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Book Review By Economist Hazel Henderson, founder of Ethical Markets
This book presents a brilliant, in-depth analysis of global finance, wonderful insights and vignettes and a positive view of how reforming markets, metrics and rule-making can steer toward a sounder financial future worldwide.
For worried retail investors like me as well as asset managers everywhere, Bull by the Horns is an insiders account of the battles in Washington and the current status of financial reform. Author Sheila Bair was chairman of the US Federal Deposit Insurance Corporation (FDIC), appointed by President George W. Bush in 2006, who President Obama re-appointed in 2009. Bair, a lifelong Republican, thus served during the tumultuous financial crisis and its still unfolding aftermath, a key player along with the Fed’s Ben Bernanke, Treasury Secretaries Hank Paulson and Tim Geithner, Senator Chris Dodd and Congressman Barney Frank, as well as in the deliberations of the G-20, the Euro Zone and the Bank for International Settlements in crafting the new rules of Basel III. The FDIC’s role insuring US retail bank deposits restored confidence in banks after its formation in 1933 during the Great Depression. FDIC’s funding comes not from taxpayers, but from insurance premiums paid by all the banks it regulates. Its 4,500 employees and billion-dollar operating budget overseeing $4 trillion of these insured retail deposits had stabilized banking, and in 2007, bank failures were at a historic low.
During the 1980s, the FDIC staff had grown to 12,000 to deal with the savings and loan crisis, caused by deregulation of these thrift institutions. The clean up cost US taxpayers more than $125 billion (p. 84). Upon Bair’s arrival at FDIC, the next series of debacles was just beginning and her personal account of the financial crises takes the reader inside all the meetings she attended with top bankers; Hank Paulson’s desperate efforts to obtain his $700 billion “bazooka”; the arm twisting of Congress to pass TARP. Bair witnessed the bailouts of the big banks, AIG, Fannie and Freddie, GM and Chrysler, and the Lehman bankruptcy’s global fallout. Bair opposed TARP and most of the bailouts, pointing out that only two of the big banks forced to take TARP funds were in trouble: Citi and Bank of America. She held that Citi was hopelessly mismanaged and could be broken up since its parts were more valuable as stand alone entities. Bank of America, still trying to absorb the toxic mortgages of Countrywide for which it had overpaid at $18 a share could not also absorb a shotgun merger with Merrill Lynch and its equally toxic book of mortgages.
Bair’s criticisms of the bailouts put her in opposition to Hank Paulson, Bernanke and Geithner, then president of the New York Fed. Bair was more aware than they were that the housing sector was just as much of a threat to the economic system as Wall Street’s banks. She pushed for marking the toxic mortgages to market or putting them in a “bad bank” while saving performing assets in “good banks.” She cited FDIC studies to show that a tsunami of foreclosures would be more damaging macro-economically while it would be less costly to banks to keep distressed homeowners in their homes by reducing their mortgage principals and restructuring their loans. Congress agreed and TARP only passed with the proviso that the $700 billion would go to bailing out homeowners and conserving local economies and neighborhood values. Instead, Bair called Paulson’s injections directly into big banks a “bait and switch” done to protect Citi’s weakness by forcing them all to take the TARP funds.
Bair’s account is in line with that of Neil Barofsky, the special Inspector General of TARP (Bailout), but it earned her the enmity of Tim Geithner who was confirmed as Treasury Secretary in 2009. Geithner began by trying to get Sheila Bair fired, accusing her of being “difficult” and not a team player. As I and many others have noted, Geithner, like Larry Summers, Gary Gensler, Jason Furman and other appointees were protégées of Robert Rubin, Treasury Secretary in the Clinton Administration who enjoyed “guru” status among key Democrats. As CEO of Goldman Sachs, Rubin was a free market believer who advocated risk-taking and was known as “Mr. Leverage.” Rubin’s reputation fell after his testimony at Phil Angelides Financial Crisis Inquiry Commission when he acknowledged his $100 million-plus compensation as Citi’s Vice Chairman, but admitted that he had no responsibilities other than high-level introductions (i.e., schmoozing). But Rubin’s aura and influence over Democrats gave him undue access to the incoming Obama administration, and he pushed the appointments of Larry Summers, Tim Geithner, Gary Gensler and other members of the economic team. Paul Volcker, Sheila Bair’s choice, was soon pushed aside and his Volcker Rule (an updated version of Glass-Steagall) barely survived in the Dodd-Frank law, which left most rule-making in the hands of regulators and bank lobbyists.
Sheila Bair signaled to the Obama administration that she was equally willing to step down from her FDIC chair – or stay if the president wished. Geithner’s objections were over-ridden and Bair was re-appointed in 2009. Her ensuing battles with Geithner were over protecting homeowners as well as shielding FDIC funds from use in further bailouts of General Motors and its GMAC and Ally Bank subsidiaries. She was under constant pressure from Treasury, abetted by Larry Summers and the free marketer holdovers at the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS), as well as those at the Fed from the Alan Greenspan years and his belief in self-correcting markets and deregulation. Bair comments on the “deregulation mania” of both the Clinton and George W. Bush years:
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.
Bair also provides concrete, often simple policy approaches to preventing the next financial crisis which I and others see as imminent (Broken Markets, Dark Pools, Bailout). TIME named Bair on its “100 Most Influential People” in 2008, calling her the “little guys’ protector in chief.” Among Bair’s recommendations for reform are those headlined below and carefully spelled out in detail in Chapter 26, “How Main Street Can Tame Wall Street.” I support them all, many covered in Ethical Markets Transforming Finance video series.
- Raise Capital requirements. (Bair won her proposed increases under Basel III.)
- Maintain the Ban on Bailouts in the resolution authority that Bair fought to get into Dodd-Frank (now miscast by Republicans as “codifying” bailouts).
- Break up the too-big-to-fail Banks and other institutions.
- Require an “insurable interest” in all Credit Default Swaps. (Without this, they are merely bets, not financial instruments.)
- Impose an Assessment or Tax on Large Financial Institutions – beyond the “living wills” and resolutions authority in Dodd-Frank. (All these were bitterly fought by Geithner.)
- A Financial Transactions Tax of below 1% to curb speculation and high frequency trading (now endorsed by UN Secretary Ban Ki Moon; on the G-20 agenda and supported by Paul Volcker, Paul Krugman, Vanguard founder John Bogle and many other financial professionals).
- Keep the new Consumer Financial Protection Bureau (still bitterly opposed by banks).
- Restructure the Financial Stability Oversight Council (FSOC). (Bair now chairs an independent watchdog group to review FSOC.)
- Abolish the OCC as unnecessary and captured by financial interests.
- Merge the SEC and the CFTC and give them independent funding.
- End the Revolving Door (an endemic problem in Washington).
- Reform the Senate Confirmation Process (used too often for political purposes).
- Abolish the GSEs Fannie and Freddie (which are still a liability owned by taxpayers).
- Stop Subsidizing Leverage through the Tax Code. (The hedge fund and private equity industry, as well as banks, live on cheap, tax-supported borrowing.)
- Tax Earned Income and Investment Income at the Same Rate. (This inequity has contributed to the widening gap between the 1% and the 99%.)
- Reduce the National Debt. (This can be done by cutting the massive subsidies to fossil fuels and nuclear power, closing loopholes, restructuring the Pentagon and Homeland Security while raising the income cap on Social Security, shifting medical fee for service to best practices and prevention, and providing Medicare for all with its 2% overhead versus 14% for private insurers.)
Hazel Henderson © 2012
HH: “This book presents a brilliant, in-depth analysis of global finance, wonderful insights and vignettes and a positive view of how reforming markets, metrics and rule-making can steer toward a sounder financial future worldwide.”