Book Review: Sheila Bair's Bull By The Horns

by: Philip Mause

Sheila Bair led the Federal Deposit Insurance Corporation (FDIC) during the eventful years from 2006 and 2011 and she has quite a story to tell. She deserves credit for anticipating some of the problems that emerged in 2008 and crying out (usually to an unresponsive audience) for precautionary measures in 2006-07. Some of her decisions during the crisis period were controversial; in its aftermath, she emerged as a force for consumer protection and regulation designed to reduce the need for government bail outs in the future. Not exactly what you would expect from a life long Republican and a Bush appointee. As a native of Kansas, during the surrealistic events of 2008-09, she may have sometimes thought she was Dorothy on a trip down the Yellow Brick Road in the Wizard of Oz (I will let you guess who the Wicked Witches, the Tin Soldier, the Lion and the Wizard were imagined to be).

The book generally proceeds chronologically but is interlaced with passages describing in plain English the operation of deposit insurance and some of the basic banking concepts and metrics. One gets a reasonably good sense of the functioning of the FDIC, the role of deposit insurance and the metrics which determine whether banks are safe and sound. When she arrived in 2006, the FDIC had just gone through one of the longest periods in United States history without a bank closing and was actually laying off staff and dealing with various issues associated with downsizing. If ever there was a "bell" ringing that should have summoned investors to climb on the ladders leading out of the pool, this was it. She took office and immediately dove into various disputes that were brewing - all of which, in one form or another, reflected the banking industry's perception that the good times would roll forever, regulation and capital requirements were superfluous, and the industry should be regulated only by the proverbial "invisible hand." Sheila Bair opposed the industry on many of these issues and was proven right by later events.

When the gathering storm clouds matured into a tempest, she was in the unenviable position of having to implement bank closings and deplete the dangerously small fund designed to refund money to depositors when the bank vault emptied out. Her positions on various issues often reflected a protective instinct toward the FDIC and the taxpayer funds that might be needed for ever larger bail outs. While this would be perfectly appropriate in normal times, it may have been shortsighted as the prospect of a full scale systemic bank run materialized.

Her description of the Washington Mutual (WAMU) resolution is interesting. Although Washington Mutual was closed and non-depositor creditors were essentially stiffed less than two weeks after the Lehman bankruptcy was announced, her discussion of the WAMU issue does not really give the reader comfort that anyone in the federal government was focusing on what the combined effect of these two debacles would be on the markets. She defends her decision on WAMU (and certainly the FDIC's resources would not have permitted any other course of action) but an administration wide huddle to determine whether the soon to be available TARP funds could have been deployed might have been in order. She notes that the stock market was up the day after the WAMU resolution was announced but does not describe that carnage that occurred in the bank bond market or the interbank lending market. LIBOR spiked to ridiculously high levels and interbank lending froze up.

This leads to another deficiency in the text. There is no real discussion of interbank lending and how it was impacted by regulatory decisions. There is no discussion of the infamous LIBOR metric that we have all grown to know and love until we reach the last chapters dealing with the recent scandal.

These, however, are quibbles. This is an excellent and readable book giving the reader a very useful chronicle of a period of financial history which will be studied for generations. She is a true heroine for speaking out honestly and forcefully at a time when prudent measures would have mitigated some of the damage. I do not agree with all of the prescriptions for future public policy set forth in the closing chapters because I think policy now has to be single-mindedly focused on generating GDP growth and some of these measures (discouraging consumers from taking on debt, reducing the deficit) might retard that effort and even be self-defeating. But she presents her case more effectively than I have seen elsewhere and she deserves a hearing because she was right on the money with her public policy recommendations in 2006-07.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.