Sheila Bair's FDIC Was Hated by Wall Street -- and That's High Praise Indeed

Last Updated Jul 15, 2011 4:17 PM EDT

Sheila Bair's retirement from the FDIC is a huge loss. She was the only person in two administrations to question the idea that what's best for Wall Street is best for the economy.

As she told an ABA conference earlier this year:
I would like to propose to you a radical-sounding notion. And it is that increasing the size and profitability of the financial services industry is not -- and should not be -- the main goal of our national economic policy.
After being appointed to run the FDIC in 2006 by then-President George Bush, Bair was the only financial regulator at the time who recognized the subprime mortgage disaster about to overtake the nation. She had the FDIC take action because neither the Fed, the Office of the Comptroller of the Currency, nor the Office of Thrift Supervision were willing to. (The OCC actually used its powers to stop states from curbing subprime abuses.)
The FDIC's radical proposals included raising loan standards and modifying mortgages so that people who were able pay them could continue to do so. Damn Communist.
Bair quickly developed a reputation as a difficult person because of her unwillingness to be buffaloed into whatever the bailout scheme of the moment happened to be. She believes the bailouts were all about protecting bondholders at the expense of taxpayers. As she told Joe Nocera:
Why did we do the bailouts? It was all about the bondholders. They did not want to impose losses on bondholders, and we did. We kept saying: 'There is no insurance premium on bondholders,' you know? For the little guy on Main Street who has bank deposits, we charge the banks a premium for that, and it gets passed on to the customer. We don't have the same thing for bondholders. They're supposed to take losses.
(Say, whatever happened to moral hazard anyway? Oh, that's right -- it's only for us common folk.)
When bailouts were needed -- as with the case of AIG -- Bair thought the debt holders should have taken a financial haircut. Instead, U.S. taxpayers had to cough up payment for 100 percent of the debt -- including more than $12 billion to Goldman Sachs (GS).

Standing up for homeowners
Bair agreed to TARP because it included $50 billion to be used for mortgage modification to keep people in their homes. This money was supposed to give loan servicers financial incentives to modify loans. It remains all but untouched, and these servicers still find it easier to foreclose, which generates fees for them, than to modify which puts nothing in their pockets.

She canned an attempt to let Citigroup (C) buy Wachovia -- with taxpayers picking up some of the tab -- when Wells-Fargo (WFC) made an offer that didn't require government assistance. This did not go down well with Citi's management -- which, given how badly Citi has been run, is a ringing endorsement in itself.

And speaking of ringing endorsements -- neither Hank Paulson nor Tim Geithner got along with Bair. I hope she puts that at the top of her resume.

Bair's nominated successor at the FDIC, Martin Gruenberg, is reported to be very much in the Bair mold. The banking industry has made it clear they don't like the pick, which is good enough for me.

Bair should have gotten Geithner's job, but instead she heads to the private sector. Sort of. Unlike most top government regulators who leave office for jobs with companies they once regulated, she'll be working for the Pew Charitable Trusts. I'd like to think this will be a temp job until whoever is president in 2013 calls her back to public service. However, I'd also like to think the Cubs will win a World Series some day.

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    Constantine von Hoffman is a freelance writer and writing coach. His work has appeared in outlets such as Harvard Business Review, NPR, Sierra magazine, Brandweek, CIO, The Boston Herald, TheStreet.com, CSO, and Boston Magazine.

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