Sheila Bair, the former FDIC chairman who heads the Systemic Risk Council, and Ricardo Delfina, a fellow Systemic Risk Council member, met on Sunday with members of several Occupy Wall Street working groups: Occupy Bank, Alternative Banking, and Occupy the SEC. I’ve watched presentations by Bair twice previously: once when she was at the FDIC, another not long after she had left government service. Even though she had been pretty direct in those discussions, she was surprisingly specific in this meeting about some of the impediments she faced during the crisis. Some of the topics:
Citigroup. Bair wanted Citi resolved. However, she was not in a good position to do so, since the OCC was Citi’s primary regulator and it, along with the Treasury and Fed, were adamantly opposed. The FDIC regulated only the depositary, which was about $1 trillion of the then roughly $2 trillion bank. That meant it had data only on that operation, since the Treasury and OCC, which had better data, refused to share it. And she stressed that that the information she had was not very good thanks to Citi’s lousy information systems. She could have forced a resolution through a seldom-used mechanism (used only 6 times in the FDIC’s history) but it would have been extremely aggressive to do so, and she felt she could justify it given her incomplete vantage. She pushed hard for a fallback of firing incumbent management and the board and using a good bank/bad bank structure, which would have had shareholders and bondholders take losses. She said that she never got any analysis from her opponents as to why these measures could not be taken, but instead was met with assertions that Citi was systemically important and that if the authorities took it down, its failure would be blamed on them (an argument Bair didn’t buy either: “This was management’s failure. We didn’t tell them to set up SIVs or buy CDOs.”).
Improving regulation. Bair thinks banking regulation should be a career, like the foreign service, with bank regulators or at a minimum bank examiners barred for life from working for banks either directly or through advisory firms. She also believes in having regulations be simple to avoid bank gaming (former Treasury Secretary Nicholas Brady also took up this theme recently in a Financial Times comment). Thus while she applauded the CFPB for its recent initiatives, she was disappointed in the complexity of their regulations. She clearly took a dim view of the banks’ hoary arguments against effective regulation.
Bair clearly didn’t see Dodd Frank as a magic bullet, but stressed that it did give regulators more powers and they were not using them. She is not happy with the way Romney and a lot of members of the Republican party have taken to demonizing regulators and said that Ronald Reagan would disapprove, quoting him as saying that the role of government was not to protect us from ourselves but from each other.
Specific proposals. Bair thought it was irresponsible not to require money market funds to use a floating NAV, and attributed the failure to get the reform through to aggressive, “vicious” lobbying by incumbents. She discussed how credit default swaps were the derivatives that needed to be reined in, and needed to be regulated like insurance, in particular, that users needed to have an insurable interest. She also argued that banks needed more capital and that using a simple leverage ratio (that is, no risk weighting), noting that Basel III will get them only to 3% when she feels 7% to 8% is what is needed.
Lack of prosecutions. “I don’t understand” why no one has been prosecuted at MF Global, such as Jon Corzine. She thinks it is important to hold individuals accountable.
Effecting change. Bair argued that Occupy and the public more broadly needed to make it clear to Congressmen that they are unhappy with legislators kow-towing to banks. She felt more signs of public outrage were needed. When pressed that public opposition to the TARP hadn’t had any impact, she suggested targeting the most industry-friendly members of the banking oversight committees. She also thought it would be useful to pressure the Administration on its failure to get good regulators in place, such as its long delay in replacing bank stooge (my expression, not hers) John Walsh and its foot-dragging on reappointing Gary Gensler.
While it was gratifying to hear someone who sees herself as a “traditional conservative” on the same page as Occupy, some themes of her discussion were disconcerting. One was her emphasis on the need for pressure from ordinary voters through conventional channels, such as calling or writing your Congressman. While I’ve encouraged readers to do that, since it is low cost and might have some impact, I’m simultaneously concerned that it isn’t all that powerful. By contrast, Ricardo Delfina said after the session that the Occupy the SEC letter on the Volcker Rule had galvinized the SEC. Apparently staffers are often opposed to lobbyist arguments, but unless they have evidence that there is well reasoned opposition, they are at a disadvantage in pressing their case with senior regulators. So focusing more on the public comment process is a potential leverage point.
It’s very hard for most people, and no doubt people who’ve invested much of their career to public service, to acknowledge how quickly our political apparatus has been eaten away from the inside. It remind me of the iconic scene from Alien, where the people seem normal until the creature bursts out. Simon Johnson, who is part of Bair’s Systemic Risk Council, seemed closest to the mark when he said that when oligarch took over, reforms would not be implemented until splits developed in the ruling classes. And it looks like things will have to get worse before that takes place.