Bair bull by the horns; fighting to save main street from wall street and wall street from itself (2012)

Thank you for purchasing this Simon & Schuster eBook Join our mailing list and get updates on new releases, deals, bonus content and other great books from Simon & Schuster CLICK HERE TO SIGN UP or visit us online to sign up at eBookNews.SimonandSchuster.com Contents Prologue The Golden Age of Banking Turning the Titanic The Fight over Basel II The Skunk at the Garden Party Subprime Is “Contained” Stepping over a Dollar to Pick Up a Nickel: Helping Home Owners, Round One The Audacity of That Woman The Wachovia Blindside Bailing Out the Boneheads 10 Doubling Down on Citi: Bailout Number Two 11 Helping Home Owners, Round Two 12 Obama’s Election: The More Things Change 13 Helping Home Owners, Round Three 14 The $100 Billion Club 15 The Care and Feeding of Citigroup: Bailout Number Three 16 Finally Saying No 17 Never Again 18 It’s All About the Compensation 19 The Senate’s Orwellian Debate 20 Dodd-Frank Implementation: The Final Stretch (or So I Thought) 21 Robo-Signing Erupts 22 The Return to Basel 23 Too Small to Save 24 Squinting in the Public Spotlight 25 Farewell to the FDIC 26 How Main Street Can Tame Wall Street 27 It Could Have Been Different Epilogue Photograph Notes Acknowledgments Index To my beloved children, Preston and Colleen, and my husband, Scott, a true saint 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 thought 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 institutions That 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 Kovacevich complained, 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 sentiments 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 government’s money 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 mortgagelending 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 industry pressure 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 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 Recession 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 in “push marketing” mortgages, 49–50 nontraditional mortgages (NTMs), 41, 42, 43–48, 53, 56 delinquencies on, 44 fully indexed rate for, 44, 46 professional investors and speculators and, 67 North Carolina, 2, 232 Northern Rock, 110, 274 Nouy, Danièle, 35 Novak, Robert, 208 O, the Oprah Magazine, 307 Obama, Barack, 141, 197, 216–17, 236, 244, 256, 283, 353 on AIG bonuses, 181–82 appointments of, 142–43, 345 on Bair’s foreclosure prevention efforts, 144, 147, 148 Bair supported by, 150, 180, 318 Dodd-Frank bill signed by, 228–29, 231 on financial reform, 189, 190–91 HAMP announcement made by, 149–50 Obama, Michelle, 306 Obama administration, 124, 134, 139, 155, 189, 195, 216, 256, 278, 283, 288, 305, 351, 353, 372n “Ode to Sheila Bair,” 320–21 Office of Complex Financial Institutions (CFI), 232 Office of Personnel Management, 20 Office of the Comptroller of the Currency (OCC), 13, 21, 25, 73, 113, 116, 128, 147, 151, 184, 192, 213, 237–40, 255–56, 258, 261, 263, 271–72, 337, 345, 357, 366n, 369n, 372n bank charters and, 277 Basel II supported by, 31–32, 38–40, 47, 357 BofA regulated by, 100 Citi regulated by, 90, 100, 121–22, 124–26, 168, 171–72, 174, 339 consumer protection record of, 223–24 dividends and, 246 Dugan’s replacement at, 235–36 “field preemption” against state anti-lending laws by, 50–51, 368n FIRA as new incarnation of, 213–14 on foreclosures, 243–48, 251–56 funding of, 340 JPMorgan Chase regulated by, 361 large banks favored by, 41–42, 45, 79, 157–60, 224, 339–41 proposed abolition of, 339–41 redefault rate report of, 137–38, 145, 148 stress tests and, 157–58, 160, 340 subprime mortgages and, 45, 49, 67 TARP repayment and, 201, 203, 205, 207 Wachovia regulated by, 84, 95–102, 339 Wells regulated by, 100 Office of Thrift Supervision (OTS), 13, 21, 25, 128, 137, 192, 236, 339 abolition of, 48, 365n bank charters and, 277 Basel II and, 32–33 “field preemption” against state anti-lending laws by, 50, 368n holding companies and, 117–18 IndyMac failure and, 80–81 larger institutions favored by, 41, 79 NTM regulation and, 42, 43, 47–48 subprime lending and, 49, 69 WaMu regulated by, 76–78, 86, 88–90 offshore tax havens, 277 Old Lane Partners, 122 OMB, 138, 279 O’Neill, Michael, 171–72, 174 On the Brink (Paulson), 319 Operation Happy, 298 Operation Hope, 309 option ARMs, 43–45, 67, 77, 79–80 Option One, 53 Oriental Bank and Trust, 282 Orlando, Fla., 215 Orman, Suze, 83 OTS, see Office of Thrift Supervision overcollateralization, 52, 54, 61 overdraft fees, 312, 314, 336 Overhaul (Rattner), 177 over-the-counter (OTC) derivatives, 198, 304, 344, 363, 364 Padilla, Alfred, 282 Paletta, Damian, 92, 224–25 Pandit, Vikram, 1–2, 4, 5, 104–5, 122, 166, 170–74, 205, 228, 270, 374n Paris, 37 Parkinson, Patrick, 187–89, 261–62 Park National Bank, 286 Parsons, Richard, 166, 171–74, 208, 320 Partnership for Public Service, 344 Paulson, Henry “Hank,” 67–68, 86, 89, 92–93, 158, 176 Bair’s farewell party and, 317–19 Citi and, 122–28 loan modification program of, 134, 137, 139, 372n TARP capital program and, 116, 131–32, 210 unlimited guarantees and, 108–13, 118–19, 301–2 Wachovia deal and, 100–101, 103 and Wall Street bailouts, 1–2, 4–6, 142 Paulson, John, 279 payment processing, 328 Pearce, Mark, 232 Pearson, Patrick, 35 Peek, Jeffrey, 178 Pelley, Scott, 298 pension funds, 12, 51 Perella Weinberg Partners, 203, 205–6 Pfeiffer, Michelle, 309–10 Phoenix, Ariz., 82–83, 149–50 pick-a-pay loans, 43, 339–40 Plame, Valerie, 208 PNC Bank, 173, 287, 318 TARP repayment by, 205 Podesta, John, 141–42 Portugal, 257, 265 Powell, Donald, 13, 31, 318 preferred shareholders, 167, 169, 202 preferred stock investments, 166 prepayment penalties, 336 Prince, Chuck, 122 principal forebearance, 132–33 principal write-downs, 132 private equity, new banks chartered by, 277–78, 279, 305 private-equity funds, 227, 279, 326 public-private investment partnerships (PPIPs), 157–58, 161–64, 170, 301 in S&L crisis, 157 for securities, 161–64 for troubled assets, 161–64 public service ads (PSAs), 83–84, 86 Puerto Rico, banking failures in, 281–83 put-back risk, 54, 57 Quadrangle Group, 175 qualified residential mortgages (QRMs), 234–35, 236, 237 Ranieri, Lewis, 64 ratings agencies, 56, 165–66, 328 Rattner, Steven, 175–78 Reagan, Ronald, 360 real estate, commercial, 42 real estate assets, 156 recession, 155–56, 157 Reconstruction Finance Corporation (RFC), 155 redefault, 250 OCC report exaggerating rates of, 137–38, 145, 148, 153 risk of, 59, 133, 136 redefault insurance, 137 Reed, John, 173, 207, 250, 270 refinancing, 52, 133, 256, 349 of subprime ARMs, 44–46, 62 of thirty-year fixed mortgages, 50, 349 regulation: antipathy to, 27, 41, 304, 314, 363–64 competitiveness and, 37 economic incentives and, 323 industry self-, 27, 41, 66, 135 principles-based, 27, 37 see also deregulation, trend toward regulatory agencies: as career positions, 343–45 Senate confirmations for, 345–47 Rehm, Barbara, 316 Reich, John, 21, 23, 25, 80, 137–38, 318 Basel II and, 32, 38 subprime mortgages and, 46, 67, 69 WaMu failure and, 77–78, 87–90, 126 Reid, Harry, 220 Reilly, David, 221 Republican party, 21, 50, 129, 147, 227, 240, 251, 286, 332, 346, 353 Bair in, 8, 13, 129, 141, 231, 306 deregulation and, 16 as entrenched in opposition, 283–84, 381n promarket, 195 resolution legislation opposed by, 193, 195–97, 215–17, 220, 223–24 swing votes in, 228 ResCap, 176 Reserve Primary Fund, 108 reserves, 73 resolution authority, 231, 307, 323 Resolution Trust Corporation (RTC), 115, 155 retail banking products, complexity, 232 retail brokers, 109 R-G Premier Bank, 281–83 Rhodes, William, 170, 374n Richmond Federal Reserve Bank, 188 risk, 150, 171 analysis of, 49 assessment of, 233 differentiation of, 22 management of, 37, 43, 247 put-back, 54, 57 systemic, see systemic risk underestimation of, 31 risk profiles, 14 premiums based on, 22–23 risk retention, 234–35, 237, 323–24, 332, 340 Roeder, Douglas, 96 Rohr, James, 173, 318 Romer, Christina, 147 Roosevelt, Franklin D., 155 Rosenblatt, Marty, 64 Rove, Karl, 208 Rubin, Robert, 2, 122, 124–25, 142, 158, 171, 196 Rymer, Jon, 17 Sachs, Lee, 179, 204 SAFE Banking Act, 385n safe harbors, for securitizations, 233–34, 236–37, 304 San Diego, Calif., 312, 315 San Diego Union-Tribune, 299–300 S&P 500 companies, 121–22 San Francisco, Calif., 245 San Francisco Federal Reserve Bank, 87 Sanio, Jochen, 261, 268, 271–72 Santander bank, 90, 91, 281–82, 330 Sarbanes, Paul, 13, 21, 50, 318 savings and loan (S&L) crisis, 16–17, 22, 24, 38–39, 83, 84, 208, 274, 276, 297, 299, 365n PPIPs in, 157 Resolution Trust Corporation (RTC) and, 115 SCAP, 207 Schakowsky, Jan, 288 Schapiro, Mary, 147, 152, 189, 191, 234, 235, 305 Schoppe, Bob, 282 Schumer, Charles, 37–38, 80 Schwarzenegger, Arnold, 68, 69, 310 Scotiabank, 282–83 Seattle, Wash., 76, 77 securities, 127, 312, 328, 341–42 auction rate, 95, 121 complex, 218 government, 333 mortgage-backed, see mortgage-backed securities (MBSs) trust-preferred, 203, 258 Securities and Exchange Commission (SEC), 52, 86, 95, 147, 152, 185, 189, 191, 222, 244, 341–42, 344, 349, 356, 366n–67n Basel II approved by, 36–37 disclosure rules proposed by, 234 enforcement action against Goldman Sachs by, 287 independent funding for, 342–43 Rattner investigated by, 175 securities brokerages, retail, 100 securities dealer operations, 169 securities firms, 74, 175 capital standards for, 186 leverage by, 193, 326 securities trading, 329 securitization, 48, 49, 51–58, 149, 347–48, 356–57, 369n accounting of, 233–34 economic incentives distorted by, 135 foreclosures as result of, 60–66, 71 mortgage pools in, 51 reforms to, 231 reps and warranties in, 53–54 risk retention in, 324, 332–33, 364 safe harbor rule for, 233–34, 236–37, 304 of subprime mortgages, 51–58, 369n tranches in, 51, 54, 61–63, 135, 234 securitization agreements, 133 securitization trusts, 244 Seidman, William, 83, 276, 297 Senate, U.S., 192, 199, 342, 381n Agricultural Committee of, 342 Appropriations Committee of, 343 Banking Committee of, 13, 38, 64, 131, 144, 177, 247, 294, 316, 342, 343, 365n cloture rule in, 261 confirmation process in, 14, 345–47, 363 financial reform bill in, 213–29, 238 Geithner’s confirmation by, 147 Judiciary Committee of, 141 Permanent Subcommittee on Investigations of, 89, 93 resolution authority and, 188 see also Congress, U.S.; House of Representatives, U.S September 11, 2001, terrorist attacks, 12, 344, 377n shadow banks, 186, 227, 313, 330 shareholders, 311, 328, 330 bad-bank structure and, 169 in banks, 28–30 dividend payments to, 245, 256 in FDIC resolution, 370n losses absorbed by, 184, 324 protection of, 167 Shelby, Richard, 38, 64, 213, 215–16, 218–21, 227 shell holding company structures, 278 Sherburne, Jane, 103–4 Shiller, Robert, 135 ShoreBank, 283–90 short-term credit, 198–99 short-term debt, 352–53 short-term funding, 114, 218 short-termism, 317 Treasury, 352–53 short-term transactions, 336 Shriver, Maria, 310 Simpson, Alan, 353 single point of contact (SPOC), 252–53 60 Minutes, 298–99 small businesses, 150 insured deposits for, 109–10, 112, 115 small community banks, 175, 303, 315 business customers and, 112 capital standards for, 218–21, 371n CRE regulation and, 41–43 Dugan’s scapegoating of, 100 failures of, 273–95, 298–99 FDIC premiums for, 226 as held to higher standard, 158, 159 loan balances at, 371n loan restructuring by, 59–60 resolution authority supported by, 188–89 share values of, 331 single regulator as disastrous for, 193 superior lending of, 120, 271 SmartMoney, 309 Snowe, Olympia, 224, 229 Social Security, 351, 353 Sorkin, Andrew Ross, 100, 103, 162–63, 218, 271, 301–2, 307 South Korea, 261, 267 Spain, 91, 257, 265, 330, 334–35, 352 speculation, 55, 323, 334 real estate, 67, 69 Spitler, Eric, 38 Spoth, Christopher, 175–78, 288–89 state attorneys general, 249, 251–52, 256 state-chartered banks, 175 State Department, U.S., 142 states: anti-predatory lending laws in, 50–51, 368n bank charters and, 277 credit default swaps and, 356 State Street Corporation, 3–4, 5, 114 Steel, Robert, 67–68, 95–98, 103–4 Stern, Gary, 188 stimulus spending, 351 stock market, U.S., 333 stocks, bank, 28, 159 Streep, Meryl, 309 structured investment vehicles (SIV), 73–74 Stumpf, John, 98–99, 173 subprime borrowers, 67, 69–70 dismissive attitude toward, 66 subprime crisis, 175–76, 330, 333 subprime lending, 176, 178 subprime mortgages, 48, 53, 73, 74, 77, 176, 178, 304 of Citi, 56, 98, 121 delinquencies and defaults in, 37, 44, 46–47, 62, 369n extension of starter rate on, 62–65, 68–71 large banks and, 45 loss mitigation strategies for, 63 negative amortization in, 43–44, 50 payment resets on, 44–45, 46, 50, 51, 62 performance of, 49 prepayment penalties in, 45, 50 restructuring of, 57–58, 59–71 securitization of, 51–58, 369n see also hybrid ARMS; nontraditional mortgages (NTMs) Summers, Lawrence, 142–45, 147, 152–53, 175, 182 on banking regulations, 188–91, 216–17 Citi and, 170 Swagel proposal favored by, 148–49 super mod, 250–51 superregulator, bank, 192 supplemental capital measures, 36 Suskind, Ron, 170 Swagel, Phillip, 136, 148–49 Swann, Benita, 15, 181 Sweden, 260 Swiss National Bank, 263 Switzerland, 35, 263–64, 269, 271 banking-to-GDP ratio of, 260 systemically important financial institutions (SIFIs), 259, 266–71, 324 systemic risk: assistance, 113 exception, 75, 93, 99, 103, 115, 126, 128, 185 tangible common equity (TCE), 258–59, 279 Tarullo, Daniel, 40, 145, 173, 174, 203, 238–39, 241–42, 247–48, 254 Basel III and, 258, 262, 264, 266, 269–70 taxes, 329, 351 on earned income, 350–51 financial transaction, 226 on investment income, 350–51 leverage and, 349–50 taxpayers, 278, 293, 300, 316, 323 losses absorbed by, 184, 190, 340, 358 protection for, 197, 217–18, 229 tax reform, 353 Taylor, Diana, 13, 174, 365n TD Bank Group, 357 Tea Party, 231 Temporary Liquidity Guarantee Program (TLGP), 118, 127, 158, 169–70, 176–77, 202 Thain, John, 3, Thatcher, Margaret, 302, 309 13 Bankers (Johnson), 327 Thomas, John, 113 Thompson, Ken, 95 Thompson, Sandra, 87–88, 170–71, 286–87 3/27s, 44–45, 56, 67, 136 thrift holding companies, 117–18 thrifts, 210 capital requirements for, 40 failed, 57, 75–76, 279 insured, 53 mortgages and, 52 NTM loans made by, 43–44, 47–48 NTM regulation and, 42 sick, 89 Time, 8, 305, 309 Too Big to Fail (film), 319 Too Big to Fail (Sorkin), 100, 301, 319 too-big-to-fail (TBTF) institutions, 5, 43, 94, 189, 190, 196, 215, 218–19, 229, 307, 312, 348, 358, 385n Citi as, 167 internationally, 260 moral hazard and, 28 small businesses and, 109, 112 TPG Capital, 77–78, 91 trading partners, unsecured, 241 tranches, 51, 54, 61–63, 135, 234 Treasury bonds, U.S., 352 Treasury Department, U.S., 1, 16, 19, 67, 74, 82, 141, 179, 182, 187, 240, 247, 249, 278, 280, 318, 342, 358, 363, 381n, 386n on bad mortgages, 128 Bair at, 12–15, 23, 49, 50–51, 285, 346 on Basel II implementation, 37 on Basel III, 258–59, 270 BofA and, 127–28, 204 borrowing by, 351–52 Capital Assistance Program, 158–59 CDFI-centered TARP of, 285–86, 287, 289 Citi and, 125, 126, 168, 169–70, 206, 359 FDIC’s borrowing from, 110, 177, 217–18, 294, 300 Financial Stability Plan of, 155–64 free-market economists at, 134, 135, 139, 147 FSOC and, 338 Geithner as new head of, 124, 142–44, 363–64 inspector general of, 369n Lehman Brothers failure and, 107 loan interest subsidy program at, 136, 148–49, 151–53 on mortgage loan modification, 131–32, 134–37, 139 on mortgage loan servicers, 244 proposed regulatory legislation and, 182–99, 214–18, 221–22, 229, 240 resolution proposals of, 183–84 securities PPIP of, 161–64 short-termism at, 352–53 stress tests and, 156–59 stronger lending standards recommended by, 50 subprime lending and, 49, 67–71 TARP investments by, see Troubled Asset Relief Program unlimited guarantees program and, 108–13, 115–20, 201–2 on Wachovia situation, 100–101, 103 on WaMu situation, 86, 89, 93 white paper of, 187–91, 193, 224 Trichet, Jean-Claude, 261, 268, 271–72 triple-A ratings, 52, 55, 61–63, 70, 149 Troubled Asset Relief Program (TARP), 92–93, 99, 109, 111–13, 118, 137, 152, 155–56, 178, 179, 191, 340, 357, 369n Capital Assistance Program and, 156, 158 for CDFIs, 285–87, 289 Citi and, 121, 125, 126, 167–68, 201–3, 205–8 funding for, 216–17, 335 large banks as principle beneficiaries of, 4–5, 6, 115–16, 131–32, 134, 141, 153 repayments of, 201–8, 358–59 special inspector general for (SIGTARP), 207 taxpayer anger at, 118 UCB and, 280 Turner, Adair, 263, 269 23A, 176 2/28s, 44–45, 56, 67, 70, 136 UBS, 271 Ugoletti, Mario, 51 unemployment, 157, 359 unemployment benefits, 353 uninsured accounts, money markets as, 108 uninsured deposits, 81, 85, 90, 92, 100, 108–9 foreign, 98, 121, 123, 168, 169, 173, 226 large, 238–39 United Commercial Bank (UCB), 280–81 United Kingdom, 225, 260, 262–64, 269, 330 Barclay’s Libor scandal and, 361–62 debt guarantee program in, 117 Financial Services Authority (FSA) of, 192 Northern Rock crisis in, 110, 274 unsecured creditors, 85, 331 unsecured debt instruments, 91 Urban Partnership Bank, 290 USA Today, 108 U.S Bancorp, 171, 173, 286, 287, 331 Utah, 25 variable-rate financing, 209 Vekshin, Alison, 163 venture capital firms, new banks chartered by, 278 Villarreal, Jesse, 15, 68, 80, 109, 111, 113, 298, 316 Virgina, 311 Vogue, 306–7 Volcker, Paul, 141, 205, 222 Volcker Rule, 222–23, 227, 229 Voting Rights Act, 309 Wachovia Bank, 1–2, 79, 95–105, 107, 143, 166, 192, 233, 301, 339 Citi’s bid for, 96–105, 124 as complex institution, 100 Golden West acquired by, 76, 84, 95 “ring fence” proposal for troubled assets of, 96 systemic risk exception for, 99, 103 Wells Fargo’s acquisition of, 96–105, 124, 143, 355 Wall Street, 68, 129, 141, 143, 157, 162, 184, 218, 228, 301, 347, 350, 351, 361 hostility to restructuring on, 65–66, 69 see also investment banks Wall Street Journal , 8, 14, 67, 92, 128, 144, 171, 221, 224–25, 251, 278, 288, 300–301, 304, 309, 325, 361 Walmart, bank charter application of, 14, 25–26 Walsh, John, 235–37, 239–40, 246, 248, 252, 254, 256, 258, 270, 271–72, 318, 339, 356 Walter, Stefan, 257–60, 262–63, 266, 269–70 WaMu Inc (WMI), 92, 195 Warner, Mark, 188, 191, 214–15 Warren, Elizabeth, 244, 251, 305 Warsh, Kevin, 91, 105 Washington, D.C., 11, 20, 64, 70, 87, 210, 231, 271, 298, 302, 310, 311, 312, 314, 315, 346, 351, 357, 360, 364 Bair home in, 209–11 special interests in, 129 Washington Mutual (WaMu), 3, 192, 233 Basel II consequences for, 33, 38 capital and liquidity positions of, 87 failure of, 75–78, 84–94, 95, 98, 99, 100, 107, 126, 144, 162, 195, 279, 355 NTM loans made by, 43 Washington Post, 14, 218, 317 Washington Times, 137 Weber, Axel, 267–68, 271 Wellink, Nout, 33–36, 257–60, 262–63, 266, 270–72 Wells Fargo Bank, 1–2, 5–6, 64, 114, 173, 209, 252–53, 287, 368n business model of, 328 strong management of, 161, 331 TARP repayment by, 205, 206–7 Wachovia acquired by, 96–105, 124, 143, 355 WaMu acquisition considered by, 86–87, 90–92 Wessel, David, 98, 103 West, Christal, 111 West, Theresa, 15–16 West Coast, 280 FDIC public information campaign on, 86 toxic mortgages on, 95, 99, 102, 339–40 Westernbank, 281–82 Whalen, Chris, 307 White House, 99, 101, 103, 110–11, 116, 170, 177, 181–83, 216, 236, 306 free-market economists in, 134, 135 press office of, 139 White House correspondents annual dinner, 310 Wigand, James, 57–58, 62, 91, 101, 232, 275–76, 287–89, 298 Williams, Julie, 40, 157, 236, 238, 255 Williams, Robert, 88 Winfrey, Oprah, 307 WL Ross & Co., 277, 279 WMI (WaMu Inc.), 92, 195 Wolin, Neal, 216 Wriston, Walter, 173 Yellen, Janet, 86–87 Yingling, Edward, 293, 312 Zandi, Mark, 65, 162 Zeitler, Franz-Christoph, 261, 268, 271 Zuberbühler, Daniel, 35, 263 Zurich, 271 We hope you enjoyed reading this Simon & Schuster eBook Join our mailing list and get updates on new releases, deals, bonus content and other great books from Simon & Schuster CLICK HERE TO SIGN UP or visit us online to sign up at eBookNews.SimonandSchuster.com SIMON & SCHUSTER A Division of Simon & Schuster, Inc 1230 Avenue of the Americas New York, NY 10020 www.SimonandSchuster.com Copyright © 2012 by Sheila Bair All rights reserved, including the right to reproduce this book or portions thereof in any form whatsoever For information address Simon & Schuster Subsidiary Rights Department, 1230 Avenue of the Americas, New York, NY 10020 First Simon & Schuster trade paperback edition September 2013 The Simon & Schuster Speakers Bureau can bring authors to your live event For more information or to book an event, contact the Simon & Schuster Speakers Bureau at 1-866-248-3049 or visit our website at www.simonspeakers.com ISBN 978-1-4516-7248-0 ISBN 978-1-4516-7249-7 ISBN 978-1-4516-7250-3 (eBook) ... 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. .. tax and benefit forms and other paperwork Midway through the morning, Theresa suggested that we go to the security office so I could be photographed for my ID badge We took the elevator to the. .. 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 government’s money We publicly announced the stabilization