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Bair Market

In late November, the media cheered and the market swooned, for a few days at least, as President-elect Barack Obama rolled out his economic team. It certainly checked a lot of boxes: Wall Street favorite? Tim Geithner. Monetary policy eminence grise? Paul Volcker. Respected academic? Berkeley's Christina Romer. All-around genius? Larry Summers. But Obama forgot--or declined--to mention yet another member of his team, a holdover from the Bush administration and one of the most powerful economic voices in Washington: Sheila Bair, who has two and half years remaining in her term as chair of the Federal Deposit Insurance Corporation.

It's easy to see why Obama might have overlooked her. Charged with protecting the public from bank failures, the FDIC has long been the Beltway equivalent of a small-town fire department, called on every few years to put out some flames but otherwise ignored. Since taking over in 2006, however, Bair has transformed it into one of Washington's most important power centers: a robust research and policy generator, a key player in negotiating the recent wave of bank implosions, and a front-and-center soapbox from which Bair has repeatedly criticized her administration colleagues for prioritizing Wall Street over Main Street. When Bush Treasury secretary Henry Paulson put the kibosh on her $25 billion plan to assist foreclosure-threatened homeowners, she thrashed him mercilessly in a series of newspaper interviews and speeches. "I think she has an incredible amount of courage to be a lone voice in the wilderness,” says John Taylor, CEO of the National Community Reinvestment Coalition. For her efforts, Bair has become the darling of Congressional liberals, the consumer advocacy sector, and the financial media. Just about everyone except the White House.

That, oddly enough, could hold true even after Obama takes office. Bair is one of a dwindling species in Washington: a pragmatic conservative who recognizes that fiscal discipline and small government aren't always the answer--and who sometimes sounds downright populist as a result. "A lot of people out there are losing their houses,” she told me last month. "I think people draw false choices between bailing out financial institutions and helping homeowners. Well, maybe we need to spend on both.” Indeed, Bair's views on the current crisis may actually be more liberal than those of Obama's generally centrist appointees, and already there have been signs of strain between Bair and the incoming administration. Who could have guessed that the high-ranking government official most likely to attack Obama's economic policies from the left would be--of all things--a Republican?


Born in Independence, Kansas, and educated at the University of Kansas and its law school, Bair came to Washington as a staffer for Senator Bob Dole. But she made her first mark as an independent voice in the early 1990s while serving on the Commodity Futures Trading Commission. In 1992, a budding energy firm called Enron wanted to play in the protean world of financial derivatives, but doing so meant heavy regulatory and collateral requirements. Enron successfully lobbied the commission's chair, Wendy Gramm (wife of Senator Phil Gramm), for an exemption from CFTC regulations, including anti-fraud restrictions. The exemption passed 2-1, with Bair dissenting loudly, even testifying in Congress when Democratic Representative Glenn English of Oklahoma tried to overturn it. "She had the courage to hold her ground and make the point that in fact this was wrong for the country,” says English, now CEO of the National Rural Electric Cooperative Association.

Bair--who has a pleasant, controlled demeanor and the sensible shoes and perm to match--left Washington in 1995 to work at the New York Stock Exchange, but she returned in 2001 as assistant Treasury secretary for financial institutions. Again, she had no problem being a lone voice. While most of her colleagues were happy to see home prices skyrocket, Bair was worrying about the expansion of predatory and subprime lending practices, and she worked to put together a set of uniform federal guidelines. "She was a breath of fresh air,” recalls the New America Foundation's Ellen Seidman, who worked closely with Bair as a Clinton-era holdover at the Office of Thrift Supervision. Bair developed a reputation around town for doing her homework--and her boss's, too: When then-Treasury Secretary Paul O'Neill, speaking before Congress, admitted that Bair had written his testimony, one senator quipped, "I noticed when you were speaking, her lips were moving.” Then September 11 intervened, forcing her to work 18-hour days on a terrorism insurance plan. Less than a year later, she decamped for academia, taking a professorship at the University of Massachusetts-Amherst.

But rather than distancing Bair from the real world, academia seemed to make her more prescient about the emerging risks of the twenty-first century economy. She called for drastic reform of the federal regulatory system in the face of proliferating and complex financial structures, and she pushed for tougher rules on subprime and predatory lending. "Our current financial services regulatory regime, consisting, as it does, of multiple regulators structured around product function, may not be able to keep pace with globalization and technological innovation over the long term,” she told an FDIC symposium in 2003.

The world of adult finance wasn't her only focus, either--while at UMass, Bair, who has two young children, wrote Rock, Brock, and the Savings Shock, a picture book about the merits of saving. (Her second kid's book, Isabel's Car Wash, was published earlier this year.) Academic life appeared to suit her well--better than Washington, at least. "Washington is a one-industry town and you get sucked into this 24/7 career environment,” she told the Daily Hampshire Gazette in early 2006. "I couldn't balance it with the time I wanted to spend with my family.”


Bair's return to Washington in 2006, then, as FDIC chair took even her close friends by surprise. "I have no idea why they asked her back,” Seidman says. Indeed, it's unclear exactly why the Bush administration turned to someone who had already shown a penchant for dissenting loudly from conservative orthodoxy. But, at the time, FDIC chair was a relatively obscure, inactive post not known for playing a role in policy debates. Bair, having fled Washington politics with her bipartisan reputation intact, may have struck Bush officials as the perfect caretaker for a job few ideologues wanted, or even cared about.

FDIC chairmanships last five years, staggered with the presidency to reduce the risk of executive meddling and, presumably, to ensure that its occupant stays on the political sidelines. Bair, however, had other ideas. From the start, she set out to use her new job to address many of the problems she had identified from her university perch. She put the agency's vast and under-utilized research staff to work on the details of the emerging subprime lending crisis, before most people in Washington realized a crisis even existed. She teamed up with the Fed and the Office of the Comptroller of the Currency to impose tough new rules for adjustable rate mortgages (ARMs). And as early as October 2007, she called for subprime mortgages to be fixed at their current rates, before many of them automatically reset to rates unreachable by borrowers.

The rest, of course, is history. Few listened to Bair, and, when the housing bubble burst in late 2007, foreclosures began to pile up. In December 2007, Bair told Congress that some 1.3 million mortgage loans would reset over the next year, which "could result in hundreds of thousands of additional mortgage foreclosures over the next two years." A few months later, she was pushing a comprehensive mortgage relief program, hardly the bailiwick of past FDIC chairs. Her plan, which drew praise from Capitol Hill liberals and consumer advocates but the ire of Henry Paulson and the White House, would require banks to renegotiate interest rates for troubled mortgages, with the government promising to cover most of the losses if they went into foreclosure later.

Opponents accused her of wanting to bailout negligent homeowners--and thereby violate conservative economic values. But Bair argued repeatedly, with impeccable data, that many of the homeowners had been duped, and that in any case the potential social cost of millions of unoccupied houses outweighed the risk. For Bair, this wasn't a sign that she'd given up her Republican credentials. Rather, it was a pragmatic solution to an unprecedented problem--a problem that Bush has yet to tackle, a year later. Without action now, "the housing market will continue to deteriorate,” she tells me, adding, "I don't understand why we can give out billions to the financial sector, but when we talk about the [individual borrower] level, we get out the fine-toothed comb.”


Bair's clash with the economic powers-that-be heated up with the banking crisis this summer. She took a lead role early on, gaining industry and media plaudits for her deft handling of the Washington Mutual collapse and negotiating a nail-biting forced sale of Wachovia to Wells Fargo. Originally, she had been close to selling it to Citigroup, but managed to pull out when it became clear Wells Fargo could offer a better deal to taxpayers (Citigroup wanted the government to cover most of the hit it would take from absorbing the troubled bank). She also used the FDIC's takeover of California's IndyMac as a demonstration project for her mortgage relief plan, helping thousands of endangered homeowners restructure their loans. At the same time, she heavily criticized the way Paulson was handling the crisis. "Why there's been such a political focus on making sure we're not unduly helping borrowers but then we're providing all this massive assistance at the institutional level, I don't understand it,” she told The Wall Street Journal. "It's been a frustration for me.”

Tensions with Paulson also brought her into conflict with Tim Geithner. In October, Paulson and Geithner (now Obama's Treasury secretary in waiting, but then president of the New York Fed) asked Bair to back up interbank loans using FDIC money. But Bair protested that such a move would endanger her agency's already strapped resources, and, after a marathon meeting, she got them to agree to higher insurance fees from banks getting bailout money. They clashed again in November, when Paulson and Geithner insisted that the FDIC cover a large portion of mortgage-related losses by Citigroup as part of a bailout for the ailing bank; Bair nearly sank the deal when she held out for a significant chunk of the bank's assets.

By December, an anti-Bair whisper campaign was making the rounds. The Wall Street Journal reported that Geithner had criticized Bair for protecting the FDIC over the broader interests of the economic recovery efforts, while a December 4 Bloomberg account had anonymous sources saying that Geithner didn’t think Bair was a “team player” and that Obama had decided to isolate her, if not ask her to step down as FDIC chair. "They're just criticizing me for doing my job,” Bair tells me defensively.

To be fair, it's worth asking how much of Bair's stiff-arming is a matter of principle and how much is, in fact, about turf protection. Moreover, her critics seem to be saying, if Bair wants a say in policy circles, she has to be willing to pay the ante, and more readily commit her agency's resources to the bailout efforts.

The Obama transition team insists that relations between Bair and Geithner are perfectly fine. "Tim Geithner very much respects Sheila Bair's work at the FDIC, and believes her views bring an important perspective to the discussion,” says transition spokesperson Stephanie Cutter, adding that "it is completely inaccurate to say that he's seeking her removal.” Still, the underlying tension between the two, at least at the policy level, is impossible to deny. And, beyond low-level meetings with the transition team, there has been no interaction between Bair's office and Obama--"We have briefed the transition team on the [foreclosure assistance] proposal,” according to Bair, but that's it--a strange lacuna considering how important both bank solvency and foreclosure assistance will be to any recovery.


Bair, while paying lip service to presidential prerogative--"I assume if they want change, they'll let me know,” she says--has no incentive to leave and every reason to stay, particularly if she believes that Geithner will continue Paulson's Wall Street-friendly bailout strategy. And she'll have her hands full: The number of banks at risk of collapse is growing--171 by the end of September, the latest number and the highest in 13 years--while the foreclosure crisis, once limited to homeowners who had borrowed more than they could pay, is now spreading to homeowners hit by unemployment. By some estimates, at least one million homes will enter foreclosure next year, on top of some 880,000 this year, leaving in their wake gutted neighborhoods, fragile families, and battered local economies. Meanwhile, so far, Obama seems to be putting off homeowner assistance in favor of infrastructure stimulus and industry-specific bailouts.

Like some of Bair's critics in the Bush administration, the Obama team is right to be wary of the FDIC chair's sharp elbows. Not only will she continue the very public push for her foreclosure-assistance plan, but--as she did during Bush's rescue of Citigroup--she is likely to demand that the FDIC once again be awarded a large chunk of assets when its money is used in future bailouts. "She has no interest in going along to get along,” says Tom O'Brien, former dean at the UMass business school and a close friend of Bair.

That said, there are still two reasons Obama needs to bring Bair into the fold. First, excluding Bair means creating an external power center, beloved by liberals, that could clash with Obama's White House as bitterly as it did with Bush's. And, because Bair is a Republican, she may feel even less allegiance to the next administration than she feels to the current one.

But it's not just a question of which direction, tent-wise, Bair should be spitting. When it comes to the nuts and bolts of bank rescues and mortgage relief, no one in Washington knows more than Bair. And while she readily admits that her plan isn't a panacea--"there are no silver bullets, no perfect solutions,” she says--her agency has been doing loan modifications for decades, using them to clean up the assets of shuttered banks it takes over. "She absolutely knows how the various institutions work, what kind of strategies and proposals have not worked, and what are the immediate steps that need to occur,” says Taylor. "She can hit the ground running. If she had support from a White House that cared about these things, we would have a rapid improvement.”

Clay Risen is the managing editor of Democracy: A Journal of Ideas, and a contributing editor at World Trade. His first book, A Nation on Fire: America in the Wake of the King Assassination, will appear this month.