Sheila Bair was the Chairman of the FDIC under Bush and later reappointed under Obama. In Bull by the Horns she gives her perspective on the housing crisis and the financial collapse.

Sheila was a Republican and voted for McCain, but her criticisms were quite bipartisan

As Chairman of the FDIC her primary concern was the health of the banks and insurance of the depositors. This focus led her into conflicts with other regulators. Particularly she opposed the Basel II accords because it allowed banks to reduce their capital requirement at a time when the delinquency rate was rising. Not surprisingly the large banks welcomed the increased leverage and lobbied Congressmen such as Chuck Schumer to adopt them. Her alarms proved to be prescient.

When the mortgage defaults began to mount she pushed for large systemic modifications of the loans to prevent further defaults. She pushed for simple quick documentation. She knew from her banking experience than when banks held the loans themselves they tried to avert foreclosure whenever possible

But the securitization of the mortgage loans had vastly complicated this process. Because the mortgages were sold in tranches those who held the higher rated tranches had a greater incentive to foreclose because the loss would be born by the lower quality tranches. She further fought agencies such as the OCC and Treasury who sought to modify the loans on a case by case basis. Such a move, meant to salvage as much of the investors’ interest as possible, would make the larger scale modifications that were needed almost impossible to attain.

The press addressed the re-default rate of resets included many that did not reflect the standards Sheila wanted. The data used to embarrass her and her agency by the other agencies was also greatly flawed.

Advisors under Bush who pushed for market accountability for mortgage holders obviously held no such standards for the Wall Street Firms they bailed out. While Sheila Bair supported the insurance of depositors she opposed bailing out bondholders and shareholders, an action supported by Treasury, OCC, and the Fed.

Though she voted for McCain, Bair hoped that Obama would bring a different standard to the resolution of the crisis. Concern over this crisis, after all had catapulted Obama into the White House. She had hoped Paul Volcker would have been brought in as head of Treasury, since he had the fortitude to stand up to the power structures on Wall Street. She was deeply disappointed that Tim Geithner was selected, since he was largely a part of the problem and had supported policies that led to the disaster. He was tight with Robert Rubin (Clinton’s Treasury Secretary) who had been a major bundler for Obama and also influenced other picks in his cabinet. Rubin had been materially involved in the course of Citibank, which was one of the worst disasters during the crisis.

While Sheila criticized the shortsightedness and greed of the investors who refused to see the benefit in systematic loan modifications, she saw greater failures in the regulators and policy makers who through the securitization of mortgages and the Basel II accords created an environment that subverted the control that regulators needed to accomplish their jobs. There was too much reliance on market accountability and far too much complexity allowed in the system.

Most notable was the utter lack of cooperation between the regulatory agencies. The Fed, The Treasury, the OCC, and the OTS (Office of Thrift Supervision) were often conflicted with each other and thus forced compromises on policies that needed speed and strength to be effective.

She criticized the laissez-fair attitude of Greenspan and others in the Bush administration, though it was certainly not equally applied. The larger problem was clearly not the lack of regulations (though this may have been true with derivatives and credit default swaps) but the poorly thought out regulations and policies of the regulatory agencies and their utter lack of cooperation. There is also clearly too much of a cozy relationship with Wall Street and K Street. Unfortunately, this may have gotten worse under the current president.

Sheila felt unwelcomed by the other agencies since she stood in opposition to many of their policies that she felt had precipitated the problem, and the policies they sought as a solution once the dam broke. There were several instances where she felt the other agencies were deliberately undermining her efforts and authority.

Some may see this as white washing; others will see it as setting the record straight. I see it as an indispensible part of understanding this dark episode in out economic history.

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