Sheila Bair’s recent memoir, Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself provides a front row seat, from a senior US government official’s perspective, of the 2008 financial crisis. Whether or not you agree with Ms. Bair’s views, you’ll find her down-home Kansas-style narrative refreshingly frank, animated, and spirited. Her book ranks among the most intellectually stimulating literature on the financial crisis.
The chaotic organization of US financial regulation is in the crosshairs:
[T]he United States has gone too far in creating a plethora of regulators with responsibility for various pieces of the financial system. We do not have an efficient decision-making structure for them to collectively address systemwide problems. Each agency tends to focus on protecting its own turf, instead of stepping back and taking a broad view of regulatory measures that will protect the stability of the system as a whole.” (page 337, emphasis mine)
Anyone who has experienced the dysfunctional inter-agency relationships of the US Treasury, White House, Congress, Federal Reserve, FDIC, OCC, OTS, SEC, CFTC, FSOC, GSEs, PCAOB, FCIC, Basel Committee, G20, GHOS, and a sea of lesser players will instantly recognize the bureaucratic nightmare which the author depicts in breathtaking detail. Having worked on Information Technology projects involving several of these agencies, I can attest that Ms. Bair’s observations offer more than the ring of truth. She writes with passion about how financial wrongdoers failed to take responsibility for actions that worsened the crisis and how government regulators sat idle, choosing not to stop them:
That is why I have written this book. I wanted you to see the crisis through my eyes and experience the obstacles that stood in my way as I tried to push for reform measures that were so obviously needed. (page 356)
If you yearn to see raw uncut footage of financial regulation sausage being made, I highly recommend this book. A few colorful characters add large dollops of pettiness, ego, and incompetence to the mix to spice up the story. You’ll get a clear idea of who Ms. Bair regards as the bad guys (and they’re all male) of Wall Street and Washington. You’ll also read kind words for the good guys and gals. Of those folks in the story I’ve met, I’d say Ms. Bair’s characterizations are fair and balanced.
The fight over Dodd-Frank legislation shows the ugly side of sausage. Ms. Bair tells how she worked with senators and tangled with other regulators to write a liquidation provision that had teeth. Through this, the law would prevent bail outs of failing financial institutions and would force them to be closed with stockholders bearing the losses. But Dodd-Frank turned over the implementation details to the same ‘bad guy’ regulators who abetted the formation of the crisis. Naturally they dragged foot and watered down the law, leaving the government unprepared to deal with future crises. Two years later, Ms. Bair is frustrated Dodd-Frank accomplished nothing:
The Dodd-Frank Wall Street Reform Act, the landmark law enacted on July 21, 2010, was designed to end the kind of risk taking, greed, and avarice that brought us the financial crisis of 2008. Yet, notwithstanding thousands of pages of proposed and final rules to implement this important law, nothing much seems to have changed … why don’t they just fix this stuff?
Though the final chapters articulate a few laudable policy ideas, Ms. Bair suffers from the same tunnel vision she criticizes above. She views many issues through the lens of compassion for individuals, capital adequacy, and deposit safety. Had she taken “a broad view,” she would have framed the crisis as a classic financial panic consisting of an asset price bubble, inflated by shortsighted policy, easy money, and mass stupidity, resulting in a world wide series of runs on investment banks and commercial banks. And we’re still not out of the woods: sovereign defaults may yet ensue. Such tragedy isn’t unprecedented and a broader look at past crises — not just the Great Depression — would have been beneficial.
Ms. Bair’s policy prescriptions are weak sauce. They treat the crisis symptoms using politically expedient band-aids. The implicit strategy of favoring small institutions over the too-big-to-fail is wrong: it’s government picking winners and losers. This strategy just rearranges the deck chairs on the sinking ship. Ditto for taking small steps to reorganize the persistent morass of overlapping regulatory jurisdiction. Both of these issues call for a forceful drive towards a new architecture for financial regulation.
What’s wrong with favoring small banks over the too-big-to-fail? Ms. Bair argues that implicit government guarantees for too-big-to-fail banks confer advantages over small banks. To compensate, she suggests letting small banks employ higher leverage. But free guarantees for the too-big-to-fail are bad policy for a market economy. And small banks are no more virtuous than big banks. So favoring small banks to counteract bad policy on big banks is an ineffective band-aid. To fix too-big-to-fail, we must eliminate the US taxpayer as the silent partner of big banks. Instead Ms. Bair wants to hand out more government freebies to whoever whines loudest.
Ms. Bair’s band-aids patch up the survivors of the last war when we need to be girding for the next war, which is inevitable and likely to go nuclear.
The book’s closing thoughts evoke profound cognitive dissonance:
It is not hard to fix these problems. We simply lack the political will and fortitude to get the job done. (page 364)
Well, Ms. Bair, I call bull. If these problems are so easy, why didn’t you fix them? Could this “political will and fortitude” thing be harder than it looks? My two cents: the bull that’s the real subject of this book isn’t the famous one that hails from lower Manhattan. The bull we gotta stop is the brown organic stuff that Washington dishes out by the truckload.