Sheila Bair, chairwoman of the Federal Deposit Insurance Corporation, revealed in a riveting exit interview in The New York Times that the mortgage industry’s rampant abuse of homeowners and government funding stems from lack of “market discipline” and a general “disdain for borrowers.” “I think some of it was that they didn’t think borrowers were worth helping,” said Bair.
Bair’s role in the F.D.I.C. was characterized by the heinous subprime mortgage crisis that led to the collapse of the housing market, which she foresaw and fought to prevent. Bair began speaking out against predatory subprime lending as early as June of 2006, voicing concerns that inevitable massive defaults would devastate entire communities as well as the banking system. Bair addressed the unwavering resistance on the part of financial institutions to grant loan modifications, and pioneered to overcome this resistance long before the housing bubble burst in 2007.
Bair and the F.D.I.C. regulated floundering banks such as Wachovia and Washington Mutual throughout the crisis. Bair crusaded against bailouts and was also a major player in crafting the Dodd-Frank reform law, often considered the most significant achievement in financial regulation since the Great Depression.
Joe Nocera of The New York Times reported:
Since the law passed, she has made an immense effort to convince Wall Street and the country that the nation’s giant banks — the same ones that required bailouts in 2008 and became known as “too big to fail” institutions — will never again be bailed out, thanks in part to new powers at the F.D.I.C. Just a few months ago, she went so far as to send a letter to Standard & Poor’s, the credit-ratings agency, suggesting that its ratings of the big banks were too high because they reflected an expectation of government support. If a too-big-to-fail bank got into trouble, she wrote, the F.D.I.C. would wind it down, not bail it out.
As a moderate Republican – an increasingly rare breed in today’s world of faith-based evangelism and tea party antics – Bair believes strongly in “regulations that reinforce economic incentives.”
Crusading against the criminal tactics of subprime lenders was a lonely feat for the F.D.I.C. chairwoman. No one else seemed to care. Lenders profited by selling the loans to Wall Street. Wall Street then bundled the high-risk securities and sold them off to unknowing investors. Federal Reserve chairman Alan Greenspan did nothing tame subprime lending abuses due to an abhorrence to regulation, and the Office of the Comptroller of the Currency actually used its federal jurisdiction to shoot down individual states’ attempts to regulate abusive subprime tactics.
The White House’s approach to the subprime lending explosion has been largely ineffective as well. ProPublica reported:
While Bair said that President Barack Obama’s “heart is in the right place,” she criticized his economic team for taking controversial steps to aid banks while, in Nocera’s words, being “utterly unwilling to take any political heat to help homeowners.”
We have been tracking Obama’s struggling home loan modification program since 2009. Bair’s analysis of the government’s approach is very much in line with what we’ve reported. From the beginning, the program was watered down and stripped of key enforcement measures, after President Obama backed away from his campaign promises to force banks to modify mortgages. Treasury’s oversight of the program has been lax and characterized by deference to banks.
The government has only recently begun to penalize several major banks for their byzantine, error-prone modifications. As we’ve reported, homeowners have often been forced to deal with lost documents, poor communication and mistaken denials. As of May, approximately 730,000 homeowners had received permanent loan modifications—a fraction of the millions of homeowners that the Obama administration promised to help.
While Bair admitted that some of the bailouts were necessary, she was quick to point out that they were entirely too generous. “I’ve always wondered why none of A.I.G.’s counterparties didn’t have to take any haircuts. There’s no reason in the world why those swap counterparties couldn’t have taken a 10 percent haircut. There could have at least been a little pain for them.” Remember the public’s reaction to Goldman Sachs collecting $12.9 billion from the A.I.G. bailout? Bair also added, “They didn’t even engage in conversation about that. You know, Wall Street barely missed a beat with their bonuses. Isn’t that ridiculous?”
Mortgage defaults in California declined 19% for the 2nd quarter and are at their lowest level in 4 years.
