Chairman Sheila Bair To Leave FDIC Next Month
RENEE MONTAGNE, host:
This is MORNING EDITION, from NPR News. I'm Renee Montagne.
And we're going to hear now from a woman who has overseen the takeover of hundreds of failed banks. Sheila Bair has also butted heads with other regulators over bailouts to financial giants like Citigroup, and she won support from lawmakers for trying to help struggling homeowners with a loan modification program.
After five years of some of the biggest ups and downs in the banking industry, the chairman of the Federal Deposit Insurance Corporation is stepping down. Sheila Bair is leaving the FDIC next month. She joined us from her office in Washington, D.C. to talk about what she's learned from the financial crisis.
Ms. SHEILA BAIR (Chairman, FDIC): Good morning.
MONTAGNE: I'd like to start with a concept that we've heard an awful lot about since the start of this crisis, that banks were simply too big to fail, some of them, and that would be because their failure would mean the collapse of the financial system. At this point, do you have faith that too-big-to-fail won't happen again, that the U.S. taxpayer won't be bailing out big banks in the future?
Ms. BAIR: Well, I certainly feel confident that we have the tools to insulate taxpayers and make sure that if these large institutions get into trouble going forward, there will be an alternative mechanism so that they can be what we call resolved in an orderly way without resort to taxpayer funding, but without the disruptive impacts that you can have with bankruptcy, as we saw with the Lehman Brothers bankruptcy.
MONTAGNE: Well, a lot of the issues with the banking stemmed from companies that were actually not banks.
Ms. BAIR: That's correct. That's quite true.
MONTAGNE: And may I say I think people will know a name they would've never known before this crisis: AIG. But the whole question of banks that are too big to fail, the biggest banks have only gotten bigger over the past couple of years.
Ms. BAIR: They have. And you find this typically in periods of economic and financial distress, that it will feed a lot of consolidation activity. I will say, too, I think size by itself, though, perhaps is not as big of an indicator of systemic risk as it is interconnected relationships with other financial institutions.
For instance, that was the problem with AIG. It had entered into all these derivatives contracts with other financial institutions that had created substantial exposure for the other financial institutions if AIG failed.
I think that is really an area that we need to look at particularly. The interconnectedness and the complexity and the international activity are three strong indicators of an institution being systemic that perhaps are even more reflective than just sheer asset size.
MONTAGNE: Congress passed a raft of banking reforms last year in the Dodd-Frank bill, and that law calls for banks to maintain higher capital reserves, among other things, a kind of, I guess, a rainy day fund. Banks say that holding more cash means they can't put the money back in the economy. They can't lend it. First of all, what do you say to that? I mean, does anybody really know what effect it's having on the economy?
Ms. BAIR: Well, I think - I must say, I think those arguments really do not hold water if you just scratch slightly below the surface. Banks have a tremendous capacity to lend right now. They're sitting on piles of cash. They have adequate capital to make more loans.
Raising capital requirements has nothing to do with the bank lending situation that we have now. I think some financial institutions are still being too risk adverse.
But in fairness to banks, I think borrower demand is down because of uncertainties about the economy. So we don't have as many borrowers seeking loans. And that's really what's driving lending levels right now. It has nothing to do with capital requirements.
MONTAGNE: You have said in the past that although a lot of what was done by executives in these financial institutions may have been irresponsible, not so much of it is obviously criminal. But can you blame Americans for thinking executives did get a free pass, that there hasn't been enough accountability?
Ms. BAIR: I do think there's not been enough accountability. I think more people should've lost their jobs. With our process, when an institution fails and costs the Deposit Insurance Fund money, we have the ability to sue the board members and executives of these institutions to try to recoup some of our losses, and we will go after personal assets. I think you can make it felt in the pocketbook, as well.
But with these larger institutions, they didn't fail, and so we don't have that ability to sue to impose some financial accountability with the - some of the board members and executives.
But I think probably the bulk of this at the executive level was not so much criminal. It was just abject failure at your responsibilities as a manager.
I think a recurring theme throughout this crisis is people were making decisions without thinking about the long-term consequences. They were thinking about making short-term profits, which would equate into perhaps bigger bonus packages and compensation packages for them without thinking longer term about what they were doing to their financial institution or the broader economy.
I would also add, though, I think it's important not to lump all banks and financial institutions together. I think there were several that were quite well-run. Everybody made mistakes. But I think there should be some differentiation with some institutions, and they shouldn't all be lumped together.
MONTAGNE: Shelia Bair comes to the end of her five-year term as chairman of the FDIC next month.
Thank you for joining us.
Ms. BAIR: All right. Thank you.
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