpayers at risk while bailing out undeserving debt holders. For instance, during the peak of the crisis, with credit markets largely frozen, banks found themselves unable to roll over their short-term debt. This made it virtually impossible for them to function. Geithner wanted the F.D.I.C. to guarantee literally all debt issued by the big bank-holding companies — an eye-popping request.

Bair said no. Besides the risk it would have entailed, it would have also meant a windfall for bondholders, because much of the existing debt was trading at a steep discount. “It was unnecessary,” she said. Instead, Bair and Paulson worked out a deal in which the F.D.I.C. guaranteed only new debt issued by the bank-holding companies. It was still a huge risk for the F.D.I.C. to take; Paulson says today that it was one of the most important, if underrated, actions taken by the federal government during the crisis. “It was an extraordinary thing for us to do,” Bair acknowledged.

Citigroup was another example. No bank needed more federal assistance than Citi — it required three separate bailouts. And yet, in Bair’s view, no bank was treated as solicitously, especially by the New York Fed. She felt pressured by the Fed to allow Citi to buy a failing Wachovia — which she suspected was a kind of backdoor way to strengthen Citi by giving it access to Wachovia’s stable deposit base. To make the deal work, the New York Fed even agreed to absorb some of Wachovia’s losses. When the F.D.I.C. accepted the Citi offer, Geithner felt that a deal had been made. But before Citi could close the deal, Wells Fargo, a much stronger bank, made a better offer — one that didn’t require government assistance. Bair leapt at it. Geithner was furious, complaining that Bair’s action was sending the wrong signal at the wrong time: that the federal government couldn’t be trusted to stick to its word. Bair didn’t care; she clearly got the right outcome for taxpayers and bank depositors, even if it didn’t help Citigroup.

As she thinks back on it, Bair views her disagreements with her fellow regulators as a kind of high-stakes philosophical debate about the role of bondholders. Her perspective is that bondholders should take losses when an institution fails. When the F.D.I.C. shuts down a failing bank, the unsecured bondholders always absorb some of the losses. That is the essence of market discipline: if shareholders and bondholders know they are on the hook, they are far more likely to keep a close watch on management’s risk-taking.

During the crisis, however, Treasury and the Fed were adamant about protecting debt holders, fearing that if they had to absorb losses, the markets would be destabilized and a bad situation would get even worse. “What was it James Carville used to say?” Bair said. “ ‘When I die I want to come back as the bond market.’ ”

“Why did we do the bailouts?” she went on. “It was all about the bondholders,” she said. “They did not want to impose losses on bondholders, and we did. We kept saying: ‘There is no insurance premium on bondholders,’ you know? For the little guy on Main Street who has bank deposits, we charge the banks a premium for that, and it gets passed on to the customer. We don’t have the same thing for bondholders. They’re supposed to take losses.” (Treasury’s response is that spooking the bond markets would have made the crisis much worse and that ultimately taxpayers have made out extremely well as a consequence of the government’s actions during the crisis.)

She had a second problem with the way the government went about saving the system. It acted as if no one were at fault — that it was all just an unfortunate matter of “a system come undone,” as she put it.

“I hate that,” she said. “Because it doesn’t impose accountability where it should be. A.I.G. was badly managed. Lehman Brothers and Bear Stearns were badly managed. And not everyone was as badly managed as they were.”

Grudgingly, Bair acknowledged that some of the bailouts were necessary. There was no way, under prevailing law, to wind down the systemically important bank-holding companies that were at risk of failing. The same was true of a nonbank like A.I.G., which the government wound up bailing out just two days after allowing Lehman Brothers to fail. An A.I.G. bankruptcy would have been disastrous, damaging money-market funds, rendering giant banks insolvent and wreaking panic and chaos. Its credit-default swaps could have brought down much of the Western banking system.

“Yes, that was necessary,” Bair said. “But they certainly could have been less generous. I’ve always wondered why none of A.I.G.’s counterparties didn’t have to take any haircuts. There’s no reason in the world why those swap counterparties couldn’t have taken a 10 percent haircut. There could have at least been a little pain for them.” (All of A.I.G.’s counterparties received 100 cents on the dollar after the government pumped billions into A.I.G. There was a huge outcry when it was revealed that Goldman Sachs received more than $12 billion as a counterparty to A.I.G. swaps.)

Bair continued: “They didn’t even engage in conversation about that. You know, Wall Street barely missed a beat with their bonuses.”

“Isn’t that ridiculous?” she said.

John Podesta, who headed the Obama transition team, was another Democrat that Bair had known forever. In one of her early conversations with him, she volunteered the name of Paul Volcker as a possible Treasury secretary. Volcker was most famous for taming inflation as Federal Reserve chairman in the 1980s, but he was also someone who didn’t think like a big banker. On the contrary, he was highly critical of the banks. “I just thought there had been too many people who had been too close to the financial situation for too long,” Bair told me. “I thought we needed a fresh perspective.”

Instead, Obama turned to Geithner. It was no secret by then that Bair and Geithner had a frosty relationship; inevitably stories leaked out that Geithner was trying to push her out. But the stories were wrong: Bair’s support for mortgage modifications made her enormously popular with Democrats; when she told Podesta that she would step down early if that’s what the president wanted, he said no: Obama wanted her to stay. (For his part, Geithner told me: “Even though we didn’t always agree, I greatly admire Sheila for her early recognition of the severity of the crisis and for her creative use of the F.D.I.C. to stem the panic.”)

What has been discouraging is that the Obama administration hasn’t done much better on the loan-modification front than the Bush administration did. Early on, the president told his staff to talk to the F.D.I.C. about how to set up a loan-modification plan. The F.D.I.C. had a wealth of experience, in part because it operated IndyMac for nine months until a buyer was found. It used that time to work on mortgage modifications with IndyMac borrowers and came up with a template for a program it felt could work nationwide. “They did talk to us,” Bair said of Obama’s staff, “but I always had the sense they were talking to us because the president wanted them to.”

Getting the banks to make large-scale mortgage modifications is no different today than it was in 2007 — next to impossible. The servicers still lack the economic incentives to modify mortgages; it’s easier in most cases for them to foreclose, which also generates fees, while modifications don’t. As Bair herself discovered during the IndyMac experience, changing that attitude requires dogged effort. “I ended up having calls with our servicers every Friday, to get a status report on what they’d done that week on loan modifications, just to keep the pressure on,” Bair said.

Without question, it is difficult to get mortgage modifications right. But many Democrats originally voted for TARP because it contained a provision mandating that $50 billion of the $700 billion in bailout money go to mortgage modification. The Paulson Treasury ignored that part of the law — and the Geithner Treasury has barely touched that $50 billion.

Still, a Democratic administration had to do something. Bair offered up the F.D.I.C.’s ideas, which involved, among other things, some government insurance protection for redefaults that took place after three months. She was sure her plan had better economic incentives for servicers than anything else under consideration. But the Obama administration went with a plan that didn’t fundamentally change the incentives, and that was not much different from what the Treasury under Bush did after the financial crisis.

When Bair was shown the plan, literally hours before it was announced by the president, she told them, “That’s fine; I’m not going to speak out against this, but don’t expect me to marry up to it either, because I don’t think it will work.” She told me: “They wanted my name and reputation on it.”

Sure enough, the Home Affordable Modification Plan has not exactly been a rousing success. Although some 700,000 homeowners have gotten modified mortgages through the program, that number is dwarfed by the millions of foreclosures that have taken place and the millions of homeowners in default today. Too often qualified borrowers have sought HAMP modifications only to be turned away by their servicers. Foreclosure remains their preference.

“I think the president’s heart is in the right place,” Bair told me. “I absolutely do. But the dichotomy between who he selected to run his economic team and what he personally would like them to be doing — I think those are two very different things.” What particularly galls her is that Treasury under both Paulson and Geithner has been willing to take all sorts of criticism to help the banks. But it has been utterly unwilling to take any political heat to help homeowners.

The second key issue for Bair has been dealing with the too-big-to-fail banks. Her distaste for the idea that the systemically important banks can never be allowed to fail is visceral. “I don’t think regulators can adequately regulate these big banks,” she told me. “We need market discipline. And if we don’t have that, they’re going to get us in trouble again.”

In the early wrangling over what became the Dodd-Frank bill, “resolution authority” was not a prominent part of the agenda. Then in March 2009, A.I.G. filed documents showing that it had set aside $165 million in bonuses for its traders. The public anger over these bonuses was enormous. One day in the middle of the furor, the president summoned Bair to the White House. When she arrived at the Oval Office, Geithner and Lawrence Summers, Obama’s top economic adviser, were sitting on the couch — and the seat next to the president was empty. That was where she was supposed to sit.
As the president vented his frustration over the A.I.G. bonuses, Bair saw her opportunity. “This doesn’t happen with our process,” she told the president. “We have a resolution process that we’ve used for decades, and when we put a bank into receivership, we have the right to break all contracts, we can fire people, we can take away bonuses and we don’t get into this kind of problem.” The president quickly signed on to the idea of having Dodd-Frank include the ability to resolve giant bank-holding companies and other systemically important financial institutions like A.I.G.

That was the easy part. Dealing with the Treasury Department was, as usual, the hard part. The original white paper the administration produced that outlined the financial reforms it wanted from Congress included a section calling for the government to be able to legally “resolve” the big banks. It had the F.D.I.C. running the process, which clearly made the most sense; the agency had been doing it for so long, it had the process down to a science. That’s why bank depositors scarcely notice when the F.D.I.C. shuts down their bank on a Friday and reopens it under new management on a Monday morning.

Weeks passed. About an hour before the president was set to announce the reform package, F.D.I.C. officials, including Bair, were shown the latest copy of the white paper. According to Bair, “The resolution authority had completely changed.” While the F.D.I.C. still had an important role, its authority had been seriously diluted — now the Treasury and the Federal Reserve would also have to sign off before a bank could be wound down. From Treasury’s point of view, this was completely reasonable. After all, any wind-down would require short-term lending from the Treasury, so it wanted some say in the process. But Bair felt strongly that this was yet another example of her — and her agency — being undercut by other regulators.

So she fought back; and in typical Bair fashion, she did so publicly. When called to testify before the House Financial Services Committee about the new resolution authority, she bluntly told Barney Frank, then the committee chairman, that, as she put it to me: “It still doesn’t resolve the large bank-holding companies. We would like the authority to do that.” In the final Dodd-Frank bill, Treasury’s oversight role was diminished — and the F.D.I.C. had the authority to manage a failing too-big-to-fail bank.

Even so, there are many people who remain convinced that the government will never have the nerve to let an important institution actually fail. Indeed, the big banks currently have a much lower cost of capital than their smaller brethren precisely because the bond market doesn’t believe they will ever be allowed to fail.

Bair has spent much of the last year trying to convince the country — and Wall Street — that the F.D.I.C. is up to the task. Most people remain unconvinced. But she insists, thanks to the new resolution authority, “I think we are in a lot better shape than we were.” The truth, of course, is that nobody can possibly know what the government will do. The only way to find out is to have an institution fail — not exactly a prospect to relish. But that will be a problem for someone else, not for Sheila Bair. She has done her part.

“I didn’t start off being assertive and going public with concerns,” Bair said as our second interview was winding down. “But we were being ignored, and we had something to bring to the table. There’s been speculation: maybe it was gender or that I’m not an Ivy League person. It could be; everybody has their biases. But I found I had to become assertive when they just wouldn’t listen.”

My own view is the country would have been far better served if more people in positions of power had been willing to listen to her as the financial crisis unfolded. Hers was a voice of common sense, trying to protect the taxpayer, the bank depositor and the homeowner. If other regulators had taken her early subprime concerns seriously — to cite just one example — the financial world might be a different place today.

“We always saw ourselves as the champion of the little guy,” she continued. “The other regulators never saw the pain of a bank closure, because that was our role. We were the ones that saw people losing their jobs when we had to shut down a little bank. They never understood the unfairness of the way little banks were treated versus big banks. Some of the other regulators have an institutional mind-set that the big banks have to always be with us.”

Which brings me back to where we began, with Bear Stearns. As I’ve thought about it in the weeks since our interviews, I’ve come to the view that she was absolutely right. “I think that the Bear deal set up an expectation for government intervention that was not really helpful,” she told me. Letting Bear Stearns fail would most likely have sent the right message to the rest of Wall Street, while there was still time, and without creating the kind of chain reaction that the Lehman failure caused. “I’ve always thought,” she said, “that it was really important for everybody to have to play by the same set of rules.”

That didn’t happen in 2008. Fighting the good fight, Bair has tried to make sure that it will happen the next time there’s a crisis.

Joe Nocera is an Op-Ed columnist for The Times and the co-author of “All the Devils Are Here: The Hidden History of the Financial Crisis.” Editor: Vera Titunik (

23 Responses

  1. Modification:


    Subject to applicable law regarding exclusion of proof of contemporaneous or previous agreements, the obligation of a party to an instrument to pay the instrument may be modified, supplemented, or nullified by a separate agreement of the obligor and A PERSON ENTITLED TO ENFORCE THE INSTRUMENT, if the instrument is issued or the obligation is incurred in reliance on the agreement or as part of the same transaction giving rise to the agreement. To the extent an obligation is modified, supplemented, or nullified by an agreement under this section, the agreement is a defense to the obligation.

    This is from Article 3 and applies to NEGOTIABLE instruments.

  2. Ms.Bair did not go far enough. Why did she push for modifications. She certainly new the banks had no standing as she knows about securitization frontwards and backwards. She is willing to talk but does not bring up the elephant in the room…the missing note and the fact that the Servicers cannot do modifications..did her brain get stuck.

  3. @Marilyn, the recorded documents are always sent back to the title companies. First of all, they are the ones who get them recorded – in their job description. They are the ones insuring the title so they want to know the dot is recorded. They are charged with the responsibility of seeing that the original recorded document gets where it’s supposed to go. The title company does then shuffle the original off somewhere. It’s likely the original recorded document never made it thru to where it was supposed to go. I’m not sure what if anything that’s good for, though. But up to the title co. recording the dot and then getting it back, nothing wrong there. UNless like a deed to a property, delivery is required. For a deed from John to
    Bob to be effective, Bob must get delivery of that deed. But as I recall, the title company is the agent for the lender, so delivery to the title company is delivery to the lender. If the title company is not the agent of the lender, then maybe there is no delivery if required. But I think they are.
    I don’t believe anyone is ever going to get anywhere with the funding at closing argument. Those funds came from a warehouse line owned by the lender shown on the note or otherwise provided at a cost to the lender by a third party. I can borrow money to loan you, and it was still my money I loaned you. When a loan is brokered, say to a countrywide, countrywide underwrites the loan, and countrywide may be the party who sends the funds to the title company. But pursuant to the purchase and or broker agreement between countrywide and the broker, the broker may be the agent of countrywide. Can’t remember. Now is countrywide the lender and not the broker named on the note? That’s the question, but it does not run to Wall Street. Even if countrywide had itself sold the loan forward, I think we’d find that the actual funds used to fund the loan thru title belonged to Countrywide and came from its own warehouse line. I’m willing to be convinced otherwise, but I don’t see it.

  4. I read the article but it told me nothing. In the past I have read articles and many blogs and took notes as to what I felt were ‘ clues ‘ to who was the CREDITOR/ LENDER and not the pretender payee/lender as the ‘ bank ‘ put on the Note and Mortgage. I learned on Livinglies from an article that told to ” FOLLOW THE MONEY “.,,FROM THE ORIGINATION…checking the few documents in my daughters closing..I saw that the recorded mortgage was to be sent to the title co….not the bank. So now I figure the bank was a strawman..and I felt fraud was involved….Now more frauds start to show upon further checking…with all this added to researching further…I have come to the conclusion who the CREDITOR (that is hidden with the PRIVACY ACT) really is. So WHO has the recorded mortgage…? That is what you need to request in the Discovery…the recorded mortgage…the banks don’t have them. With millions of foreclosures and frauds being approved in the courts…Does that not make you think deep… Just keep it simple…WHO IS THE CREDITOR AND HAS THE RECORDED MORTGAGE??? Why just show the ‘blue ink note? I figured the ‘ bank ‘ sold that right away…Your answer will prove why we are fighting this massive fraud alone…….

  5. I may have gotten that all wrong about the UCC, It may mean just that a transfer for value only vests in the transferee a shield from defenses to the note up to the amt of the promise to pay the bankster has actually paid.

  6. @rdewayne – yes: Attorney J. Thomas Black. He slayed them in
    “Hernandez”: If that case – see opinion on mtn to dismiss 12/07/09 , AP 09-03280 – has never been posted here, it should be. It’s great.

  7. This might be worth something. You know how assignments, particularly the ones which purport to assign the note as well,recite consideration, like “10 dollars and other good and valuable consideration”? Assume for a moment the assignment is legit. (Don’t gag.) It’s perfectly okay for that recital. The thing is, UCC section 3-303, states:

    •(a) An instrument is issued or transferred for value if:
    ◦(1) the instrument is issued or transferred for a promise of performance, to the extent the promise has been performed;

    While it’s okay to state it as 10 bucks and other good and valuable consideration, there is also this thing known as adequacy of consideration. Nobody is actually getting a note and dot for 10 bucks, so there is more consideration required than the 10 bucks. Here’s how you might be able to make them prove what the alleged consideration actually was. (There isn’t any) Let’s just say the assignee paid the 10 bucks in cash (well, I’d like to see evidence of even that and there’s case law out there – recent – which under Judicial Notice of a document, like an assignment, it’s not a fact in evidence that a document does what it purports by its mere existence) and the rest of the ‘good and valuable consideration consists of a promise to pay the rest of the consideration, which in non-bs deals is okay, too. But, the UCC provision above says that in a transfer for value, the transfer has ocurred only to the extent the promise to pay has been performed. I find this odd and there’s certainly a chance I misinterpret it. If not, if the bankster actually only paid the 10 dollars and has not performed on its promise to pay the balance, it is not a transfer for value for one thing. Secondly, or in conjunction, the assignee may only be entitled to collect on the notes from us the amt it has actually paid, if anything. So if bankster paid only 10 dollars, that’s what it can get out of you. They’re not even paying the 10 dollars – that’s just cr–. So you say very appropriately to the bankster, ” I’d like verification under UCC Section 3-303 of your investment in this note.” Because the bankster’s right to collect from you on the note turns on the consideration it paid itself for the note, you have a right to know what that amt is. A court could not deny the request….that’s IF I got this right. And you don’t need an assignment to bring this argument – just a claim in any forum. This is true any time the party trying to take your house is not the original payee on the note, which is all the time. I think if a non- jud f/c action is filed, you could just demand this info or file an action for a declaratory judgment in state court, which is what I’d do. They can’t ‘remove’ you to federal court because the dollar amt of the ‘dispute’, if any, isn’t known, so they can’t say it exceeds 75k (which is an amt required in controversy for federal jurisdiction as opposed to state) or involves issues of federal law. UCC’s are matters of state law.
    A complaint for declaratory judgment is where you ask the court to determine the rights of the parties – you and the bankster. You would be asking the court to determine what if anything you owe the bankster based on the bankster’s ‘investment’ in your note. But I’m not an attorney, so you might get at least some advice as to what to call it from your local pro-homeowner attorney. And again, that’s if I got this right.

  8. Dear rdewayne contact David Krieger

  9. As Government Nears Accord With Banks, Questions Swirl Over Scope Of Investigation

    “A comprehensive investigation with full disclosure and meaningful settlement terms would be a first step toward fixing the damage to American families caused by lax oversight of mortgage lending and servicing over the past decade,” Brown said. “These negotiations must provide justice for homeowners, confidence for investors and certainty for the housing market.”

    FULL DISCLOSURE: = ADMITTING that “mortgage lending” in these cases is a FALSE statement…a LINE OF CREDIT was given—disguised as a “regular ol’ mortgage loan”…WITH NO DISCLOSURE of this reality…FRAUD FRAUD FRAUD FRAUD FRAUD.

    Big surprise—NONE of the big banks would comment for the story…and HUD and the Justice Department declined also.


  10. chat·tel   
    [chat-l] –noun

    1.Law . a movable article of personal property.

    2.any article of tangible property other than land, buildings, and other things annexed to land.

    3.a slave.


  11. You signed the note and executed the mortgages.

    The equitable claim fails with “I got a loan and I got a mortgage and I got screwed . . .” You will get the judges attention – that’s for sure.

    The loan you received is a conditional contract and subject to counter party reps and warrants. You cannot enforce a conditional contract without disclosures.

    Your loan “note” is actually “Chattel” , an installment contract. You home is serving as a contractual Guaranty.

    Its equitable interest is transferred into a trust and there it is administered until the next loan or next borrower comes along .

    There is no foreclosure ! .

    This combination of lenders as payee and IPO as depositors, The NA as the Repository and Pledgee as the Obligor. . . . .

    The “Creditor” is so far removed from the foreclosure it makes one want to puke. The platform allowed a National Association to raise capital from FDIC funds under one an another IPO. “SPV”

    You can raise capital in an IPO from the accredited investors. They own the pooled assets.

    That’s not what happened here . . . .

    “BBB…make him stop ”

  12. @rdewayne

    Someone a while back posted that there was a lawyer in the Huston area who was very good at stopping foreclosures—she posted her email address and said she would be happy to put people in touch with him—her email:

    She said this lawyer was a “saint of saints of a real estate attorney”, and that he “did not just stop the foreclosure, he threatened their Securities licenses and they ponied up with EVERY single dime the homeowner had paid into the ‘servicing company’ from the date the securitized audit showed the loan had been assigned to to a REMIC Trust and according to the PSA (Pooling & Servicing Agreement).”

    By the way, I’m still wondering why if this guy can do what she’s talking about, WHY DON’T MANY MORE real estate attorneys do this???

    If any lawyer in the So.Cal area can do this, please email me:

    My “loan” is IndyMac/Deutsche—fake “trust”, etc.

  13. so no one see’e anything wrong with this. she new about the fraud and let it continue until we can not find jobs and pay our mortgages. how sad for our own government to do this to us. when some of us do the right thing we get a slap in the face instead of helping us keep our homes. i put my 20% an investment not 0 down not 3-5 % , 20%. my equity was suppose to be there when i retired. i did not take out a home equity loan. i worked hard to pay my bills. and this is what i get. i get told by wells fargo bank to default. , to not pay i had to be in eminent default to qualify for a hamp loan. wha texactly is the definition of eminent default and whty were they aloud to say this to homeowners. i asked for this in writing and they told me they could not provide this to me that was 9/14/2010 then on 9/15/2010 i asked again before i did not pay my mortgage again they told me to apply for hamp i had to be in eminent default i said again i must have this in writing and they told they could not provide this for me. hoe does a bank tell their employees to tell homeowners this but not provide it in writing to protect the homeowner and the judges sit on their bench and allow this allow our homes to be stolen, after finalkly being in the eminent default status and applying for the hamp loan wells fargo went and moved my file out of review with out
    any actual determinayion. then they go and lose an important document package. lieing and saying i never sent it. and this woman does nothing allowed these servicers to abuse home owners. i do not know what to do at this point.

  14. Can someone recommend an attorney in the Houston Texas area that understands foreclosure ligitation

  15. “My registry is a crime scene as evidenced by this forensic examination,” stated John O’Brien.
    there is no hope for recovery without total exodus of the current body politic ,even then its questionable as this same cancer is anywhere $ & power can be exchanged!

  16. When you consider the discussion of ‘Covered Bonds’ in which FDIC is promoting allegiance with WaMu and BOA ….

    The national banking associations and federal savings banks insured by the FDIC – the only purpose of FDIC stated in comment below. When you realize RETAIL is the Secondary Market, the deposits of each consumer for every mortgage payment (revenue stream) into custodian’s accounts were placed where? During foreclosure the non-performing loans moved to national associations in order that in the event the institution defaults….

    Why are we not using the actual investor terms for the secondary market used inside the SEC documents?

    Aggregator for example. A party involved within the secondary mortgage market that purchases mortgages from financial institutions and then securitizes them into mortgage-backed securities (MBS).

    Aggregators earn profit by purchasing individual mortgages at lower prices and then selling the pooled MBS at a higher premium.

    Purchasing an MBS tends to be far less risky compared to purchasing an individual mortgage as the pools of mortgages diversifies the source of the individual mortgage’s income stream.

    Some mortgage originators also become aggregators as securitizing a pool of mortgages can be seen as a natural extension of their business. Plus, doing so would limit losses incurred to the originator in the event that mortgage rates rise, as typically seen when originators would sell the mortgages into the secondary market

    Mortgage-Backed Security (MBS) – A type of asset-backed security, SEC SIC CODE SEC 6189, that is secured by a mortgage or collection of mortgages.

    These securities must also be grouped in one of the top two ratings as determined by a accredited credit rating agency, and usually pay periodic payments that are similar to coupon payments.

    Furthermore, the mortgage must have originated from a regulated and authorized financial institution.

    MBS aka “mortgage-related security” or a “mortgage pass through”
    When you invest in a mortgage-backed security you are essentially lending money to a home buyer or business.

    An MBS is a way for a smaller regional bank to lend mortgages to its customers without having to worry about whether the customers have the assets to cover the loan. Instead, the bank acts as a middleman between the home buyer and the investment markets.

    This type of security is also commonly used to redirect the interest and principal payments from the pool of mortgages to shareholders. These payments can be further broken down into different classes of securities, depending on the riskiness of different mortgages as they are classified under the MBS.

    So, you have a mortgage and the LENDER placed on the ‘mortgage’ credit line was utilized by the PURCHASER and SELLER as Aggregator.

    Mortgage Pool Number – alpha character unique

    Freddie Mac might be ‘D’ prefix; Fannie Mae ight be ‘F’

    Mortgage-backed securities (MBS) traders frequently use pool numbers (as opposed to Cusip numbers) to identify and trade securities as the pool number is more easily quoted, and the initial digit in the pool number frequently identifies the issuer. Those familiar with pool numbers might also be able to quickly distinguish between older and newer issues by the pool number

  17. Google ‘FDIC’ discussion with ‘WaMu’ and ‘BOA’ …. FDIC helps promote sales of Covered Bonds?

    FDIC ‘Krimminger’ US law would apply to insolvency
    consistent with the 45 day period in the case of conservatorship
    or 90-day period in the case of receivership.

    Not the same type of stay you have under bankruptcy. It’s the time period during which you have to get consent of FDIC to take action with regard to collateral or terminate a contract and such.

    Only two options in an insolvency

    1) Government either bails out the institution or

    2) Government institutes liquation proceedings

    FDIC Typical Role: Appointed Receiver for failed insured institution and FDIC transfers operations as much as possible to another bank.

    “Kenneth Marin – Why only residential mortgage collateral? Why not other highly liquid assets like Treasuries that a financial institution would often post as collateral?

    “Krimminger – FDIC’ – Initially we were looking at covered bonds as a vehicle for expanding liquidity for the mortgage markets, particular for the residential mortgage markets. The part of a covered bond structured that could prove challenging to institutions during times of stress is metting the cover test.

    That could be difficult if the mortgage or other assets pledged to the covered bond are deteriorating in value so that you have to sweep additional assets into the cover pool and take them out of that unpledged category that we could sell off, if needed.

    ‘ASR’ If FDIC took over an institution, it would transfer all of the assets and liabilities to another insitution, enabling the covered bonds to remain outstanding — then you would not need to do anything else to solve the acceleration risk issue.

    KRIMMINGER FDIC – US public policy of providing clear protection to insured depositors, and one way is to give the FDIC flexibility in deciding what the resolution structures for different institutions are.

    A Done Deal: Bingham, McKee Nelson Officially Combine

  18. Ms. Bair did an excellent job with the tools she was given, and the pain she suffered many times from the slings and arrows from Fed Reserve and Treasury. A decent government in favor of the homeowners could have made and still could make a difference. Now, that the crimes are so far-reaching and have completely destroyed the chains of title and violated the PSA agreements, the only way I see out of the mess is to sue the pretender/lenders in state court.

  19. “Bair continued: “They didn’t even engage in conversation about that. You know, Wall Street barely missed a beat with their bonuses.”
    “Isn’t that ridiculous?” she said.”

    And the administration looks the other way.

    Yes, crony capitalism at it’s best…Jack Welch: “It’s the ‘culture’ of Wall Street…that’s just the way it is!”

    So that makes fraud, deception, various ponzi schemes, pay offs, bail outs, bonuses,etc. OKAY…Because it’s the “culture”.

    Meanwhile, the American people are killing themselves (and sometimes their family members), in record numbers…or living on the streets…or dying of the stress of it all…


  20. How touching…..right! she’s still delusional by suggesting “loan/mortgage modifications”. Are all those people really that stupid? or are they just hell of actors and actresses? well paid? absolutely!!! sharp? not at all, if they were a knife, they wouldn’t be able to cut through crap!! that’s how sharp they are.

  21. We need more Sheila Bairs and Elizabeth Warrens to oversee the regulation and activities of the banks.

    As a matter of fact, we probably need women to restore this country. Women are much more practical at times. 😉

  22. THE FDIC KNEW even before they took over INDYMAC, that it was nothing more then a criminal front. Indymac was acting in CONSPIRACY with K.Hovnanian American Mortage, and other builders I allege, to set up the most massive straw man scam ever.

    INDYMAC knew all the AMERICAN MORTGAGE loans were going to defuault, as they knew the BUYERS had no idea about the loans!, and the builders were setting up false sales, or tricking spouses into the “investment” scam.

    I have seen the files at the recorders office, and I would guess that at least 90% have defaulted, as it was not the buyers who were defaulting, it was the STRAW MAN! The builders would pay for two months, and then default, and INDYMAC would put FALSE notes on the MATRIX to show that the “buyer” had claimed his renters stopped paying.

    FBI, is this enough?


  23. Sunday 10 July 2011

    A “feel good” article, well done, but changes nothing.

    The bankers hold all the trump cards, and “we the people”
    get to “eat cake,” if we can find it.

    No cheers!

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