Sheila Bair – No Good Ole Boy

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Having appreciated her sincere, forthright approach for years as head of the Federal Deposit Insurance Corporation (FDIC), I am eager to read Sheila Bair’s new book, Bull By The Horns. Although I have not yet gotten into it, I have read a few reviews, and I listened to her interview by Charlie Rose on Bloomberg TV yesterday afternoon.

Quite naturally, most of us tend to appreciate those whose views resemble our own. Having objected to almost all of the rescue efforts that our government entities have conducted since 2008, I relish hearing Bair characterize those efforts as seriously flawed. She rails against government’s actions that have once again promoted moral hazard. Watching government bail out the bad with the good, she rightfully recognizes that the message again has been reinforced that bankers can pursue profit irresponsibly and count on government bailouts if they fail. Why exercise prudence when you can keep the profits if you win and can count on a deep-pocketed backup if you fail? Most businesses don’t have that luxury, forcing them to more careful decision-making.

Bair goes into detail in arguing that bondholders as well as stockholders should have been punished rather than relying on taxpayers to fund the rescues. I have argued further that, to the extent taxpayer rescue money was needed, taxpayers should have become owners of the various institutions. In a national emergency–which this was–the essential executives, who were responsible for dragging the banks down, should have been conscripted and kept in their jobs at reasonable salaries until private investors could repurchase the shares and eliminate the further need for taxpayer money. It was absurd that we allowed these people to be bid away by the highest bidder then get rewarded with outsized bonuses for making profits in a game subsidized with taxpayer money.

This “protect the banks and bankers first and foremost” approach lies at the heart of Bair’s disagreements with Treasury Secretary Tim Geithner. Bair describes Geithner’s overriding goal to have been strictly making banks, especially big banks, profitable. She argues that the goal should have been to make them both profitable and responsible.

I am eager to read her arguments for requiring significantly greater bank capital and for getting rid of any kind of “too big to fail” financial institutions. And in yesterday’s interview, she pointed to the weakness inherent in many banks due to the abundance of legacy mortgage loans still on bank balance sheets. I have in the past highlighted each of these as dangers to our system, and I look forward to learning more from her insights.

Bair’s positions certainly deviate from those held by many top executives of the banks she regulated for years. I suspect few of them view her as a member of the “good ole boys” club that has ruled Wall Street and the banking industry for generations.