Bair’s chutzpah

By Felix Salmon
November 14, 2009
Paul Solman for putting my question to Sheila Bair. Her answer is quite astonishing in its chutzpah:

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Many thanks to Paul Solman for putting my question to Sheila Bair. Her answer is quite astonishing in its chutzpah:

Solman: Felix Salmon, who blogs for Reuters and does a lot of very interesting reporting, wanted us to ask this: was the Washington Mutual intervention a mistake, given the knock-on effects it seems to have had on the broader community. And more generally, is there anything you would do differently, in hindsight, about Washington Mutual or any other of things that you did?

Bair: I think actually that’s a bit of a myth. WaMu was a liquidity failure. It could not meet its obligations, it didn’t have enough cash on hand to meet the funding obligations it had contractually committed to. That is a basis for closing an institution. And the other option would have been to pump government money in there too, and we’ve tried to resist a lot of these bailouts. So I don’t think that was the right solution. So we really didn’t have any other option.

It was a below-the-fold story. It didn’t even really get that much press play. It was completely smooth. Shareholders and creditors, yes, took significant losses, but everybody else was pretty much protected: the general creditors, even the uninsured depositors were protected. The employees: almost all were kept. So actually I don’t think the WaMu failure had a disruptive impact at all.

Now at about the same time, Congress voted down TARP, and there was a very severe market reaction to that. Those all happened about the same time, and I think that maybe sometimes people get that confused. But the WaMu failure itself was barely a ripple in what was going on with the financial system at that time.

Solman: Felix Salmon’s question is in general, in hindsight, is there anything you would now have done differently?

Bair: Yes, certainly there is. I think we would have tried to tried to dissuade Treasury from making the TARP capital investments…

Just, wow. I don’t necessarily expect Bair to get into the nitty-gritty of the difference between senior unsecured debt and tier-2 capital in a national TV interview. But the fact is that she did have the option of paying off WaMu’s senior unsecured bondholders, and she dismisses that option a little bit too blithely in saying that she doesn’t like “bailouts”. WaMu would still have been a major failure, complete with creditor losses, if she had done that.

And I think she’s simply wrong when she says that hitting WaMu’s bondholders as she did had no disruptive impact. Maybe this is a matter of opinion, since it’s hard to prove a direct causal relationship, but Bair, here, wiped out the senior debt of an enormous commercial bank — the kind of debt which is exactly what Libor measures. It seems to me pretty improbable that she could do that without a pretty significant knock-on effect on interbank markets and on the level of trust between banks. And as we saw at the end of 2008, when that trust disappears, all manner of extremely gruesome consequences result.

Certainly the failure of the TARP legislation to pass the first time round didn’t help things, partly because the markets were hoping that it would rapidly shore up that fast-eroding trust. But the need to shore up trust wouldn’t have been as urgent as it was were it not for WaMu. (And Lehman, of course, but that was out of Bair’s bailiwick.)

Finally, Bair, when asked if there was anything she would do differently in hindsight, essentially says no, there isn’t: the only thing she points to is a decision that Treasury made, not that she made. Rather than taking the opportunity to revisit her own decisions, she quickly turns on Treasury. That’s something she’s done many times in the past. When it comes to admitting to human fallibility, she’s still batting zero.

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