European Affairs

CAN WALL STREET BE SAVED FROM ITSELF AND MAINSTREET FROM WALL STREET?     Print Email

jacqueline-grapin“Government fundamentally failed in its role of protecting us,” such is the conclusion Sheila Bair reached after reflecting on her experience during the financial crisis as FDIC Chairman. Appointed by George W. Bush in 2006 at the head of the Federal Deposit Insurance Corporation, she witnessed the origins of the financial crisis and in 2008, became –along with Hank Paulson, Ben Bernanke, and Timothy Geithner – one of the key players trying to repair the damage everyone was witnessing. In 2008 and 2009 Forbes named her the second most powerful woman in the world behind German Chancellor Angela Merkel. She was one of the first people to identify and accurately assess the subprime crisis. In “Bull by the Horns” she describes her fight to make her voice heard in a male world of bankers and politicians more preoccupied by their self interest and personal relations than by the public good.  A main merit of this book is its honesty. It does not hide the sometimes ugly reality of the negotiations, which led to the distribution of billions of dollars to banks, subsequently distributed in fat bonuses to their undeserving leaders.

“I want the general public to understand how difficult it is when a financial regulator tries to challenge the conventional wisdom and make decisions in defiance of industry pressure,” says Sheila Bair. “People need to understand that we are at risk of another financial crisis unless the general public more actively engages in countering undue influence of the financial services lobby.” The book demonstrates how the lobby works at the center of political power. And while describing the negotiations that led to absurd decisions in favor of banks at the expense of the tax payer, she offers a set of recommendations on “How Main Street Can Tame Wall Street.” For her the problems that drove the crisis –excess leverage, unbridled speculation, lack of basic consumer safeguards-, “are not really that hard to understand . Rather “sometimes I think people in the financial sector don’t want you to understand the issues.”  Bair divides the necessary reforms  into three categories: things that will make our financial institutions work better; things that will make our regulators work better; and things that will make our entire financial system work better.

Maintaining the ban on bail-outs is central to her vision, as it is the only way to convince shareholders and creditors that if they make bad decisions they will have to absorb the losses, and not transfer them to the tax payers. She preaches for good sense and responsibility while recognizing that a culture of greed and shortsightedness continues to permeate our financial system, infecting even the best managed institutions.

She reveals that the billions of TARP funding were authorized around a table of politicians and bankers without proper information on the reality of the situation, probably because none of the participants wanted it disclosed.    “The audacity of that woman,” as one of the regulators who tried to prevent her from doing her duty labeled it, was to resist as much as she could when it came to defending her institution, the FDIC.

Sheila Bair demands that public officials --be they in Congress, the administration or the regulatory community--act in the public interest, even if reforms mean lost profits for financial players who write big campaign checks. Perhaps it is too much to ask for.

While delivering a sophisticated lesson in economy and finance, this is a fun book, because it describes negotiations in which well known characters like the U.S. Secretary of the Treasury, key regulators, politicians and the star bankers of the planet take backward positions.   And she does not hide her views on each of these characters. It is also a book which is of great interest for the Europeans, because it implicitly tells them that they should stick to the reforms that have been decided in the G20 and Basel III negotiations, even at the time when the US Congress, under the pressure of the financial services industry, says that the US will not.

Publisher FP Free Press, A Division of Simon & Schuster, Inc. Ebook Edition also available at  SimonandSchuster.com

Jacqueline Grapin is founder and Chairman of the European Institute.