This book from one of the insiders of the financial crisis is an intriguing look at how the FDIC keeps banks safe despite many attempts by government officials to cater to them.
Shelia Bair was appointed in 2006 to be chairman of the FDIC, the agency that regulates banks, and charges them a fee to insure their deposits. If your bank fails, you get up to $250K insured against loss. The book only briefly went through the process that the agency uses to keep you safe, but went into details about the policy and regulatory environment during the recent financial crisis.
There are many agencies that regulate banks, the FDIC, Fed, OTS, OCC, and there’s the US Treasury Secretary. They all have different beliefs about how much banks should be regulated, and from Bair’s account it seems clear that many of them think their job is to help and protect their banks rather than to help US citizens by keeping the banks safe. It was amazing to read how agencies didn’t want to have their banks look bad, or be subjected to “hard” regulation, but they didn’t seem to mind regulation for other banks. There were instances where the OCC supported strict regulation for ARM loans, but not for subprimes, presumably because the banks the OCC regulated originated more subprime loans.
Clearly, many of the regulators seemed to want to stop at nothing to help the banks, and bail them out. The FDIC has a nearly perfect history of helping bad banks find a buyer, or get sold at auction, or just get dissolved seemlessly for the really bad ones. Yet the FDIC was rarely involved when all the banks were going bad and the government was throwing billions of dollars at them. It’s preposterous. They just wanted to help the banks.
Citibank was brought up again and again as a terrible bank, and yet the NY Fed kept suggesting that it was in ok shape. It wouldn’t downgrade its status because of claims along the lines of “We’re bailing it out again (for the 3rd time), so it’s not really troubled anymore.” It was just really eye-opening.
It seems that Tim Geithner as the head of the NY Fed was incredibly pro-bank, so it shocked Bair to see him get appointed as Treasury Secretary by a Democrat president. Over and over his actions indicated that his priorities were to help the banks stay profitable and competitive, rather than to help the US citizens.
One thing that Sheila did to really help our banking system was to oppose the Basel II regulation standards. In 2006 all the banks were wanting to adopt these looser standards, and the banks in Europe did. Basically she was the one who stood up to not allow this to happen. Since it was early in her tenure, she got identified as a trouble-maker, and it led to more tension in her relationship with the other regulators. The Basel II standards basically indicate that banks should be free to leverage even more of their money, especially in sovereign debt. In other words, they can own as much Greek debt as they want, and it doesn’t count against their capital ratio. Europe is in serious trouble right now because they implemented this.
Bair is fairly proud of the Frank-Dodd bill that passed to specify what should happen in a banking crisis, but worries that regulators are too slow in implementing the changes. At the end of the book she has a whole bunch of practical changes that should be made that should make our banking system much better. OK so maybe reducing the national debt, and eliminating the GSEs would be hard, but raising capital requirements and taxes on large financial institutions should be “pretty easy.” But certainly not with Geithner around. And it’s hard to do anything in politics it seems.
The great thing about this book is the authentic feel of it. I learned about it because she recently became a columnist at Fortune (my favorite magazine), where she’s a real straight-shooter. I’m interested in hearing Paulson’s side of it, but I’m sure it’s going to sound very self-serving. Other books about the failures at Bear Stearns and Lehman Brothers were much more engaging and interesting, but I’m sure they weren’t as accurate. This is more like the textbook history of the crisis. If that’s your thing, then I recommend it. If you’re looking for a lighter read, try one of the other ones.