Book Review: Sheila Bair's "Bull By the Horns"

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In her new book, "Bull By the Horns," former FDIC chairman Sheila Bair revisits a wide range of policy debates that occurred during her tenure from 2006 to 2011. Chairman Bair has appropriately received acclaim for having steered the FDIC through the crisis, and especially for being among the first to identify the foreclosure crisis and call for policy action to address the problem. The accolades include praise by former Treasury Secretary Hank Paulson in his 2010 memoir, "On the Brink." I added my praise in a paper presented at an economics conference in April 2009, in which I noted that "The Chairman of the FDIC, Sheila Bair, correctly identified the rising foreclosure problem early on and pushed for the administration to take action."

Chairman Bair's book provides insights regarding recent economic and financial issues and includes both a critical review of policies and suggestions about ways to improve the policy process. This work merits a thorough review that is beyond the scope here. An initial reaction is nonetheless useful as a cautionary note for readers in evaluating the book.

A succinct description of "Bull By the Horns" is that lots of mistakes were made during the crisis - by others. Current Treasury Secretary Timothy Geithner receives particularly vivid criticism, a feature of the book that is not surprising in light of the widely-known animus between the two officials. Press coverage of the book has focused on lines that are irresistible for quotation such as the label of Geithner as the "bailouter in-chief." To be sure, Geithner was a chief architect of the crisis response, but he did so in close collaboration with Fed Chairman Ben Bernanke and with former Treasury Secretary Hank Paulson (to whom I reported as an assistant secretary). As Treasury Secretary, Geithner reports to President Obama, who is ultimately the decider (as noted by the previous chief executive). It is striking then that Geithner is the one who comes in for the criticism, even though his decisions were made jointly with others who are spared - or in the case of President Obama, actually lavished with praise. It is as if this book is written in feigned ignorance of the U.S. government's organization chart.

The policy response across the Bush and Obama administrations, notably the use of the Troubled Asset Relief Program (TARP), was successful at stabilizing the financial system, though this did not help us to avoid a deep recession. Even so, a salient feature of the financial crisis was indeed the huge number of mistakes made both in getting into the crisis and in responding to it. My 2009 paper discusses many of these. Bair got the big picture on housing right before others and was a lonely voice calling for action. She has earned the right to criticize.

What she has not earned, however, is the right to invent a new history. Some of the assertions in the book are squarely at odds with the facts in ways that are easily documented to the contrary. This includes discussions of events in which there were dozens of people in the room who can attest to what actually took place, or events for which there is a primary documentary record. In some ways, Bair's book resides in an alternate universe. This is a universe of criticism, in which blame must be apportioned - always to others.

An illustrative example is over the claims in the book regarding the failed TARP bailout of the troubled lender CIT. Bair claims that the FDIC was inadequately consulted before the company received a TARP capital injection, an investment that later turned into a multi-billion loss for taxpayers. I was one of the Treasury officials on the TARP investment committee and participated in the decision to put TARP money into CIT. I voted yes on the investment; mea culpa. CIT was indeed a difficult case. The company was having problems, but it was a key provider of credit to small and medium-sized businesses and at the Treasury we were keenly aware of the importance of this activity. The TARP investment process was set up to ensure that the Treasury received input from the experts at the federal banking regulators, including not just the primary regulator of each company (in this case, the Federal Reserve), but also the other regulatory agencies including the FDIC, the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS).

That is, the TARP investment process was deliberately set up to ensure that all of the regulatory agencies were involved in the investment process and commented on each other's written and spoken opinions. Staff from each agency was in the room for the discussion by the investment committee of each TARP application and witnessed the ultimate investment decision for each firm. The FDIC staff involved contributed enormously to the TARP process. Their work was invaluable and hugely appreciated. A huge number of people were involved in the effort to rapidly inject up to $250 billion of government capital into the financial system.

Among these are people who can attest that someone from the FDIC was in the room for the discussion of CIT's TARP application and in the room at the moment that the decision was made to go forward with the TARP investment in CIT. Written minutes were taken to memorialize the discussion; these would include any views expressed by the FDIC. Indeed, this process was set up by the TARP investment team under the leadership of Neel Kashkari precisely to avoid claims that rash investments were made with taxpayer money.

 The investment in CIT turned into a huge loss for taxpayers, which thankfully was more than offset by other TARP investments that made substantial profits. But the investment was undertaken in full recognition of the risk, in accordance with the mission of the TARP, and with full participation by the FDIC. Bair in her book claims otherwise, despite the presence of a written record to the contrary and multiple eyewitnesses including her own employees.

On a personal level, one of the accusations she makes about me is that I undermined the Federal Housing Adminstration's (FHA) Hope for Homeowners program set up in the middle of 2008 to help homeowners at risk of foreclosure refinance their mortgages into FHA-backed loans. The development of the Hope for Homeowners program was a collaborative effort between the FHA, the broader Housing and Urban Development Department of which FHA was a component, the FDIC, Federal Reserve, and the Treasury. The parameters of the program were set by the Housing and Economic Recovery Act of 2008 (HERA). A notable requirement was that for a homeowner to qualify, the lender had to agree to a writedown of the mortgage to 85 percent of the current home value, leaving the borrower with considerable equity plus the favorable interest rate of an FHA-backed loan. This was a well-intentioned effort to incentivize banks to restructure mortgages.

Sadly, however, the program was hobbled by the legislation. This was because the terms of normal FHA loans were typically more favorable to lenders, who could write down a loan to only 97 percent of the home value and then pass off the risk exposure to the FHA rather than take the additional loss of writing down the loan all the way to 85 percent of the home value. Banks therefore had little reason to participate in the Hope for Homeowners program. This was not a decision made by executive branch officials, but a feature of the legislation. This was the law and we were bound to follow it.

Nonetheless, a huge group of staff from the agencies spent hundreds of hours together working to implement the program. The people from Treasury involved in this effort were motivated not just by our obligation to fulfill a law enacted by the Congress and signed by the President, but also by the opportunity to help homeowners avoid foreclosures. I believe this motivation was equally shared across the agencies, including by the staff from the FDIC. In the end, the program was a bust, with only a trickle of borrowers receiving loans.

This was unfortunate, but it was not for any lack of effort. If anything, the fault should go to the Congressional designers of the legislation, who sought to balance the government assistance to homeowners with a requirement of sacrifice by lenders. This was a reasonable goal, but at odds with the notion of voluntary participation on the part of lenders. It is difficult to understand why Chairman Bair feels a need to assign blame for the failure of the Hope for Homeowners program. It was certainly not the fault of the FDIC. But neither was it that of anyone from the Treasury, including me.

It is inevitable that fast-moving events and policy disagreements will lead to differing viewpoints. This book goes beyond that inevitability. I have discussed only two examples, but Chairman Bair makes a range of assertions that are at odds with the historical record and easily discounted by the recollections of countless other participants. Chairman Bair has justly received considerable praise for her insights and actions taken during the crisis. But her legacy will not be enhanced by this book's faulty recounting of this tumultuous time.

Phillip Swagel is a non-resident scholar at the American Enterprise Institute and a professor at the University of Maryland's School of Public Policy, where he teaches courses on international economics and is a faculty associate of the Center for Financial Policy at the Robert H. Smith School of Business.  He was Assistant Secretary for Economic Policy at the Treasury Department from December 2006 to January 2009. 

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