Did Sheila Bair Save the US From Complete Financial Meltdown?

When a moderate (meaning anachronistic) Republican proves to be a more tough minded regulator than Democrats, it serves as yet another proof of how far the county has moved to the right. Bair, in a long “exit interview” with Joe Nocera, says a number of things that would have been regarded as commonsensical and obvious in the 1980s, yet have a whiff of radicalism about them in our era of finance uber alles. For instance: Bear should have been allowed to fail, TBTF banks are a menace (well, she doesn’t say that, but makes it clear she regards them as repugnant), bank bondholders should take their lumps.

Bair was alert to the dangers of subprime, having recognized how dangerous it could be in the early 2000s (when a smaller version of the market blew up, taking homeowners along with it), and was not a believer of the Paulson/Bernanke party line that subprime would be “contained”. She long championed mortgage mods as better for lenders, borrowers, and the economy, and has fought an uphill battle with the Administration on that front. With the IndyMac failure, which put the subprime lender/servicer in the FDIC’s lap, she pushed hard to develop a template for how to do them, which then was ignored by the Administration (they did HAMP instead, an embarrassment which she refused from the outset to endorse).

The piece serves as an indictment of the banking industry toadies in the officialdom, namely the Treasury, Fed, and OCC. One priceless quote:

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’s one thing to decide to intervene based on an assessment of the costs and benefits, quite another to have banks say they have 15 lbs. of Semtex strapped to their waist and will go “boom,” killing them and everyone nearby if you don’t accede to their demands, and have the authorities have no idea whether they are fibbing or not.

Even though it was useful having Bair confirm my dim view of what passes for financial services regulation ex the FDIC, Nocera recognized and flagged a critically important bit of bureaucratic stonewalling that almost certainly kept Citi and probably Bank of America and JP Morgan from doing even more damage to themselves in the runup to the crisis:

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.

Nocera is correct to flag both the reliance on the notion of risk-weighting, which proved to be seriously flawed. As former central banker London Banker noted in “More on the Lunacy of the Basel Accords“:

I was looking at the preferred asset classes under the Basel Accords…and realised that every single asset class that is given less than a 100 percent credit risk weighting is now tainted by widespread default, scandals or bailouts.

But (probably because it was not germane to the focus of this piece), he did not single out what was the most destructive aspect of the Basel II standards: that it made Euorbanks eager buyers for subprime CDOs, which in turn were the driver of demand for subprime loans in the toxic phase (third quarter of 2005 to mid 2007, when the market froze). Ex the CDOs, which actually drove demand to the worst sort of mortgages, the subprime market would have died a much earlier death thanks to Fed interest rate increases that started in 2004 (subprime origination fell in 2004 v. 2003 and was projected to decline further in 2005, when it instead got a new lease on life, see ECONNED for a long form description).

And why were CDOs so popular with Eurobanks? They were the prefect vehicle for looting bonus gaming. From ECONNED:

Negative basis trades can be executed when the cost of hedging a bond via credit default swap or another form of insurance is lower than the market yield on the same instrument. For instance, if you can purchase a bond at an interest rate of 400 basis points (4%) and buy a credit default swap of the same maturity referencing the company that issues that bond for 375 basis points (3.75%), the investor has 25 basis points (0.25%) of income….

Let’s look at an example. EuroBank buys a super senior CDO, rated Aaa/AAA. It has a floating rate coupon set at one month Libor (an interbank borrowing rate set daily in London) plus 50 basis points (0.50%). At its peak, EuroBank could fund this purchase by borrowing at Libor minus 20 basis points (–0.20%), so its “spread,” or gross income, is 70 basis points (0.70%), which may not sound like much but is actually very good value for high-quality paper. But at this juncture this calculation doesn’t capture all the costs. Since EuroBank does not have an infinite ability to borrow, it must also hold some much more costly equity against this position too, which makes the trade
look less appealing.

Then the fancy footwork starts. EuroBank buys protection on the bond via a credit default swap from an AAA counterparty. It pays 20 basis points (0.20%), so its remaining spread is 50 basis points (0.50%). Acquiring this guarantee has two perverse effects. One is that, because the paper is rated AAA, the Basel II rules, which European bank regulators followed, let banks decide how much capital to hold. Not only did EuroBank decide to hold a small amount before this procedure, but then it further decided that the CDS hedge meant it had no riskand therefore no equity cushion was needed.

But it gets even better. Assume the bond has a seven-year average life. What would the internal profit and loss statement show? It would not simply count the 50 basis points as income this year. It would show a profit equivalent to taking the earnings from years two through seven and discounting them back to the current year…Hedging the AAA position with a guarantee from an AAA (supposedly impeccable) counterparty freed up the capital formerly needed to support it, at least according to these metrics An immediate profit was credited to the desk that put on the guarantee.

Now consider how this looks to traders, who focus strictly on their own bottom lines. This is free money, thousand dollar bills lying on the sidewalk. Many of these transactions are incredibly simple to arrange and require little to no monitoring once booked. The not-trivial danger, that the party that provided the insurance might not be good for it (“counterparty risk,” the possibility
that the other side of the deal might fail to perform), is treated as the bank’s problem, not the trader’s. The fact that there is no charge for the cost of equity also means the people on these desks will face far fewer risk management limits than for other types of business. In other words, they can enter into transactions like this in extraordinarily large volumes.

I guarantee Citi would have had to have been nationalized if it had been permitted to play this sort of game. It is certain to have piled in every bit as hard as its European counterparts. And that would have made the subprime bubble even worse.

The article also indirectly serves to illustrate how what used to be conservatism, which is also once upon a time was very much bound up in ideas like strict morality and respect for tradition and authority, has instead become a propaganda cover for plutocratic land grabs. Mark Ames, via e-mail, provides another example of how other conservative lines of thought that ran counter to the interests of large corporations and other powerful interests were pushed aside:

Have you heard of this Depression-era U. Chicago classical-liberal Henry Simons? It’s a very interesting story: Simons was the mentor to both Milton Friedman and George Stigler, as well as Aaron Director; and Simons did more than anyone to set up the “Chicago School” in the early-mid 1940’s. He also collaborated closely with Hayek to create the foundations for Mont Pelerin. Then he committed suicide in 1946.

Simons’ liberalism turns out to be vastly different (and better) than the corrupt corporate neoliberalism we have. He was the real deal. Simons argued for classical Adam Smith liberalism: That meant it was the government’s duty to actively ensure the greatest amount of competition. In the mid-30’s, Simons argued that the big tragedy about the Great Depression is that everyone assumed it was caused by unfettered capitalism and too much competition run amok. Simons argued that the real cause was that the government, in the pockets of the wealthy, didn’t do its job to ensure maximum fair competition, and instead allowed oligopolies and monopolies to strangle competition and exploit. He believed that the government must always break up large corporations; he believed that the entire banking system should be nationalized, as its role is to finance competition, not to speculate; he believed that the government should take complete control over money, and manage the money supply to ensure low inflation and stimulate employment; he believed that the income tax code should be used to redress inequalities; that utilities should be nationalized; that there should be welfare for the neediest.

And he was one of the most rabid anti-New Dealers, anti-Keynsians out there.

What’s interesting is that Friedman, at the first Mont Pelerin conference in 1947, was also against privately-held monopolies, which he argued strangled competition and hurt consumers; Friedman even argued that private monopolies were more destructive than publicly-held monopolies.

He got in trouble for that from the big business backers of the new neoliberal movement, and shut his mouth up about monopolies for a couple of years. Then he came back to Mont Pelerin and proclaimed he’d seen the light: Private monopolies are never bad–in fact, they cannot rationally exist, because they always succumb to the laws of competition, where the consumer is king. The only problem is when the public owns a monopoly on anything–utilities, schools, parks, roads, you name it. It’s always inherently bad and oppresses our liberty.

Bair managed to make herself an irritant and an impediment to members of the Administration who were all too keen to give the banks everything they wanted. Had she been more powerfully positioned, she might have been able to do more good. But impeding bad courses of action, even though it seldom leads to the best headlines, is precisely what a regulator should do.

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  1. jck

    “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,”
    oh really? in 2004? banks have been holding capital on a “risk-weighted” basis” since basel I (1989)

    1. Yves Smith Post author

      Yes, and RAROC and its ilk were already used by banks since, what, the early side of the 1990s?

      I don’t fault Nocera here, this piece is for a mass audience, and explaining the differences between Basel and Basel II would have induced MEGO (My Eyes Glaze Over) in his readers.

      1. jck

        RAROC predates basel I by a long shot, started in the mid-70s at bankers trust, became the foundation of the new “risk-weighted” capital regime thx to Paul Volcker.

      2. MichaelC

        Agree about the MEGO point, but its useful to review evolutionary trends in finance. RAROC was clever and useful for a simpler time, but it followed (rather than led)the BISI concept (developed in the 80’s). It wasn’t terribly revolutionary or clever, despite BTs spin.

        Anyway, it was surpased by VaR at JP in early 90’s, when the regulators (BIS at least) were sold on its magical ability to quantify the ‘risk’ bit of risk weighted assets.

        The good folks at BIS implemented a capital charge for market risk (measured by Var models) in 98 via CAD.
        But the new rules led to the transformation of credit risk (via securitization) into Market risk and reduced capital charges. Transformed credit risk could be “hedged” away, leaving the appearance of O cedit risk at the banks. Euro banks (and their US competitors) focused on building their trading books. Traditional Banking books became capital hogs post ’98.

        The rating agencies made things worse, but under the rules banks could load up on junk, hedge with a AAA counterparty and hold close to 0 capital. In that scenario they only needed to hold capital on the market risk of the net position. That’s another reason the banks didn’t give a shit about the ratings agencies assignments on the bonds. As long as AIG could afford the hit (and it was universally understood that they could), who cared?

        So the pushback from US re BISII dates from 98, and the relevant rule changes at the heart of the crisis date to an earlier time than is generally understood. Bair clearly understood . If Bair were not so outnumbered Timmy’s opposition to Dodd Frank in favor of coordinated global reg changes based on the BISI/II/III would have been dismissed out of hand. Every regulator on the planet understands the fatal flaws of the BIS framework.

        Since the relevant bits of CAD were implemented between BISI and BISII, the major remaining change for BISII was an additional charge for Operational risk (snore). This train left the station a long time ago.

  2. K Ackermann

    I read this at Economist’s View, via the New York Review of Books…

    Here is Franklin Roosevelt, in Madison Square Garden, in 1936:

    For nearly four years you have had an Administration which instead of twirling its thumbs has rolled up its sleeves. We will keep our sleeves rolled up. We had to struggle with the old enemies of peace—business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob. Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me—and I welcome their hatred. I should like to have it said of my first Administration that in it the forces of selfishness and of lust for power met their match. I should like to have it said of my second Administration that in it these forces met their master.

    To which was added…

    President Obama might recall that Roosevelt won re-election by the largest majority before or since.

    1. financial matters

      Toto jumped . . . and tipped over the screen that stood in a corner. As it fell with a crash they looked that way, and the next moment all of them were filled with wonder. For they saw, standing in just the spot the screen had hidden, a little old man, with a bald head and a wrinkled face, who seemed to be as much surprised as they were . . .
      “I am Oz, the Great and Terrible,” said the little man, in a trembling voice. (The Wonderful Wizard of Oz)

      If Wright Patman had been a character in The Wizard of Oz, he would probably have been Dorothy’s feisty dog Toto, who nipped fearlessly at the Wicked Witch’s heels, saved his mistress by leaping boldly across a closing drawbridge, and exposed the man behind the curtain pretending to be a Great and Powerful Wizard. (Web of Debt)

      1. financial matters


        “””Unfortunately, under heavy lobbying by private bankers, Congress delegated the power to create money to a private group of bankers with the 1913 Federal Reserve Act and its 1934-35 Amendments. About this, Patman said:

        In the US today, we have in effect two governments. We have the duly constituted government, then we have an independent, uncontrolled and uncoordinated government in the Federal Reserve, operating the money powers which are reserved to congress by the Constitution.”””

        1. Because

          Wrong on all accounts. The ability to “create” money was already long gone, gone by the 1800’s. The Federal Reserve Act was a attempt by the bankers and government to try and get control of those flows so we wouldn’t have boom/bust crashes which the wealthy used as confiscation vehicles against the working class.

          Who cares about the 34-35 admendements either. All they did was take power away from regional banks because those regional banks failed to do their job and allowed for speculatory orgies? See the problem.

          Get over the FED. They are irrevelant. Get on the crap that is fractional Reserve banking, the system that has taken money creating powers from US treasury.

          1. F. Beard

            Get on the crap that is fractional Reserve banking, the system that has taken money creating powers from US treasury. Because

            Without a lender of last resort (the Fed), the ability of banks to leverage would be greatly limited.

            The banks are almost pure counterfeiters now. They allow the so-called “credit worthy” to steal purchasing power from their neighbours – those who can’t or won’t borrow.

            There are ethical ways to create money but as long as the government backed counterfeiting cartel exists the game is loot or be looted.

    2. F. Beard

      “I should like to have it said of my second Administration that in it these forces met their master.” FDR

      While I admire FDR for taking on the bankers, it’s a mistake to believe a fundamentally crooked system like central banking can be mastered.

  3. Paul Tioxon

    So FDR was so hated that he was declared an illegal alien, a Kenyon revolutionary Mau Mau with no birth certificate, created a tea party like uprising in opposition to him and had the largest all news network cursing him on every decision real and imagined and hired his political opponents who would eventually run against him to have their own regularly broadcast shows to attack him continually. Forces like that were arrayed against FDR? I don’t know many people who even know one name of the Rep candidates who ran against him, but Sarah Palin will go down as Huey Long with lipstick. And he is, to put it mildly, hated from day one, before he did or did not do anything other than run for president and win. He got 67 million people to vote for him, 9 million more the Mc Cain, who was not born in the USA, but in Panama, which is never brought up by Orley Taitz.

    1. JTFaraday

      Baloney. Short of a miraculous recovery, Sarah Palin is about a paragraph and a half in some future history on the decline and catastrophic fall of the US.

      I can see already that 2012 can’t get here soon enough.

    2. lambert strether

      I don’t hate Obama. But I was paying attention, so I didn’t miss or deny the grotesque and vile misogyny of his campaign and so many of his online supporters, the false smears of racism, caucus fraud in TX, or the way that the Rules and Bylaws committee handed him the votes he needed to make it over the top in delegates (when his opponent won the popular vote). Ill means, ill ends. Given a track record like that, it’s unsurprising that Obama wasn’t the progressive his deceptive and manipulative hopey change campaign promised (unless you were paying attention, and noticed him putting Social Security on the table in IA, the FISA vote to retroactively legalize Bush’s warrantless surveillance program, or whipping the CBC for TARP as President presumptive).

      Smarter Obama fans, please. Of course, to be fair, Obama has claimed the right to kill any US citizen without due process, which even Bush never did, so maybe they’re just scared.

  4. Drones evict Civilians

    “Bair was alert to the dangers of subprime, having recognized how dangerous it could be..” She then applied powder to prevent chafing, knowing that she needed to look good for the photographers, especially when sitting next to a humorless stiff like Dugan.

  5. km4

    “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”.

    Now it will become worse going forward…

  6. F. Beard

    When one gets down to it, aren’t the Basel Accords just rules on how much counterfeiting the banks are allowed?

    How about this instead – allow the banks to lend as they will but with absolutely no backstopping by government?

    Isn’t forest management an appropriate analogy? If humans suppress every little fire then the brush builds up till the eventual fire is far, far worse. Murray N. Rothbard (a libertarian) said that bank runs were a healthy thing. I agree. They should be compared to periodic brush fires that keep the forest healthy.

    1. Dan_in_KC

      Interesting, “she” ought to be eh? Lets see, you make no mention of anyone else who should, by all rights in a fair and just society, be there first (such as those who perpetrated the fraud that led to the bank failures). Those FDIC funds went to depositors – hmmm, a tad upset that those funds were not instead stuffed into the pockets of the fraudsters themselves? No mention at all, of course, that the insured limits were subsequently raised for everyone.

      1. Paul Jurczak

        “you make no mention of anyone else who should” – I don’t think it is necessary to attach a full list of crooks de jour to every statement in order to pass fairness test. The point made about bailing out depositors beyond stated FDIC insurance limit is a valid one. This rule was broken many times in the past (S&L bailout stands out) at a large cumulative cost to taxpayer. The fact that more FDIC bailout money went to IndyMac investors than it went to depositors, doesn’t justify exceeding insurance limits.

        The original purpose of these limits was to shield small depositors from financial system instability, but not to offer implicit bailout guarantee for everyone. If you had $300K of deposits, forcing you to do your legwork and spread it among 3 different banks had a healthy effect of sustaining demand for existence of 3 different banks, preferably in your neighborhood, rather than just one giant megabank.

  7. MichaelC

    Re BISII

    You say, “he did not single out what was the most destructive aspect of the Basel II standards: that it made Euorbanks eager buyers for subprime CDOs, which in turn were the driver of demand for subprime loans in the toxic phase (third quarter of 2005 to mid 2007, when the market froze). ”

    True, but the timeline of the implementation of the BISII rules re capital charges for securitizations bears review. The BISII rules germane to your point were already in effect since 98 with the implementation of the Capital Adequacy Directive (CAD) via the Basle Convergence Agreement. The critical basekine year is 98, rather than the ’04 date of the BISII kickoff.

    The Basle Convergence Agreement was:
    “An international compact to establish and implement common standards for bank capital adequacy. These and similar capital adequacy rules have encouraged banks to embrace disintermediation with the object of cleaning up their balance sheets. In addition, banks have tried to replace interest rate spreads with trading spreads and fees. There has been an overall tendency to transfer credit risk from banks to other financial market participants. See Bank Capital Adequacy Requirements, Capital Adequacy Directive. See also Add-On, Bank for International Settlements (BIS).


    Here’s a quick overview of the CAD/BISII relationship/timeline

    You also say “Bair was alert to the dangers of subprime, having recognized how dangerous it could be in the early 2000s…”

    The CAD rules were in effect in early 2000s for the Eurobanks. Bair and other regulators got a preview of the dangers of full implementation of BISII in the US.

    1. Cedric Regula

      I recall a Sheila Bair interview post crash where she stated US banks (of the size the FDIC regulates) held $60B in Subprime CDOs.

      Somewhere along the line reading all this stuff since 2007, I did get the impression that banks can hold a subprime CDO tranche of the less than AAA variety, buy a CDS on it, and this causes a lead to gold transformation and it counts as what I’ll call high quality, or liquid capital, for my lack of the official term.

      Whether it can then be used as collateral in a repo with another bank or the Fed, I don’t know.

      Now I may have confused and homogenized stuff in my mind that I was reading about Euro banks and US banks. That is certainly possible.

      1. Yves Smith Post author

        The banks here seemed to have had less latitude in their ability to play bonus games. You could get to 0% risk weighting with only a partial hedge (no joke, my recollection was that UBS bought CDS for only 4% of the notional amount of CDS hedged and got to zero weighting). Basel allowed the institution considerable freedom on how it risk-weighted a hedged AAA instrument (which really meant what level of hedging it took to get to a 0% risk weight).

        The Eurobanks also got the benefit of cheap deposit funding, so they could fund at Libor minus (lower than Libor). My impression was that was not true of the US banks, so the negative basis trades as sheer bonus gaming were less attractive been the more costly funding and the need to hedge a bigger % to make the trade work from a balance sheet perspective.

  8. readerOfTeaLeaves

    … what used to be conservatism, which is also once upon a time was very much bound up in ideas like strict morality and respect for tradition and authority, has instead become a propaganda cover for plutocratic land grabs.

    Old-fashioned Main Street conservatives got pwned by plutocrats. Enabled by

    No analysis, no meaningful discussion.[attributed to Bair]

    1. PQS

      I think it was the courting of the religious right that was the first nail in the coffin of conservatism.

      Most of the Republicans I know are the “old fashioned” kind – they like small government, low taxes, and non-interference in personal affairs. They are business owners who were horrified by Sarah Palin not only because she was so demonstrably an idiot, but also because of her blatant religiosity and opposition to abortion and other personal issues.

      Those of us on the left love to think we’re the only people without a party in America; I’d posit that many on the right feel the same way. I know my (now deceased) Reagan-loving Presbyterian grandfather would be utterly mystified by today’s GOP which is dominated by people like Mitch McConnell and assorted obviously ignorant Tea Party types.

      1. readerOfTeaLeaves

        Sounds like you and I know some of the same fine people, or the same fine kinds of folk. Living and not.
        Great folks, without a party these days.

  9. dandeluca

    I remember thinking that Sheila Blair seemed to be the most reasonable person in the corridors of power in the aftermath of the meltdown. Who knows how much of this is revisionism, but at least she appears to be saying some of what needs to be said now.

  10. chunga

    I don’t know if we’re saved just yet. Take a look at this:

    MERS and Fannie Mae sue Short Sale Seller and Buyer


    Duane DeSalvo

    Licensed Real Estate Agent

    Camarillo, CA

    July 04, 2011

    OMG! Just when you think you’ve seen it all, along comes a new horror story that makes the thought of doing short sales even more disgusting than before!!

    Because of our intense hatred of all banks (BofA and Chase head the top of the list) we decided to stop doing short sales, and most conventional real estate transaction last summer and have been buying and flipping properties instead!

    The last short sale we did was one we were referred to in October of 2009 (no good deed goes unpunished!!). The client (Tom) had recently lost his job due to downsizing and, to make matters worse, his mother had been diagnosed with a life threatening disease. There was no way we could turn this opportunity down to assist him so we took the listing on his one bedroom condo in southern California. He had purchase it in 2007 for $224K and we figured the current value was about $125K. We put it on the market and got an offer for $130K within a couple of weeks! Tom moved out of state to assist his mother in her remaining days on earth and we were happy to have an offer. After 5 months of negotiating with BofA (loan servicer) with 2 different negotiators, we finally got approval for a sale price of $123k!! (First negotiator said it was worth $180K!!!- Surprise)!

    We closed the deal in April, 2010 and both the Seller and Buyer were ecstatic! All was right with the world!

    Fast forward to July 2011! Last week, we received a document from our Seller that he had received. Are you sitting down? It was a LAW SUIT on behalf of MERS and Fannie Mae (Plaintiffs) against the Seller and Buyer (Defendants) and a possible 23 other defendants, (Does) who are at this point unnamed!

    The Law Suit maintains that: ————“The Substitution of Trustee and Full Reconveyance on the County records which purports to reconvey MERS’s interest in the property is a mistake and was not properly prepared or recorded by ReconTrust. An actual controversy has arisen and now exists between Plaintiffs and Defendants concerning their respective rights and duties in that Plaintiffs contend that the Substitution of Trustee and Full Reconveyance is a mistake and, therefore, of no force or effect which should be stricken from the public records and that Fannie Mae’s Deed of Trust is valid and enforceable.!”

    WTF!!!! I thought that the movie Too Big To Fail was unbelievable but this is ABSOLUTELY INCREDIBLE!!! Here is MERS (those bastards who were identified on 60 minutes as putting phony signatures on thousands of mortgage documents) maintaining that Recon Trust (not a party to the suit) MADE A FRIGGIN MISTAKE? They did not properly prepare or record the reconveyance of the loan!!!

    To top it off, the scum sucking lawyers (and I apologize to any scum out there that may be offended by the comparison) have filed a LIS PENDENS on the property such that the new buyer could not sell the property if she wanted to!!!!!

    This lawsuit FAILS to mention that monetary consideration of $123K was ACCEPTED by BofA for the purchase of the property!!

    I have to stop because my blood pressure is getting dangerously high!!!!

    Has anyone EVER seen this before!!! I suspect that Fannie and MERS are probably putting these lawsuits out en masse in the hope that- WHAT- they get the property BACK so they can sell it now for $89K?



    I bet they wish they could take that lawsuit back. What if everyone came to realize these “obligations” were sold more than once – under different names?

    Sure takes a lot of wind out of the “Moral Contract” sails…lol.

    1. Cedric Regula

      I’m shocked, shocked I tell you, that we may see chain of title disputes in this country some day.

      I’m certain this problem is “contained” to your case, and you probably did something wrong anyway. (prepared joint press release from Treasury and Federal Reserve)

      Not to worry tho, you have title insurance, no?

      Don’t bother writing your congressperson. They have other matters to attend to.

  11. Anonymous Comment

    There are mistakes in timeline, as noted by other commenters. BIS put an end to staw buyers – one of the most important parts of healing all this, even though it was perceived as a brick wall. It’s still early to name the heroes in this on-going debacle.

    However, Bair does seem the most honorable and level-headed of the regulators.

  12. Per Kurowski

    Current capital requirements for banks allow for very little bank equity when the credit ratings determine there is very little or no default risk at all, and so the regulators obviously based these requirements on the credit ratings providing correct risk information.

    Why? If I was a regulator I would not lose one minute of sleep concerned with the credit ratings being correct, I would only toss and turn about the possibility of these being wrong… and these worries is what I would primarily try to cover for with capital requirements.

    As is the current crisis left our banks with no capital simply because they were not required to have any capital against what was ex-ante rated as “not-risky” and “ex-post” turned out to be very risky.

    This is an awful crisis, and many are suffering, and so I do think the bank regulators owe us a lot of explanations… and, if they can’t provide us with satisfactory answers, they should be fired and shamed.

    PS. Loony bank regulations explained in red and blue! http://bit.ly/mQIHoi

    Per Kurowski
    A former Executive Director at the World Bank (2002-2004)

  13. Mother!

    Bair upgraded the castle with a jumbo loan from BOA one summer. Her excellency was treated like a customer – rather then a factory animal. (Lied to, manipulated, stolen from, bankrupted, drawn, quartered and processsed – all with Federal approval.)
    Job security isn’t a concern here. But don’t hate the rich. Housing, employment and healthcare will never be held ‘against’ them, or used as a weapon, that treatment is reserved for the folk:

    “Sheila Bair, one of the chief regulators overseeing Bank of America’s federal rescue, took out two mortgages worth more than $1 million from the banking giant last summer during ongoing negotiations about the bank’s bailout and its repayment.”

    1. Yves Smith Post author

      There is a long list of people on the Friends of Angelo meal ticket, who got cut rate mortgages. That was clear bribery.

      By contrast, you haven’t made a compelling case against Bair with this factoid. She runs the FDIC, for Chrissakes. She can be accused of a conflict of interest with ANY loan she’d take. Is she also not supposed to use credit cards? Yes, it was pretty crappy that she did not get a waiver, but there isn’t evidence of bribery here.

      She’s over 50 and married (and so wold have benefitted from house price appreciation over the years and if she didn’t do equity extraction, between spousal income and equity accumulation over the years, a $1 million house does not sound out of line at all given her age and martial status).

  14. Susan the other

    It is easy for me to believe that Sheila saved our banks from the worst. But nobody has thanked her. All the banks do is whine and file lawsuits. They whined when it looked like Basel regs would clip their wings; they said they would never be able to compete with the EU banks. Then their complaining quieted down. Because some clever person was working on “insuring” their assets to free-up capital. Who first came up with this CDS angle? Who first rationalized that a top rated CDS writer could ease the capital requirements? This must have been the TBTFs themselves. And why wasn’t it ever a problem to the rating agencies that the writers of al those CDSs didn’t have a dime in the bank to cover their policies? Now we learn that Ben Bernanke liked the whole CDS angle as it was being proposed in conjunction with Basel. Amazing. Strange, Ben really didn’t run the Fed until the shit had already hit the fan.

  15. Cedric Regula

    Sheila Bair will be arrested soon for conspiring with Paul Volcker, Elizabeth Warren and Bill Black in an insidious scheme to wreck the financial system and global economy.

  16. Benedict@Large

    Most people these days think that derivatives were deregulated by Phil Gramm’s Commodities Futures Moderization Act (CFMA) in 2000, but this is not the case. The CFMA merely provided “economic certainty” (don’t you LOVE that word?) by writing into law that derivatives could not be regulated without some subsequent act of Congress.

    In actuality, dervatives were deregulated by an administrative ruling of the Commodities Futures Trading Commission (CFTC) during the closing moments of 1992, as the Bush I administration was winding down. The CTFC at that time was headed by Wendy Gramm (yes, HIS wife!!!), who used the final moments of her chair to force through this ruling by a 3-to-2 vote.

    One of the two people who voted “no” was Sheila Bair.

    P.S. Bair has an editorial today’s in WaPo: “Short-termism and the risk of another financial crisis” http://www.washingtonpost.com/opinions/our-focus-on-the-short-term-is-holding-the-economy-back/2011/07/06/gIQAw3cI4H_story.html

    Mostly OK, but she strays in macro a bit, and it’s not her strong suit.

  17. KnotRP

    So a one-eyed regulator in the land of blind regulators is King (or Queen), eh?

    Doing passive-aggressive delay tactics is a job well done now?
    I don’t think so.
    She only shines in comparision to the cave darkness that surrounds her.

  18. Uncle Tom

    “When a moderate (meaning anachronistic) Republican proves to be a more tough minded regulator than Democrats, it serves as yet another proof of how far the county has moved to the right.”

    This is a misguided comment. It is proof of how soundly the Democrats have been utterly and completely captured by the moneyed interests. Funny how it is the Tea Party types and Republicans like Bair and Hoenig (who is certainly a Republican) that want to end TBTF, but the party of Obama and Geitner prefer to keep it alive but wrap it with a highly discretionary form of regulation. Hence, they can wring more campaign contributions from those who are regulated.

    Heaven forbid Obama and Geitner were to kill of the cash cow of the Democratic Party (ie, the Wall St banks and the uber-rich).

    1. Yves Smith Post author

      You don’t like hearing it, but pro corporate positions ARE right wing. Anti regulation IS right wing.

      I agree the Dems are corprocrats with some middle of the road window dressing, but the whole country has moved massively to the right. Wake up and smell the coffee.

      1. Uncle Tom

        So what label do you give someone like Stephen Breyer who when working for Sen. Ted Kennedy recognized how captured the regulators had become and advocated deregulation to get back to competitive capitalism instead of crony capitalism?

        Pls put down your coffee and read some Mancur Olson.

        1. Because

          Bundy, your a idiot. The tea party frauds want freckless speculatory orgies then crashes with no intervention to profit from the collapse.

          You have also heard of the “Grover Cleveland” or economic liberal wing of the party have you not?

          The truth is, most Democrats, especially in today’s party are not “progressives” or “socialists”. You do understand that right? The “revised” wing of the Cleveland side of the party has long made a comeback.

          1. Uncle Tom

            So you prefer to engage in puerile name-calling instead of discussion? Is that the standard practice at this blog?

            Am I supposed to conclude from your second sentence that you prefer interventions in the form of bailouts to help out the NY bank fat cats profit from reflating asset prices. That’s an economic policy based on distorting asset prices from the realities of underlying cash flows. Good luck with the sustainability of that model.

            Today’s Democrats do not resemble Grover Cleveland. He was not captured by the special interests of his day.

          2. Dan Duncan

            Hey Because…

            If you’re—or, I’m sorry…”your”– going to call someone an idiot, you might be well served to learn how to construct a coherent sentence.

            Moving on…Are you saying that Uncle Tom’s comment lacks freckles…because WTF, exactly, does “freckless” mean?

            Seriously…Go ahead and type “freckless” into the “Submit Comment” box. See that scriggly red line? [I know you can see it, because I’m seeing it after I just wrote scriggly.]

            OK…that scriggly red line means that the computer is trying to let you know that “freckless” isn’t a f*cking word. It means that the computer (also) thinks you’re a moron. [Unfortunately it doesn’t help with apostrophes though. You’ll need your 2nd grade grammar teacher for that.]

            So…The scriggly red line means that when you see it—while calling someone else an idiot —that you are the idiot.

            Listen to the scriggly red-line, “Because”. Because it’s telling you that it is you are a moron.

          3. observer

            Ha ha! This is the height of comedy–Dan Duncan lecturing someone on how to write and spell.

            Dan, you’ve outdone yourself.

    2. Because

      The only trouble with this part of the post “Tom” is that Blair was hardly a strong regulator. Compared to the Bryan wing of the Democratic party, she was a loose hoe.

      The Republicans and the tea party are so beholden and financed by wall street, you lie about your own intellectual capacity.

      1. Uncle Tom

        Could you pls provide an example of a strong and effective regulator from say the last 25 years?

        Do you know where most of Goldman Sachs’ campaign contributions have gone for the last 25 years?

        Do you think there is any connection between these two anwsers?

  19. Max424

    “[Chicago School founder Henry Simmons]believed that the government must always break up large corporations; he believed that the entire banking system should be nationalized, as its role is to finance competition, not to speculate; he believed that the government should take complete control over money, and manage the money supply to ensure low inflation and stimulate employment; he believed that the income tax code should be used to redress inequalities; that utilities should be nationalized; that there should be welfare for the neediest.”


    re: Sheila Blair

    I know we’re not suppose to bring up the gender thingy, Yves, but I must say, I have women way ahead of men on my Beltway Integrity Scorecard.

    In fact, not only are Beltway men being shut out in this “game,” it’s looks quite likely they will never get a batter to first base.*

    *Let’s face it, unless some dumb ox gets hit by a purpose pitch, men are looking at a perfect game against.

    1. financial matters

      That would be nice and then she could delegate some real power to Elizabeth Warren.

      I think the big mistake the FDIC made was in bailing out bondholders in addition to depositors. Again with the excuse of trying to ‘save the system’. But that card has been played and won’t be available in the next hand.

  20. Francois T

    Reading this interview, something obvious finally jumped at me: Sheila Bair knows and live the true meaning of conservatism applied to economics.

    ‘They should have let Bear Stearns fail,”
    She favored “market discipline” — meaning shareholders and debt holders would take losses ahead of depositors and taxpayers — over bailouts, which she abhorred.

    I don’t know how she was able not to punch the actual retards in CONgress who dare to label themselves “conservatives”, when in reality, they are proto-fascists who worship the symbiosis of the corporation with the State to the detriment of the individual.

  21. JobWaltz

    “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”

    Why didn’t she speak out WHILE this was going on? The horse has already left the barn, and now she wants to close the door. If she wants some credibility with me, she needs to name names and expose the crony capitalists that have been ripping us off.

  22. beowulf

    Ahhh, Henry Simons. He certainly was old-school, some good soul (Bill Totten) put online his 1934 book “A Positive Program for Laissez Faire”.

    “We may endure regulation for a time, on the dubious assumption that governments are more nearly competent to regulate than to operate. In general, however, the state should face the necessity of actually taking over, owning, and managing directly… industries in which it is impossible to maintain effectively competitive conditions..”

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