Bull by the Horns Prologue Monday, October 12, 2008
I took a deep breath and walked into the large conference room at the Treasury
Department. I was apprehensive and exhausted, having spent the entire weekend
in marathon meetings with Treasury and the Fed. I felt myself start to tremble,
and I hugged my thick briefing binder tightly to my chest in an effort to
camouflage my nervousness. Nine men stood milling around in the room,
peremptorily summoned there by Treasury Secretary Henry Paulson. Collectively,
they headed financial institutions representing about $9 trillion in assets, or
70 percent of the U.S. financial system. I would be damned if I would let them
see me shaking.
I nodded briefly in their direction and started to make my way to the opposite
side of the large polished mahogany table, where I and the rest of the
government’s representatives would take our seats, facing off against the nine
financial executives once the meeting began. My effort to slide around the
group and escape the need for hand shaking and chitchat was foiled as Wells
Fargo Chairman Richard Kovacevich quickly moved toward me. He was eager to give
me an update on his bank’s acquisition of Wachovia, which, as chairman of the
Federal Deposit Insurance Corporation (FDIC), I had helped facilitate. He said
it was going well. The bank was ready to go to market with a big capital raise.
I told him I was glad. Kovacevich could be rude and abrupt, but he and his bank
were very good at managing their business and executing on deals. I had no
doubt that their acquisition of Wachovia would be completed smoothly and
without disruption in banking services to Wachovia’s customers, including the
millions of depositors whom the FDIC insured.
As we talked, out of
the corner of my eye I caught Vikram Pandit looking our way. Pandit was the CEO
of Citigroup, which had earlier bollixed its own attempt to buy Wachovia. There
was bitterness in his eyes. He and his primary regulator, Timothy
Geithner, the head of the New York Federal Reserve Bank, were angry with me for
refusing to object to the Wells acquisition of Wachovia, which had derailed
Pandit’s and Geithner’s plans to let Citi buy it with financial assistance from
the FDIC. I had little choice. Wells was a much stronger, better-managed bank
and could buy Wachovia without help from us. Wachovia was failing and certainly
needed a merger partner to stabilize it, but Citi had its own problems—as I was
becoming increasingly aware. The last thing the FDIC needed was two mismanaged
banks merging. Paulson and Bernanke did not fault my decision to acquiesce in
the Wells acquisition. They understood that I was doing my job—protecting the
FDIC and the millions of depositors we insured. But Geithner just couldn’t see
things from my point of view. He never could.
Pandit looked nervous, and no wonder. More than any other institution
represented in that room, his bank was in trouble. Frankly, I doubted that he
was up to the job. He had been brought in to clean up the mess at Citi. He had
gotten the job with the support of Robert Rubin, the former secretary of the
Treasury who now served as Citi’s titular head. I thought Pandit had been a
poor choice. He was a hedge fund manager by occupation and one with a mixed
record at that. He had no experience as a commercial banker; yet now he was
heading one of the biggest commercial banks in the country.
Still half listening to Kovacevich, I let my gaze drift
toward Kenneth Lewis, who stood awkwardly at the end of the big conference
table, away from - the rest of the group.
Lewis, the head of the North Carolina–based Bank of America (BofA)—had never
really fit in with this crowd. He was viewed somewhat as a country bumpkin by
the CEOs of the big New York banks, and not completely without justification.
He was a decent traditional banker, but as a deal maker, his skills were
clearly wanting, as demonstrated by his recent, overpriced bids to buy
Countrywide Financial, a leading originator of toxic mortgages, and Merrill
Lynch, a leading packager of securities based on toxic mortgages originated by
Countrywide and its ilk. His bank had been healthy going into the crisis but
would now be burdened by those ill-timed, overly generous acquisitions of two
of the sickest financial institutions in the country.
Other CEOs were smarter. The smartest was Jamie Dimon, the CEO of JPMorgan
Chase, who stood at the center of the table, talking with Lloyd Blankfein, the
head of Goldman Sachs, and John Mack, the CEO of Morgan Stanley. Dimon was a
towering figure in height as well as leadership ability, a point underscored by
his proximity to the diminutive Blankfein. Dimon had forewarned of
deteriorating conditions in the subprime market in 2006 and had taken
preemptive measures to protect his bank before the crisis hit. As a
consequence, while other institutions were reeling, mighty JPMorgan Chase had
scooped up weaker institutions at bargain prices. Several months earlier, at
the request of the New York Fed, and with its financial assistance, he had
purchased Bear Stearns, a failing investment bank. Just a few weeks ago, he had
purchased Washington Mutual (WaMu), a failed West Coast mortgage lender, from
us in a competitive process that had required no financial assistance from the
government. (Three years later, Dimon would stumble badly on derivatives bets
gone wrong, generating billions in losses for his bank. But on that day, he was
undeniably the king of the roost.)
Blankfein and Mack
listened attentively to whatever it was Dimon was saying. They headed the
country’s two leading investment firms, both of which were teetering on the
edge. Blankfein’s Goldman Sachs was in better shape than Mack’s Morgan Stanley.
Both suffered from high levels of leverage, giving them little room to maneuver
as losses on their mortgage-related securities mounted. Blankfein, whose
puckish charm and quick wit belied a reputation for tough, if not ruthless,
business acumen, had recently secured additional capital from the legendary
investor Warren Buffett. Buffett’s investment had not only brought Goldman $5
billion of much-needed capital, it had also created market confidence in the
firm: if Buffett thought Goldman was a good buy, the place must be okay.
Similarly, Mack, the patrician head of Morgan, had secured commitments of new
capital from Mitsubishi Bank. The ability to tap into the deep pockets of this
Japanese giant would probably by itself be enough to get Morgan through.
Not so Merrill Lynch, which was most certainly insolvent. Even as clear warning
signs had emerged, Merrill had kept taking on more leverage while loading up on
toxic mortgage investments. Merrill’s new CEO, John Thain, stood outside the
perimeter of the Dimon-Blankfein-Mack group, trying to listen in on their
conversation. Frankly, I was surprised that he had even been invited. He was
younger and less seasoned than the rest of the group. He had been Merrill’s CEO
for less than a year. His main accomplishment had been to engineer its
overpriced sale to BofA. Once the BofA acquisition was complete, he would no
longer be CEO, if he survived at all. (He didn’t. He was subsequently ousted
over his payment of excessive bonuses and lavish office renovations.
At the other end of the table stood Robert Kelly, the CEO of
Bank of New York (BoNY) and Ronald
Logue, the CEO of State Street Corporation. I had never met Logue. Kelly I knew
primarily by reputation. He was known as a conservative banker (the best kind
in my book) with Canadian roots—highly competent but perhaps a bit full of
himself. The institutions he and Logue headed were not nearly as large as the
others—having only a few hundred billion dollars in assets—though as trust
banks, they handled trillions of dollars of customers’ money.
Which is why I assumed they were there, not that anyone had bothered to consult
me about who should be invited. All of the invitees had been handpicked by Tim
Geithner. And, as I had just learned at a prep meeting with Paulson, Ben
Bernanke, the chairman of the Federal Reserve, and Geithner, the game plan for
the meeting was for Hank to tell all those CEOs that they would have to accept
government capital investments in their institutions, at least temporarily.
Yes, it had come to that: the government of the United States, the bastion of
free enterprise and private markets, was going to forcibly inject $125 billion
of taxpayer money into those behemoths to make sure they all stayed afloat. Not
only that, but my agency, the FDIC, had been asked to start temporarily
guaranteeing their debt to make sure they had enough cash to operate, and the
Fed was going to be opening up trillions of dollars’ worth of special lending
programs. All that, yet we still didn’t have an effective plan to fix the
unaffordable mortgages that were at the root of the crisis.
The room became quiet as Hank entered, with Bernanke and Geithner in tow. We
all took our seats, the bank CEOs ordered alphabetically by institution. That
put Pandit and Kovacevich at the opposite ends of the table. It also put the
investment bank CEOs into the “power” positions, directly across from Hank, who
himself had once run Goldman Sachs.
Hank began speaking.
He was articulate and forceful, in stark contrast to the way he could stammer
and speak in half sentences when holding a press conference or talking to
Congress. I was pleasantly surprised and seeing him in his true element, I
He got right to the point. We were in a crisis and decisive action was needed,
he said. Treasury was going to use the Troubled Asset Relief Program (TARP) to
make capital investments in banks, and he wanted all of them to participate. He
also alluded to the FDIC debt guarantee program, saying I would describe it
later, but his main focus was the Treasury capital program. My stomach
tightened. He needed to make clear that they all had to participate in both the
Treasury and FDIC programs. My worst fear was that the weak banks such as Citi
would use our program and the strong ones wouldn’t. In insurance parlance, this
is called “adverse selection”: only the high risks pay for coverage; the strong
ones that don’t need it stay out. My mind was racing: could we back out if
we didn’t get 100 percent participation?
Ben spoke after Hank, reinforcing his points. Then Hank turned to me to
describe the FDIC program. I could hear myself speaking, walking through the
mechanics of the program. We would guarantee all of their newly issued debt up
to a certain limit, I said, for which we would charge a fee. The purpose of the
program was to make sure that they could renew their maturing debt without
paying exorbitant interest rates that would constrain their ability to lend.
The whole purpose of the program was to maintain their capacity to lend to the
economy. We were also going to temporarily guarantee business checking accounts
without limit. Businesses had been withdrawing their large, uninsured checking
accounts from small banks and putting the money into so-called too-big-to-fail
was causing problems in
otherwise healthy banks that were small enough to fail. It was essential that
all the big banks participate in both programs, otherwise the economics
wouldn’t work. I said it again: we were expecting all the banks to participate
in the FDIC programs. I looked around the table. Were they listening?
Hank asked Tim to tell each bank how much capital it would accept from
Treasury. He eagerly ticked down the list: $25 billion for Citigroup, Wells
Fargo, and JPMorgan Chase; $15 billion for Bank of America; $10 billion for
Merrill Lynch, Goldman Sachs, and Morgan Stanley; $3 billion for Bank of New York;
$2 billion for State Street.
Then the questions began.
Thain, whose bank was desperate for capital, was worried about restrictions on
executive compensation. I couldn’t believe it. Where were the guy’s priorities?
Lewis said BofA would participate and that he didn’t think the group should be
discussing compensation. But then he complained that the business checking
account guarantee would hurt his bank, since it had been picking up most of
those accounts as they had left the smaller banks. I was surprised to hear
someone ask if they could use the FDIC program without the Treasury capital
program. I thought Tim was going to levitate out of his chair. “No!” he said
emphatically. I watched Vikram Pandit scribbling numbers on the back of an
envelope. “This is cheap capital,” he announced. I wondered what kind of
calculations he needed to make to figure that out. Treasury was asking for only
a 5% dividend. For Citi, of course, that was cheap; no private investor was
likely to invest in Pandit’s bank.
rightfully, that his bank didn’t need $25 billion in capital. I was
astonished when Hank shot back that his regulator might have something to say
about whether Wells’ capital was adequate if he didn’t take the money. Dimon,
always the grown-up in the room, said that he didn’t need the money but
understood it was important for system stability. Blankfein and Mack echoed his
A Treasury aide distributed a terms sheet, and Paulson asked each of the CEOs
to sign it, committing their institutions to accept the TARP capital. My
stomach tightened again when I saw that the terms sheet referenced only the
Treasury program, not the FDIC’s. (We would have to separately follow up with
all of the banks to make sure they subscribed to the FDIC’s programs, which
they did.) John Mack signed on the spot; the others wanted to check with their
boards, but by the end of the day, they had all agreed to accept the
We publicly announced the stabilization measures on Tuesday morning. The stock
market initially reacted badly, but later rebounded. “Credit spreads”—a measure
of how expensive it is for financial institutions to borrow money—narrowed
significantly. All the banks survived; indeed, the following year, their
executives were paying themselves fat bonuses again. In retrospect, the mammoth
assistance to those big institutions seemed like overkill. I never saw a good
analysis to back it up. But that was a big part of the problem: lack of
information. When you are in a crisis, you err on the side of doing more,
because if you come up short, the consequences can be disastrous.
The fact remained that with the exception of Citi, the
commercial banks’ capital levels seemed to be adequate. The investment banks
were in trouble, but Merrill
had arranged to sell itself to BofA, and Goldman and Morgan had been able to
raise new capital from private sources, with the capacity, I believed, to raise
more if necessary. Without government aid, some of them might have had to forego
bonuses and take losses for several quarters, but still, it seemed to me that
they were strong enough to bumble through. Citi probably did need that kind of
massive government assistance (indeed, it would need two more bailouts later
on), but there was the rub. How much of the decision making was being driven
through the prism of the special needs of that one, politically connected
institution? Were we throwing trillions of dollars at all of the banks to
camouflage its problems? Were the others really in danger of failing? Or were
we just softening the damage to their bottom lines through cheap capital and
debt guarantees? Granted, in late 2008, we were dealing with a crisis and
lacked complete information. But throughout 2009, even after the financial system
stabilized, we continued generous bailout policies instead of imposing
discipline on profligate financial institutions by firing their managers and
boards and forcing them to sell their bad assets.
The system did not fall apart, so at least we were successful in that, but at
what cost? We used up resources and political capital that could have been
spent on other programs to help more Main Street Americans. And then there was
the horrible reputational damage to the financial industry itself. It worked,
but could it have been handled differently? That is the question that plagues
me to this day.
IN THE FOLLOWING pages, I have tried to describe for you the financial crisis
and its aftermath as I saw it during my time as chairman of the Federal Deposit
Insurance Corporation from June 2006 to July 2011. I have tried to explain in
very basic terms the key drivers of the crisis, the
flaws in our response,
and the half measures we have undertaken since then to correct the problems
that took our economy to the brink. I describe in detail the battles we
encountered—both with our fellow regulators and with industry lobbyists—to
undertake such obviously needed measures as tighter mortgage-lending standards,
stronger capital requirements for financial institutions, and systematic
restructuring of unaffordable mortgages before the foreclosure tsunami washed
upon our shores. Many of those battles were personally painful to me, but I
take some comfort that I won as many as I lost. I was the subject of accolades
from many in the media and among public interest groups. I was also subject to
malicious press leaks and personal attacks, and my family finances were
investigated. I even received threats to my personal safety from people who
took losses when we closed banks, warranting a security detail through much of
my tenure at the FDIC. But I am taking the reader through it all because I want
the general public to understand how difficult it is when a financial regulator
tries to challenge the conventional wisdom and make decisions in defiance of
I grew up on “Main Street” in rural Kansas. I understand—and share—the almost
universal outrage over the financial mess we’re in and how we got into it.
People intuitively know that bailouts are wrong and that our banking system was
mismanaged and badly regulated. However, that outrage is indiscriminate and
undirected. People feel disempowered—overcome with a defeatist attitude that
the game is rigged in favor of the big financial institutions and that
government lacks the will or the ability to do anything about it.
The truth is that many people saw the crisis coming and tried
to stop or curtail the excessive risk taking that was fueling the housing
bubble and transforming our
financial markets into gambling parlors for making outsized speculative bets
through credit derivatives and so-called structured finance. But the political
process, which was and continues to be heavily influenced by monied financial
interests, stopped meaningful reform efforts in their tracks. Our financial
system is still fragile and vulnerable to the same type of destructive behavior
that led to the Great Recession. People need to understand that we are at risk
of another financial crisis unless the general public more actively engages in
countering the undue influence of the financial services lobby.
Responsible members of the financial services industry also need to speak up in
support of financial regulatory reform. All too often, the bad actors drive the
regulatory process to the lowest common denominator while the good actors sit
on the sidelines. That was certainly true as we struggled to tighten lending
standards and raise capital requirements prior to the crisis. There were many
financial institutions that did not engage in the excessive risk taking that took
our financial system to the brink. Yet all members of the financial services
industry were tainted by the crisis and the bailouts that followed.
As I explain at the end of this book, there are concrete, commonsense steps
that could be undertaken now to rein in the financial sector and impose greater
accountability on those who would gamble away our economic future for the sake
of a quick buck. We need to reclaim our government and demand that public
officials—be they in Congress, the administration, or the regulatory
community—act in the public interest, even if reforms mean lost profits for
financial players who write big campaign checks. Our government is already
deeply in debt because of the lost revenues and stimulus measures resulting
from the Great
Financially, morally, and politically, we cannot afford to let the financial
sector drive us into the ditch again.
I am a lifelong Republican who has spent the bulk of her career in public
service. I believe I have built a reputation for common sense, independence,
doing the right thing for the general public, and ignoring the special
interests. Many of my positions have received editorial endorsements ranging
from The Wall Street Journal to The New York Times, from the Financial Times to
The Guardian to Mother Jones. My most cherished accolade during the crisis came
from Time, which, in naming me to its 2008 “100 Most Influential People” list,
called me “the little guy’s protector in chief.” I’ve always tried to play it
down the middle and do what I think is right.
I want to explain why we are where we are in this country and how we can find
ways to make it better. Our current problems are as bad as anything we have
faced since the Great Depression. The public is cynical and confused about what
it has been told concerning the financial crisis. In this book, I have tried to
help clear away the myths and half-truths about how we ran our economic engine
into the ditch and how we can get our financial and regulatory system back on
track. We need to reclaim control of our economic future. That is why I wrote
Sheila Bair, April 2012
Sheila C. Bair served as the 19th Chairman of the Federal Deposit Insurance Corporation for a five-year term, from June 2006 through July 2011.
Chairman Bair has an extensive background in banking and finance in a career that has taken her from Capitol Hill, to academia, to the highest levels of government. Before joining the FDIC in 2006, she was the Dean’s Professor of Financial Regulatory Policy for the Isenberg School of Management at the University of Massachusetts-Amherst since 2002.
Other career experience includes serving as Assistant Secretary for Financial Institutions at the U.S. Department of the Treasury (2001 to 2002), Senior Vice President for Government Relations of the New York Stock Exchange (1995 to 2000), a Commissioner of the Commodity Futures Trading Commission (1991 to 1995), and Research Director, Deputy Counsel and Counsel to Senate Majority Leader Robert Dole (1981 to 1988).
As FDIC Chairman, Ms. Bair presided over a tumultuous period in the nation’s financial sector, working to bolster public confidence and system stability. Determined not to turn to taxpayer borrowing during the crisis, the FDIC managed its losses and liquidity needs entirely through its traditional industry-funded resources. In response to the financial crisis, she developed innovative and stabilizing programs that provided temporary liquidity guarantees to unfreeze credit markets and increased deposit insurance limits. In 2007, she was a singular – and prescient — advocate for systematic loan modifications to stem the coming tidal wave of foreclosures. Ms. Bair also led FDIC resolution strategies to sell failing banks to healthier institutions, while providing credit support of future losses from failed banks’ troubled loans. That strategy saved the Deposit Insurance Fund $40 billion over losses it would have incurred if the FDIC had liquidated those banks.
Under Ms. Bair’s leadership, the FDIC’s powers and authority were significantly expanded by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The law extends the FDIC’s resolution process to large, systemically-important financial institutions, effectively attacking the doctrine of too-big-to-fail. The FDIC was also given joint authority to order the restructuring of an entity that cannot demonstrate, through a continually-monitored resolution plan, that it can be unwound.
Ms. Bair has been a leading domestic and international advocate for common-sense capital and leverage ratios, including backing a key provision in Dodd-Frank that requires large financial entities to have capital cushions at least as strong as those that apply to U.S. community banks. As a member of the Basel Committee on Banking Supervision, in 2006 she called for higher bank capital standards, including an international leverage ratio to constrain growing levels of leverage among the world’s major financial institutions. Financial experts now widely attribute excess leverage as a key driver of the 2008 financial crisis. In 2010, the Basel Committee finally adopted an international leverage ratio.
Ms. Bair’s work at the FDIC also focused on consumer protection and economic inclusion. Under her leadership, the FDIC issued early calls for interagency guidance addressing high-risk mortgages, and was among the first to see the dangers of these unaffordable mortgages to the broader banking sector and to the economy as a whole. She championed the creation of an Advisory Committee on Economic Inclusion, seminal research on small-dollar loan programs, and the formation of broad-based alliances in nine regional markets to bring underserved populations into the financial mainstream.
Known for her focused and effective management style, FDIC employee morale soared under Chairman Bair’s leadership. Under her leadership, the FDIC achieved a #1 ranking of the “Best Places to Work in the Government for 2011,” among more than 200 comparable federal organizations. Moreover, her hands-on approach and strong emphasis on risk management led to the FDIC receiving an “unqualified,” or clean audit from the General Accounting Office (GAO) during every year of her term, a remarkable feat given the many demands on the agency for rapid expansion and loss exposure associated with the resolution of 370 failed banks representing over $650 billion in assets.
Ms. Bair received a number of prestigious honors during her tenure as FDIC Chairman. In 2008 and 2009, Forbes Magazine named Ms. Bair as the second most powerful woman in the world, after Germany’s Chancellor Angela Merkel. Also in 2008, Ms. Bair topped The Wall Street Journal’s annual 50 “Women to Watch List.” In 2009 she was named one of Time Magazine’s “Time 100″ most influential people; awarded the John F. Kennedy Profile in Courage Award; and received the Hubert H. Humphrey Civil Rights Award. In 2010, Ms. Bair was featured on the cover of TIME Magazine with Mary Schapiro and Elizabeth Warren as “The New Sheriffs of Wall Street.” Also in 2010, she received the Better Business Bureau’s Presidents’ Award. In December of 2011, subsequent to leaving office, Ms. Bair was named by the Washington Post and Harvard University as one of seven of America’s Top Leaders.
A Kansan by birth, Chairman Bair received a bachelor’s degree from the University of Kansas in 1975 and a J.D. from the University of Kansas School of Law in 1978. Ms. Bair was inducted into the University of Kansas Women’s Hall of Fame and received the Distinguished Kansan Award from the Native Sons and Daughters of Kansas in 2011. In May of 2012, she joined fellow KU alumni Robert Dole and Ford CEO Alan Mulally in Lawrence, Ks to receive the first honorary doctoral degrees ever granted by their alma mater. She also holds honorary doctorates from Amherst College and Drexel University.
Chairman Bair has also received several honors for her published work on financial issues, including her educational writings on money and finance for children, and for professional achievement. Among the honors she has received are: Distinguished Achievement Award, Association of Education Publishers (2005); Personal Service Feature of the Year, and Author of the Month Awards, Highlights Magazine for Children (2002, 2003 and 2004); and The Treasury Medal (2002). Her first children’s book, Rock, Brock and the Savings Shock, was published in 2006 and her second, Isabel’s Car Wash, in 2008.
Chairman Bair continues her work on financial policy issues as a Senior Advisor to the Pew Charitable Trusts. She also chairs the Systemic Risk Council (SRC) a public interest group of prominent former government officials and leading financial experts which monitors progress on the implementation of financial reforms in the US. She is a founding board member of the Volcker Alliance, a non-profit organization established by former Federal Reserve Board Chairman Paul Volcker to promote more effective government. She serves on the prestigious International Advisory Council to the China Bank Regulatory Commission. In addition, she is a board member of the Rand Corporation.
Ms. Bair writes a regular column for Fortune Magazine on financial policy matters. She has written a New York Times best seller about her tenure at the FDIC, Bull By the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself, published in September of 2012. She is married to Scott P. Cooper and has two children, Preston and Colleen.
Known for her tough-minded independence, Ms. Bair takes care to earn a living in a way that does not compromise her objectivity. She is paid a salary at Pew and receives income from her Fortune column and books. She also serves on the board of Host Hotels, Grupo Santander and as an advisor to the public sector practice of the Boston Consulting Group and Alexander Proudfoot, two management consulting firms. In addition, she engages in public speaking. She speaks on a pro bono basis to nonprofits such as 501 c3′s and community groups. She charges a fee to for-profit entities, but does not accept fees from banks which the FDIC insures or bank holding companies which used the FDIC debt guarantee program during the crisis. She will speak to banking organizations as part of her efforts to raise money for special needs children at her daughter’s orphanage in Hunan China.
Source: Bair Blog