A new sport in Washington these days is bashing financial regulators, who didn't exactly cover themselves in glory during the recent credit bubble.
But through it all, there was one regulator who refused to be muscled by an industry that appeared to be generating lots of new jobs and new wealth, who never bought into the notion that bureaucrats should not substitute their judgments for those of the marketplace, who understood the magnitude of the mortgage crisis.
That regulator was Sheila Bair, chairman of the Federal Deposit Insurance Corp.
As far back as 2001, Bair, then an assistant secretary of the Treasury, sounded an early warning about the abuses of subprime lending. Arriving at the FDIC in June 2006, she pushed fellow regulators to issue new guidance on subprime lending that had been held up for nearly a year by industry opposition. Last summer, she was among the first regulators to acknowledge that a case-by-case approach to fixing the mortgage mess would not suffice and that the government would have to step in with a more systematic remedy. Even now, as Congress puts the finishing touches on its plan to refinance $50-billion in troubled loans, Bair is pushing an even more ambitious refinancing scheme that would involve direct loans from the Treasury.
Among bankers and regulators, Bair is better known for standing up to the Federal Reserve and the Comptroller of the Currency on capital requirements — how much of their own money banks must set aside as a cushion against potential loan losses. After some tense negotiations, Bair last year reluctantly signed on to a compromise that would have allowed the biggest banks to adopt international standards that everyone expected would reduce their capital requirements. But all that is pretty much on hold now that the bursting of the credit bubble has confirmed her worst fears about overreliance on credit ratings and the banks' own risk models for setting capital standards.
"She's been outspoken in a constructive way," said Robert Steel, undersecretary of the Treasury for domestic finance, who credits Bair with being right on a number of key issues early on. "She's someone people can work with," he told me.
"An ideal regulator who knows when to regulate and when not to," is how Barney Frank, chairman of the House Financial Services Committee, described her to me.
Bair is everything you'd want in a public servant: thoughtful, practical, independent-minded — a straight shooter with political savvy who can manage the details of policy without losing sight of the big picture. She's no grandstander, but she isn't shy about going public with concerns if she thinks it will help her inside game. She never forgets that her most important constituency isn't the thousands of banks she regulates but the millions of Americans who use them.
Given the respect and credibility she has with consumer groups, Congress, the media and the Treasury, you'd think the Fed would have taken pains to win over Bair before proposing new regulations on mortgage lending. Instead, the regulations put out for public comment at times read as if they had been written by lawyers for mortgage banks and brokers intent on avoiding lawsuits.
The proposal brought a sober rebuke from Bair in a 10-page comment letter. Rather than taking a straightforward approach — outlawing subprime loans with prepayment penalties, insisting that brokers' fees be simple and transparent, requiring that lenders verify borrowers' income and ensure that income would be sufficient to cover monthly payments after teaser rates expire — the Fed, according to Bair, opted for needless complexity that gave rise to gaping loopholes that would only invite new variations on the old abuses.
Tough stuff from a fellow regulator.
Meanwhile, Bair is pushing banks to come up with products to provide small-dollar loans rather than taking advantage of cash-strapped consumers with expensive payday loans and check overdraft protection. And she has riled bankers by proposing an increase in insurance premiums, both in response to a dramatic increase in insured deposits and in anticipation of an expected increase in bank failures.
Last week, the FDIC marked its 75th anniversary. The agency was launched in the early days of the New Deal, in response to bank runs that caused the collapse of the banking system and wiped out the savings of millions of American households. At the time, it was seen as a dramatic expansion of government involvement into the market economy, a practical response to a devastating market failure.
Now that the country is facing the consequences of a similar market failure, we are reminded of why we need an FDIC and why market regulation is necessary. We should be grateful that we have Sheila Bair to steer the agency and rein in the banking industry during this challenging period.