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Sheila Bair blames Geithner, Paulson and Bernanke for the credit crisis

Former FDIC chair Sheila Bair’s departure from government has been unusual for a number of reasons. First, she is not getting on the gravy train in the private sector that former officials usually do. What’s more is she allowed the New York Times Joe Nocera to pen an exit interview with Bair that was scathing in its condemnation of both the Bush and Obama Administrations in which she served. More compellingly, she has now gone on the record with an Op-Ed in the Washington Post writing those same sharp criticisms herself.

The nation is still struggling with the effects of the most serious financial crisis and economic downturn since the Great Depression. But Wall Street seems all too ready to return to the same untenable business practices that brought it to its knees less than three years ago.And some in government who claim to be representing Main Street seem all too ready to help.

Already we have heard rationalization of the subprime mortgage debacle and denigration of those of us who have advocated long-term, structural changes in the way we regulate the financial industry. Too many industry leaders, as well as some government officials, compare the crisis to a 100-year flood. “Who, us?” they say. “We didn’t do anything wrong. Nobody saw this coming.”

The truth is, some of us did see this coming. We tried to stop the excessive risk-taking that was fueling the housing bubble and turning our financial markets into gambling parlors. But we were impeded by the culture of short-termism that dominates our society.

-Short-termism and the risk of another financial crisis

Bair is too diplomatic to name names. But she is as blunt and direct as you can be without doing so. While no names were named it is abundantly clear from the Nocera piece at whom she points a disapproving finger: Paulson, Summers, Geithner, Bernanke, Greenspan. In fact, looking through the Credit Writedowns archives I see myself using the same language as Bair, pointing at the same characters.

For example, on the ‘100-year flood’ I wrote the following parody of Geithner and Summers’ thinking last November (click the links and read to see the falsity of this parody narrative):

"Wow, this crisis has been more severe than anyone could have imagined. Obviously, none of this was foreseeable because the U.S. banking system is basically sound. We have the most robust and competitive institutions in the world. So my calls for gutting regulation in the past [Summers as Treasury Sec.] and my looking the other way as leverage built up all around me in the lead up to crisis [Geithner at the NY Fed] cannot be faulted. Certainly, if some government watchdogs had picked up on an epidemic of financial fraud being perpetrated, that would be another story.

So, what do we do now that this 100-year flood has come our way?

We’ll probably be forced to do deeply unpopular, deeply hard to understand things like bailing out the banks. It’s not like we want to do this. But we have to because the banks are suffering a liquidity crisis; we can’t just put them into receivership like the obviously insolvent Fannie and Freddie.  They just need a little push, some stress tests and we can get through this. Anyway, people would panic if we took a big bank into receivership. They couldn’t open for business.

-A few comments about Tuesday’s election’s impact on the economy

On these Voodoo People and their short-termism causing another crisis, I wrote last April:

"it’s the debt, stupid."  When aggregate debt levels build up across business cycles, economists focused on managing within business cycles miss the key ingredient that leads to systemic crisis. It should be expected that politicians or private sector participants worried about the day-to-day exhibit short-termism. But White says it is particularly troubling that economists and their models exhibit the same tendency because it means there is no long-term oriented systemic counterweight guiding the economy.

This short-termism that [William] White refers to is what I call the asset-based economic model. And, quite frankly, it works – especially when interest rates are declining as they have over the past quarter century. The problem, however, is that you reach a critical state when the accumulation of debt and the misallocation of resources is so large that the same old policies just don’t work anymore. And that’s when the next crisis occurs.

-The origins of the next crisis

This is the exact same terminology Bair is using. So clearly, when she says “some of us did see this coming”, it is true, some of us did see this coming. And what we are saying now is that we are headed for another crisis in short order. And I suspect when this is over , that’s when people will start taking her view more seriously.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

11 Comments

  1. David Lazarus says:

    Personally I think that a major financial crisis will be on us very soon. I thought that we could possibly fumble on for a few more years but I am bringing forward my expected date very rapidly with every decision that comes from the politicians and central bankers. The problem is that they have no idea what will happen and just hope that they can clean it up afterwards. I am looking for that black swan event. Though I doubt that it will even be necessary for something as extreme as that. A few select defaults of periphery debt might strain a bank or two either directly of via CDS payouts. There are slow withdrawal of funds from money markets in the US, from banks in Ireland, Italy and Greece. That will require central banks to act. The stock markets are seriously overvalued and the Vix is not pricing in the volatility that I expect. A sudden move might trigger a crash.

    The problem is that mainstream economists had no idea of the problems of debt and so have no idea how to treat it. The clean up afterward solution has run its course and now is too big to deal with. It would have been so much better to rein in credit growth before, more so if they had not deregulated so much.

    US politics is so dysfunctional right now Sheila Bair is like Cassandra, being accurate but not being believed.

  2. Desmond says:

    Sheila Bair was the head of the FDIC. She had the responsibility to enforce net capital rules with respect to bank lending. That is to say, if a bank made a loan they are required to segregate a certain amount of money to cover that loan in case of default. However, because the rules also allow for banks to disregarded the rules if they are selling the loan you get the banking crisis. Translation: no skin in the game. At no point during her tenure at the FDIC did she attempt to fix/close that loop hole. So she can blame all she wants but I personally feel she was a weak leader. I suggest people go to the FDIC’s website and look at underwriting guidlines to see for themselves. Because banks lend money, the FDIC could have curtailed risky lending practices at almost any moment. It’s blame borrowers, mortgage brokers, wall street, appraisers, underwriters, account reps etc etc while missing the elephant in the room. The FDIC!

    • David Lazarus says:

      That ignores all the political involvement. The FBI had practically all its financial fraud people transferred to dealing terrorism. The regulators were gutted in the same way that the GOP is trying with Medicare. It ignores deliberate policy of mismanaging agencies when run by the Republicans. A great example was Geithner who said that his job at the Fed was not of regulator when that was his job. Sheila Bair did speak out against the changes but was ignored. There are many guilty people ranging from Goldman Sachs down to loan officers who fraudulently filled mortgage forms because of the commissions. There simply are not enough prison spaces to incarcerate all that were involved.

    • If you want perfection, go live in Utopia. In the real world, people have turf battles and ideological blind spots that it is difficult to counteract. It’s preposterous to think Sheila Bair, who was head of what was considered a second-tier government agency compared to the Fed and the Treasury, could muscle her way through against the likes of Greenspan, Bernanke, Paulson, Summers and Geithner. And that’s assuming the Presidents actually wanted to do things her way – which they did not. Are you kidding me?

      Remember, even Volcker was silenced by Geithner and Summers.

      On WaMu, John Hempton thinks she was too hasty:
      http://www.creditwritedowns.com/2008/11/the-problem-with-comprehensive-banking-crisis-solutions.html

      On Citi and Wachovia, i think she never should have signed on. But Citi was failing and the pressure to do it was immense:
      http://www.creditwritedowns.com/2008/11/citigroup-talks-with-us-government-as-bankruptcy-looms.html
      http://www.creditwritedowns.com/2008/09/citigrop-grabs-wachovia-on-cheap.html

      On the free money to PE firms in bank resolutions, I was not happy:
      http://www.creditwritedowns.com/2009/08/the-fdic-and-the-socialization-of-banking-losses.html

      Bottom line, I have watched this unfold in great detail. Sheila Bair made mistakes. I did not agree with all of her decisions. But Bair had the right attitude as she was focused on actual regulation whereas the other regulators were anti-Regulators. I think Sheila Bair has done a much better job than any other regulator in the crisis. My notes: Bair: Pretty good. Bernanke: fair. Paulson: Poor. Greenspan, Geithner: Horrible.

  3. marsh iverson says:

    THE COMING AMERICAN APOCALYPSE
    We are witnessing the end game in America’s capitalism cycle. The historical precendents are everywhere. The oligarchs obscenely enrich themselves and impoverish the masses..Democracy is hijacked and replaced with their Plutocracies everywhere
    Nationally systems are set up(WS aka the U.S.Govt) which incentivize wreckless behavior in which enormous leveraged gains are privatized while the disastrous leveraged losses are socialized. In the private sector Oligopolies/Monopolies in the key private sector are b eing established(Health Care Insurance,Telecommunications,Finance,etc) which raze employee benefits and devastate the consumers economic viability, The Presidents Economic Recovery Task Force is staffed by CEO’s whose companies pay little or no taxes and outsource as many jobs as possible.
    At the State, County, and Local the gaming of the taxpayer is even more devastating(witness the bankrupting of e.g., California and Wisconsin). Here internal parasites( Unions.such as police and firefighters ; and Ciity and County managers) have institutionalized systems which beg for double even triple dipping at the public trough. Here in Thousand Oaks and Ventura County they refuse to address this obscene feeding off the struggling mainstreet taxpayer. This clueless ,self-indulgent behavior should lead to their ouster and a taxpayers revolt. .
    This trashing of our financial and political sytems and plunging of the U.S. into depression has layed bared all of the plutocratic cancers above . The problems and solutions have thus been starkely underscored. Sadly for us, the self serving Oligarchs have neither the desire or leadership to execute.
    America is distintegrating under their stewardship ;,they are placing their bets elsware as the American Apocalypse is coming

  4. Francine says:

    I totally agree with Ms. Bair re: Bernanke, Geithner, Paulson, Summers, etc.
    Watch the documentary, “Inside Job”. And the band is still playing on.
    Congress and the Fed turned the bright lights on the appraisers and loan originators – hoping to take the heat off themselves. Even Ms. Bair got some pretty sweet mortgage loans from Bank of America – while negotiating BofA’s Tarp funds. No conflict of interest there, HUH? So, even though her hands are not totally clean in the financial mess, at least she’s stepping up to the plate and turning the bright lights on the administration and the Fed and Wall Street. What about the rating agencies? They got paid very large bucks to grade failing companies as AAA. When questioned on that – they said they only give OPINIONS! Really? No, the fraud was occasional at the bottom of the food chain (Loan Originators, brokers and appraisers) but it was massive, pervasive and continuous at the top of the hill. And nobody is wearing handcuffs yet! Where’s Angelo Mozillo? On a beach somewhere getting more and more orange. The Fed decided he has had too much heat already, so he won’t be brought up on charges again. Poor Guy – he’s living large on the money he stole from the defunct Countrywide.
    The whole bunch of these guys disgust me. Maybe Sheila Bair will finally put the light where it belongs. We’ll see…

  5. Paula says:

    When the ppl in charge of bank regulating that believe in free market principles, this is what you get. Notice that this crisis came from the largest banks and not the community banks. I saw it coming and I got my degrees from the midwest!

    It’s a matter of seeing and not turning a blind eye.

    I’m sorry, but Mrs. Bair is as bad as the rest of them. Complete failure of their most basic mission.

    Mrs. Bair let the big banks skip their insurance premium payments. She would not have done that if she that something was coming!

    • David Lazarus says:

      What we need is simple regulation which is hard to avoid. The current risk based models simply are a way of allowing the big banks to lever up on the basis that they are not taking any risks. I would like to see an end to the MBS and CDO markets. They are far beyond most peoples ability to understand them. Also end the access of the big banks to the Fed cheap money. All that does if give them a competitive advantage over community banks. Also make banks hold mortgages on their books, but allow them to issue bonds. That way if they issue junk mortgages it will be just their bonds that are affected.