American Banker’s Donna Borak has found the juiciest bits of Sheila Bair’s book yet — and it turns out to be buried in, of all places, the chapter on Basel III. Bair’s backstory to the September 2010 Basel III announcement is full of insider gossip and score-settling, and from reading Borak’s account I’d definitely class Bair as a dubiously reliable narrator. But her story is fascinating, all the same.
For one thing, Bair reveals, Tim Geithner involved himself quite deeply in Basel III negotiations. Bair can’t stand Geithner, and ascribes malign intent to everything he does. Geithner asks questions about Basel III without explicitly saying what his own opinion is? “It wasn’t clear whether Tim was trying to build consensus among the U.S. regulators or trying to stir the pot.” Geithner agrees to push for higher capital standards — exactly what Bair wanted all along? Well, that’s just his way of trying to marginalize her:
Bair sees the entire episode as a power play by Geithner. She argues he was trying to blow up the meeting between international regulators so that the issue would be kicked higher to the Group of 20 finance ministers who were set to meet in November. If the G-20 took over negotiations, Geithner would be leading the U.S., not Bernanke. The FDIC would have little say in the final number.
This simply isn’t credible. For one thing, Geithner just isn’t that Machiavellian: his biggest weakness is that he isn’t political enough, rather than that he’s some kind of master puppeteer. But beyond that, it also isn’t credible that the BIS and the world’s central bankers would ever cede the final decision on Basel III to a group of finance ministers. The central bankers might have found it hard to come to agreement, but they were technocrats working quietly to come to agreement on something very, very complicated. Basel III was a quiet victory: it came together, in the end, because it wasn’t politicized by finance ministers. The technocrats in Switzerland always knew that if Basel III were given to the G20 finance ministers, it would never go anywhere. And so they would never do that.
But Bair doesn’t see it, because she’s not one of life’s central bankers: she’s far to noisy and aggressive and opinionated. She’s a guns-blazing kind of negotiator, and seems to think of central bankers in general, and American central bankers in particular, as meek and pathetic:
U.S. regulators had trouble convincing French and German officials to go along with the idea.
In part, this was due to weak leadership from the Fed, Bair said, criticizing Pat Parkinson, the central bank’s lead negotiator, for not speaking up more.
“The Fed representative was supposed to be the head of the U.S. delegation, but Pat hardly ever spoke up,” Bair writes. “He talked a good game when he met with us, but when it came to engaging the French and Germans during the Basel Committee discussions, he was reticent.”
Similarly, Bernanke appeared reluctant to weigh in at the meetings of the Group of Governors and Heads of Supervision, a collection of the principals of international regulators, in part because of his status.
“As the head of the world’s largest central bank, he didn’t want to get down into the fray, which I understood,” Bair writes.
Dudley and Tarullo, meanwhile, also “spoke with frustrating rarity.”
“I didn’t know if they were just intimated by mixing it up with the French and Germans or whether I was being gamed and they didn’t really want reform,” writes Bair.
Again, this is about as uncharitable as it’s possible to be. The thing about being America, in any kind of international negotiations, is that you’re America. You don’t need to speak loudly: frankly, you don’t need to speak much at all. Everybody knows what your position is, and most of the time, if you just sit there and say nothing, everybody will ultimately come around and do what you want, just because it’s what America wants. Getting tougher capital standards is harder than, say, getting Jim Kim to be the new president of the World Bank, but the general principle is the same: what America wants is the base case scenario, and is likely to be what ultimately gets done. And if America shouts loudly about what it wants, that is unlikely to help and actually quite likely to hurt matters.
Bair has always come across as someone with a bit of a persecution complex: she has a tendency to think of herself as the sole defender of what is good and true, even as the rest of the government allows itself to get captured by the rapacious financial services industry. And of course there’s some truth to that: she’s absolutely right that the OCC, in particular, was an utterly toothless regulator which could always be relied upon to do whatever was wanted by the banks it was supposed to be regulating.
But it’s really not helpful, let alone accurate, to ascribe malign intent to any and every public servant you disagree with. Bair had a relatively narrow job — to make sure that banks didn’t fail, leaving her FDIC on the hook for untold billions of dollars in deposit guarantees. She fought her corner aggressively. But other people, including Ben Bernanke and Tim Geithner, had different jobs, and looked at the decisions being made, especially during the crisis, in different ways.
What’s more, it’s entirely natural that Geithner, who moved straight to Treasury from the presidency of the New York Fed, would take an interest in Basel III: after all, the New York Fed generally provided most of the frontline negotiators hammering out details far from the view of principals like Bair. And, it’s worth noting, the New York Fed was actually very aggressive in the Basel negotiations — much more aggressive, actually, than the higher-level negotiators from Washington. That was the culture Geithner came from, and if he was more sympathetic to Citi (C) and BofA (BAC) than Bair was, he was also well aware that the tougher the capital-adequacy standards, the better the competitive position of US banks in general, vis-a-vis their woefully undercapitalized European counterparts.
Geithner has only a few more months left in his job; once he leaves, he will surely be approached with many juicy offers from publishers. I have a feeling that discretion will win out, and that he’ll choose instead to float effortlessly into the world of grey financial eminences. But if he does choose to engage with Bair, expect sparks to fly. I’d give very good money to read his chapter on WaMu.