By Silla Brush - 11/03/09 11:00 AM EST
Sheila Bair has been a consistent critic of the Obama administration’s financial regulatory plans, and she is now urging lawmakers to limit the Treasury Department’s influence in a key part of the overhaul.
Bair, chairwoman of the Federal Deposit Insurance Corporation (FDIC), is concerned about a new federal council of regulators that would oversee risks across the financial system. Legislation backed by the administration and House Financial Services Committee Chairman Barney Frank (D-Mass.) would create a new council of regulators, with the Treasury Department at the head.
“We view this council as really a check on the other regulators,” Bair said. “Look, you can blame everybody on this. Everybody had things they could have and should have done better, but I think regulatory capture is an issue and becomes even more of an issue with the major concentration we’re seeing in the industry.”
With the backing of the administration in power at the time, the Treasury Department might have too heavy a hand in regulatory decisions, she said.
“They’re part of the administration,” Bair said. “We could live with it. If that’s the route Congress wants to go, we could support that. But the optimal structure, in our view, would be to have an independent head.”
Bair, appointed by President George W. Bush in 2006, has been a thorn in the side of both administrations. Under Obama, she has gotten her way on several issues.
Last Thursday, Bair criticized a plan for dealing with failing financial firms that would have levied a fee on companies with at least $10 billion in assets to cover the costs of the government taking over a failed firm. Frank and Treasury Secretary Timothy Geithner both backed the specifics of the plan, known as “resolution authority.”
Geithner has said the new powers are among the most important parts of the financial overhaul in order to end the notion of “too big to fail” that drove the government to bail out firms such as American International Group (AIG).
On Friday, Frank switched his position to favor Bair’s view that firms should pay into a fund before a firm fails. Geithner had testified that that would “create more moral hazard.”
Bair was a staffer to former Senate Majority Leader Bob Dole (R-Kan.) and made an unsuccessful bid in 1990 for the House as a Republican. But over the past two years, Bair has found the warmest embrace among congressional Democrats.
Bair pushed repeatedly for the Bush administration to do more to reduce the rate of home foreclosure. That earned her frequent praise at the end of 2008 and early in 2009 from Frank and Senate Banking Committee Chairman Chris Dodd (D-Conn.).
In the interview, Bair dismissed speculation in Kansas that she is set to run for the Senate seat now held by Sam Brownback (R).
Q&A with Sheila Bair
Does the shift on “resolution authority” relieve your concerns?
I think we’re very close on resolution authority anyway. The ex ante fund was probably the biggest issue. We would like some tightening of the language so it makes it clearer that we wouldn’t be doing a conservatorship or providing open bank assistance to any individual institution. If you’re going to end “too big to fail” and the bailouts, I think it’s important to make that clear.
Does this end “too big to fail”?
There is a provision, which we support, which would allow system-wide support for healthy institutions if you had a major destabilizing event … If you had a major destabilizing event that the whole system, even the healthy institutions, are having trouble, the government could step in to provide some liquidity support along the lines of what we did with the debt guarantee program. We think that’s fine and prudent. We think the statute should set a very high bar when the government would come in and provide assistance … Moral hazard is moral hazard. Whether the assistance is coming from us, the Fed or the Treasury, whoever, any government support for open institutions provides some risk for moral hazard.
Does the Federal Reserve get too much power?
I don’t know if the Fed wants that. They had a lot of power going into this; you can see the backlash. How much do they want to put on their shoulders? .... Their paramount role and objective is to do monetary policy well, and I think they want to be insulated from the political process in the monetary function, but the more they get spread into these other areas, the more difficult that becomes. … Concentrating even more power there, we don’t think that’s wise to do. You really can’t be a check on the Fed if the Fed has the power to enforce whatever the council decides.
What do you think of Sen. Dodd’s idea of consolidating the four banking regulators?
I admire and respect Chairman Dodd. We will work with him on whatever he wants to do. Look, I’ve been out there since 2006 on this issue. There are some real downsides to this. … In terms of tackling what caused the crisis, the ability to choose between the state and federal charter, I don’t see any significant role in this. I really don’t. AIG, and Lehman Brothers, and Bear Stearns, and Fannie Mae and Freddie Mac — that had nothing to do with whether their bank had a state or federal charter.
Is the president tough enough on big banks?
What are you most concerned by when you look at the banking industry now?
If the economy improves, banks will heal. It will be a few quarters after the economy recovers. Banks are usually lagging indicators. If the economy doesn’t, then we’re going to have some more problems. But longer-term, I think banks are well-positioned because the value of deposit insurance and deposits as a stable source of funding has proven itself.
You ran for office earlier in your career. Do you have any interest in returning to elected politics?
No, I don’t. I’m a lifelong Republican. I was just reading this interesting story that I was going to run for the Senate in Kansas as a Democrat. I don’t know where that came from. I’m a lifelong Republican. I’m certainly nonpartisan in my approach to my government responsibilities. But yeah, I think that was very interesting speculation with no basis whatsoever.
So you’re not?
I’ve got my hands full here. This is a great agency. I’m proud of what we’ve done. We’re right in the middle of the cleanup. I’m not going anywhere anytime soon. There is a big job to do here. I’m going to stick with this great agency and get us through this.