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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“… but Bair, here, wiped out the senior debt of an enormous commercial bank..”
which one? wamu wasn’t a commercial bank fyi.

I don’t think LIBOR measures the rate on senior unsecured debt, but on deposits by one bank with another. These are unsecured and rank with depositors.

Wikipedia says it “is a daily reference rate based on the interest rates at which banks borrow unsecured funds from other banks in the London wholesale money market (or interbank market).”

So what are you saying Mr. Salmon “Taxpayers should bailout every bank’s creditor.” Bondholders that make bad bets should suffer losses. The WaMu resolution was a good decision.

If you want to go after Ms. Bair, you should ask her why the loan guarantees from the Temporary Liquidity Guarantee Program (TLGP) was not a bailout that increased moral hazard. The subsidy rate on the capital injections were much lower than the subsidy rate on the loan guarantees. The higher the subsidy rate, the higher the moral hazard.

At least she is consistent. She wishes Wamu actions had been applied to the rest of the large banks come hell or high water.

Posted by Lord | Report as abusive

I had spent the better part of a year paying off my Chase charge card just to avoid the highest APR of any of my accounts. Then the scoundrels at Chase bought WaMu where I also had an account and once again, I was in their clutches.

This happened to many people.

P.S. The scoundrels at Chase are now charging me on an account I rarely use a monthly ‘Inactivity Fee’. See, when you control the world, you get to do stuff like that.

Linus, why exactly was the Wamu resolution a good decision, can you provide concrete facts backing up this claim? I’m interested.


Posted by kosta | Report as abusive

Shiela Bair plays the part of sharon tate in the cult of jamie dimon.

Awesome, getting across to Shiela Bair!

Linus Wilson may have a point. Bondholders have gotten bailed out left and right. Thankfully the line was drawn somewhere.

Felix, you yourself have been saying that a big part of the problem was perception of “risk free” …

We can’t go on protecting bondholders from all pain. Even now, holders of long term US debt and mortgage debt get the ultimate bailout by quantitative easing.

Ben should have done a real helicopter drop on America with that new money, and let bondholders see a little inflation. The real financial disease was that American consumers had rotten balance sheets. They still have rotten balance sheets! No QE for them!

Posted by Dan Hess | Report as abusive

If Ms. Bair seized Wamu because of liquidity failre, then she should also seize all the banks using the Temporary Liquidity Guarantee Program.

After all, why would any institution use this program if it didn’t have liquidity problem?

Where was the consistency?

She also didn’t “think the WaMu failure had a disruptive impact at all.”


Did she read this paper from European Central bank?

“The amounts deposited with the ECB rise from a daily average of 0.09 billion euros in the week starting September 1, 2008 to a daily average of 169.41 billion in the week of September 29, 2008… The amounts deposited with the ECB start rising after the collapse of Washington Mutual when the crisis spreads outside the investment banking realm.” h/conference/2009/cblt/interbank_market_ HHH_jan09.pdf

Her action on Wamu bondholders destroyed the bond market, and that, was NOT a “ripple”

“But many forget that at the end of 08, banks couldn’t issue paper at all, even at historically high yields. TLGP effectively unclogged the frozen credit markets, allowing first banks, but shortly after other types of corporations to issue paper, leading to an incredibly robust primary debt markets today.” warticle/articleid/3555700

TLGP was created to help rectify Bair’s colossal mistake in wiping out Wamu bondholders.

Would Wachovia have fallen apart so fast if this Wamu seizure didn’t occur?

Two huge banks just happened to “fail” while a huge bailout package (TARP) was being voted in Congress?

How could people still believe her when she talked about no more bailout and no more bonus?

Last week FDIC just agreed to back another $2.9 billion of bank bonds to help “bailout” GMAC.

Was it riskier to back CIT bonds than GMAC ones?

As to the bonus issue, why didn’t she impose restriction on executive compensation on the capital raised via TLGP?

JP Morgan sold about $40 billion of FDIC backed bonds while Goldman Sachs sold about $20 billion. ntee.fortune/index.htm

Those amounts helped these banking giants pay back TARP (with restriction on executive compensation), with plenty of dough left for their bonus pools.

By the way, “JPMorgan Chase has laid off 14, 000 workers since the bailout” did not translate to “employees: almost all were kept.”


Posted by PPY | Report as abusive

as a seattle resident, may I also add that her assertion about wamu employees is radically wrong. workers at retail branches, perhaps, but almost the entire headquarters staff was laid off with significant impacts on local labor and CRE markets

Posted by brad | Report as abusive

Thank you Felix! Great insight and initiative to forward your query to PBS for Mr Solman’s interview with Ms Bair.

Posted by Drew | Report as abusive