Sheila Bair against the world

By Felix Salmon
September 27, 2012
Donna Borak has found the juiciest bits of Sheila Bair's book yet -- and it turns out to be buried in, of all places, the chapter on Basel III.

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American Banker’s Donna Borak has found the juiciest bits of Sheila Bair’s book yet — and it turns out to be buried in, of all places, the chapter on Basel III. Bair’s backstory to the September 2010 Basel III announcement is full of insider gossip and score-settling, and from reading Borak’s account I’d definitely class Bair as a dubiously reliable narrator. But her story is fascinating, all the same.

For one thing, Bair reveals, Tim Geithner involved himself quite deeply in Basel III negotiations. Bair can’t stand Geithner, and ascribes malign intent to everything he does. Geithner asks questions about Basel III without explicitly saying what his own opinion is? “It wasn’t clear whether Tim was trying to build consensus among the U.S. regulators or trying to stir the pot.” Geithner agrees to push for higher capital standards — exactly what Bair wanted all along? Well, that’s just his way of trying to marginalize her:

Bair sees the entire episode as a power play by Geithner. She argues he was trying to blow up the meeting between international regulators so that the issue would be kicked higher to the Group of 20 finance ministers who were set to meet in November. If the G-20 took over negotiations, Geithner would be leading the U.S., not Bernanke. The FDIC would have little say in the final number.

This simply isn’t credible. For one thing, Geithner just isn’t that Machiavellian: his biggest weakness is that he isn’t political enough, rather than that he’s some kind of master puppeteer. But beyond that, it also isn’t credible that the BIS and the world’s central bankers would ever cede the final decision on Basel III to a group of finance ministers. The central bankers might have found it hard to come to agreement, but they were technocrats working quietly to come to agreement on something very, very complicated. Basel III was a quiet victory: it came together, in the end, because it wasn’t politicized by finance ministers. The technocrats in Switzerland always knew that if Basel III were given to the G20 finance ministers, it would never go anywhere. And so they would never do that.

But Bair doesn’t see it, because she’s not one of life’s central bankers: she’s far to noisy and aggressive and opinionated. She’s a guns-blazing kind of negotiator, and seems to think of central bankers in general, and American central bankers in particular, as meek and pathetic:

U.S. regulators had trouble convincing French and German officials to go along with the idea.

In part, this was due to weak leadership from the Fed, Bair said, criticizing Pat Parkinson, the central bank’s lead negotiator, for not speaking up more.

“The Fed representative was supposed to be the head of the U.S. delegation, but Pat hardly ever spoke up,” Bair writes. “He talked a good game when he met with us, but when it came to engaging the French and Germans during the Basel Committee discussions, he was reticent.”

Similarly, Bernanke appeared reluctant to weigh in at the meetings of the Group of Governors and Heads of Supervision, a collection of the principals of international regulators, in part because of his status.

“As the head of the world’s largest central bank, he didn’t want to get down into the fray, which I understood,” Bair writes.

Dudley and Tarullo, meanwhile, also “spoke with frustrating rarity.”

“I didn’t know if they were just intimated by mixing it up with the French and Germans or whether I was being gamed and they didn’t really want reform,” writes Bair.

Again, this is about as uncharitable as it’s possible to be. The thing about being America, in any kind of international negotiations, is that you’re America. You don’t need to speak loudly: frankly, you don’t need to speak much at all. Everybody knows what your position is, and most of the time, if you just sit there and say nothing, everybody will ultimately come around and do what you want, just because it’s what America wants. Getting tougher capital standards is harder than, say, getting Jim Kim to be the new president of the World Bank, but the general principle is the same: what America wants is the base case scenario, and is likely to be what ultimately gets done. And if America shouts loudly about what it wants, that is unlikely to help and actually quite likely to hurt matters.

Bair has always come across as someone with a bit of a persecution complex: she has a tendency to think of herself as the sole defender of what is good and true, even as the rest of the government allows itself to get captured by the rapacious financial services industry. And of course there’s some truth to that: she’s absolutely right that the OCC, in particular, was an utterly toothless regulator which could always be relied upon to do whatever was wanted by the banks it was supposed to be regulating.

But it’s really not helpful, let alone accurate, to ascribe malign intent to any and every public servant you disagree with. Bair had a relatively narrow job — to make sure that banks didn’t fail, leaving her FDIC on the hook for untold billions of dollars in deposit guarantees. She fought her corner aggressively. But other people, including Ben Bernanke and Tim Geithner, had different jobs, and looked at the decisions being made, especially during the crisis, in different ways.

What’s more, it’s entirely natural that Geithner, who moved straight to Treasury from the presidency of the New York Fed, would take an interest in Basel III: after all, the New York Fed generally provided most of the frontline negotiators hammering out details far from the view of principals like Bair. And, it’s worth noting, the New York Fed was actually very aggressive in the Basel negotiations — much more aggressive, actually, than the higher-level negotiators from Washington. That was the culture Geithner came from, and if he was more sympathetic to Citi and BofA than Bair was, he was also well aware that the tougher the capital-adequacy standards, the better the competitive position of US banks in general, vis-a-vis their woefully undercapitalized European counterparts.

Geithner has only a few more months left in his job; once he leaves, he will surely be approached with many juicy offers from publishers. I have a feeling that discretion will win out, and that he’ll choose instead to float effortlessly into the world of grey financial eminences. But if he does choose to engage with Bair, expect sparks to fly. I’d give very good money to read his chapter on WaMu.

13 comments

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Felix:
“Turbo Tax” Timmy Geithner isn’t political enough? And you know this how?

Posted by PhilPerspective | Report as abusive

“The central bankers might have found it hard to come to agreement, but they were technocrats working quietly to come to agreement on something very, very complicated. Basel III was a quiet victory”

LOL – There is your problem. You still believe in the “maestro.” – central bankers as altruistic technocrats. Central bankers didn’t know what they were doing than, and they don’t know what they are doing now.

Posted by fresnodan | Report as abusive

This is just painful felix. You still believe in the uncapturenedness of neoliberal technocrats? And you believe, or try to tell us, that Geithner is an incompetent bureaucratic infighter, when he’s even managed to work out your good friend Larry Summers?
Anyway, might I suggest that you read this article by Godley from 1992 about the Maastricht treaty, and extrapolate from that?
Article: http://www.lrb.co.uk/v14/n19/wynne-godle y/maastricht-and-all-that
Excerpting a relevant bit: “It took a group largely composed of bankers (the Delors Committee) to reach the conclusion that an independent central bank was the only supra-national institution necessary to run an integrated, supra-national Europe.”

Posted by Foppe | Report as abusive

Felix:
I am no fan of Bair, Geithner, Paulson, et. al., and I generally ascribe to the “a pox on all of their houses” conclusion.

But why anyone would read of listen to anything that Sheila Bair is spouting off about this week is beyond me.

She completely failed at her FDIC job.

The FDIC is essentially an insurance company; Bair had two principal tasks to discharge as the head of an insurance company: (i) estimate the future losses of the insureds (the banks), and (ii) charge enough premiums to cover those losses. She did neither. (This is abundantly clear from the FDIC’s website and its quarterly reports from the CFO to the Board from 2007 forward.)

Before the crisis, say at the end of 2007, the FDIC’s best estimate of all future losses in the US banking system was a mere $124 million.

The DIF (deposit insurance fund) had about $51.5 billion in reserves.

By 2011, the FDIC’s insured losses (bank failure costs) were in excess of $80 billion, and the DIF had been in deficit for seven successive quarters.

That’s an FDIC best estimate prediction of $124 million versus a reality of $80+ billion.

And by the way, Bair not discharging her two central job functions is not a trivial issue. If the FDIC had been adequately reserved, the Treasury might not have needed to ask the Congress for TARP (i.e. taxpayer monies) to “bailout the banks.” Bank premiums would have covered the losses and the resolutions might have been less politically charged, including Bair’s pet peave, Citibank.

Therefore, Bair’s complaints about Citibank being saved unnecessarily are really complaints about her own mismanagement of the FDIC’s insurance fund.

And if Bair didn’t even discharge the two critical tasks required of her as head of the FDIC, why should we even waste our time listening to her complaints or analysis now?

Posted by AABender1 | Report as abusive

It is interesting to see the personal way in which Felix has chosen to attack Chairman Sheila Bair. The comment by Mr. Bender is completely off target as well. Both Salon’s attack and Bender’s comment reek of instigation, by and for our beloved Treasury Secretary Timothy Geithner.

In fact, Chairman Bair handled the finances of the FDIC superbly during the crisis and then helped Congress set in place a new financing scheme for the insurance fund that is far more equitable for smaller banks.

Because Bair was willing to do her job and not kotow to the largest banks, she has earned the enmity of Geithner and his servants in the media. The FDIC did not need support from Treasury. The notion that there was some connection between the FDIC insurance fund and TARP is ridiculous.

For myself, I think Chairman Bair is one of the finest civil servants of recent times. I hope that she will continue to be active in public service. In fact, I hope Chairman Bair considers a run for the White House.

Posted by rcwhalen | Report as abusive

I think Bair should be praised for stating her viewpoint frankly and fearlessly. Too many public servants give mealy mouthed accounts of their experiences in order not to offend anyone. I would also be wary of defending Geithner, pretty much a Wall Street facilitator in my view. I saw him in an exchange with Elizabeth Warren whom he treated like an annoying gnat when she was disagreeing with his viewpoint. Arrogant man.Too arrogant.

Posted by Chris08 | Report as abusive

“she has a tendency to think of herself as the sole defender of what is good and true, even as the rest of the government allows itself to get captured by the rapacious financial services industry.”

Propping up the crumbling TBTF with chewing gum and looking the other way so the revolving door doesn’t hit him in the derriere… is what the likes of Tim Geithner aspired to. Propping up Wall Street to the detriment of Main Street was a plan and Geitner’s eyes only stopped darting when his nose was firmly planted.

He makes Bair appear saintly.

Posted by youniquelikeme | Report as abusive

@AABender1

If the FDIC had been adequately reserved, the Treasury might not have needed to ask the Congress for TARP (i.e. taxpayer monies) to “bailout the banks.”

To put it nicely, this statement is silly. The FDIC ensures that most depositors get all or most of their money in the event that a bank fails. TARP’s goal was to keep banks from failing. An adequately funded FDIC will not save banks from failing.

Posted by Mark4096 | Report as abusive

I wonder what Sheila has to say about IndyMac. She was involved in the great deal that the buyers of the failed IndyMac got (now known as OneWestBank). Those guys made an embarrasment of riches…

Posted by vanmorrisonfan | Report as abusive

Felix, it is interesting to see you go after Chairman Bair in the manner you do. You fail to mention her mutually respectful and good working relationships with Secretary Paulson and Chairman Bernanke and suggest that Secretary Geithner was in favor of higher capital standards under Basel.

Either you are being fed a line or you do not have an accurate memory or experience with the subject. First of all, the calculation of capital, as you know is not a finite issue. During the period in question there were many pushing for capital to include ‘contingent’ capital instruments. Chairman Bair and the FDIC pushed back against those instruments given the reality that, as many bank friendly regulators knew, when push came to shove in a crisis nobody would be willing to trigger the conversion… thus it was not really capital in the first place.

I would also remind you that were it not for the strong backbone of Chairman Bair, her predecessor and the FDIC staff the US would not have retained a ‘leverage ratio’… Basel was against a leverage ratio (only one member country and the FDIC supported a leverage ratio) and the NY Fed helped the banks push back against it at Basel.

Had the FDIC given up on the leverage ratio (to the NY Fed) our banks would have been and would still be in much worse shape. While I am not often a big supporter of Barney Frank I do give credit where it is due and he was instrumental in supporting the FDICs pushback against Basel on the leverage rule.

It is not paranoia nor a persecutions complex for Chairman Bair to suggest that in the development of many of the alphabet soup of programs and the first stress-test (pre CCAR), Treasury would initially agree to strenuous FDIC demands only to shift positions to a more bank friendly programs.

I do not believe Secretary Geithner is either malevolent or Machiavellian, in fact I do believe he genuinely believed that what he was attempting was best for the system even if it was driven by an arguably misguided belief that saving failed institutions through secret recapitalizations and bailouts was the best way to do so.

Still, his perspective was incorrect at the front end of this crisis. Where Chairman Bair recognized the risks that were upon us, it seems Secretary Geithner (and, to be fair, many others) failed to see the warnings and then pushed back against the more correct views of those, like Chairman Bair, who did.

This can be seen in the following comments made by Secretary Geithner in May 2007:

“Changes in financial markets, including those that are the subject of your conference, have improved the efficiency of financial intermediation and improved our confidence in the ability of markets to absorb stress. In financial systems around the world, the capital positions of banks have improved and capital markets are becoming deeper and playing a larger role in financial intermediation. Financial innovation has improved the capacity to measure and manage risk”.

Posted by JRosner | Report as abusive

RCWhalen:

I noted at the very outset of my comment, that I think that there should be “a pox on all of their houses” and that includes Geithner’s house. That alone should have been a clue that mine was not an apologia for Geithner.

On the other hand for you to assert that Bair “handled the finances of the FDIC superbly during the crisis” belies a lack of basic numeracy as well as an understanding of the facts relating to the FDIC’s DIF.

During the crisis, Bair’s DIF was being depleted at alarming rates; as a result, she: (i) increased premiums to banks, including community banks, and (ii) had banks, including community banks, pay the FDIC the premiums three years in advance.

Why three years? Because the FDIC finally realized that they might run out of cash.

So (ii) above as much as proves that the DIF was at least three years behind in the assessment of its premiums, i.e. it was poorly run insurance company.

And why else did Bair need to do this superb thing, as you call it?

Well, (i) the DIF became insolvent under her watch, and (ii) if she didn’t charge banks their premiums three years forward, she would need to go and borrow on the FDIC’s $100 billion line from the Treasury.

And if she had done that–borrow from the Treasury to fund bank failures–Tim Geithner surely would have been in a position to tell her and the FDIC what to do.

So I think you are elevating and confusing a purely intersticine internal government agency fracas speciously into something more lofty and moral.

And finally, there is a relationship between the FDIC’s DIF and TARP.

The fact remains that the FDIC’s DIF was critically underfunded at the crises’ inception. And that, among other lesser reasons, was why taxpayer money was needed to get us through this–i.e. TARP.

Posted by AABender1 | Report as abusive

Here ya go Felix, Hoenig on the fantastic status of Basel III: ““promises precision far beyond what can be achieved for a system as complex and varied as that of U.S. banking.” http://blogs.law.harvard.edu/corpgov/201 2/09/28/a-better-alternative-to-basel-ca pital-rules/

Please reconsider your uncritical stance towards “soft-spoken men”. It is not a proxy for urbanity, nor is that a proxy for quality.

Posted by Foppe | Report as abusive

“[Geithner's] biggest weakness is that he isn’t political enough, rather than that he’s some kind of master puppeteer.”

This is just horse shite, Felix. You know better. If you don’t believe me, ask Brad DeLong, who was championing Timmeh even back when you knew better and thought then that it was a positive thing that Geithner “was never on the losing side of an argument” in the Clinton White House.

Posted by klhoughton | Report as abusive