Remarks by Sheila Bair, former FDIC Chair
Introduction by Jeremy Pam, Director of GW Law’s Business and Finance Law Program
Dodd-Frank Act 10th Anniversary Conference
Tuesday, July 21, 2020, 1-5 p.m.
Transcript of Video
It is now my pleasure to introduce Sheila Bair, who’s had a long and distinguished career in government, academia and finance.
Twice named by Forbes magazine as the second most powerful woman in the world, she is perhaps best known as chair of the Federal Deposit Insurance Corporation, the FDIC, from 2006 to 2011, when she steered the agency with the greatest experience resolving banks during financial crises through the worst financial crisis since the Great Depression.
Before her appointment by President George W. Bush in 2006 to lead the FDIC, her long experience in financial regulation included service on Senate majority leader Bob Dole's staff, as a Commissioner of the Commodity and Futures Trading Commission, as a senior vice president of the New York Stock Exchange and as assistant secretary for financial institutions in the Treasury Department.
She's a frequent commentator and op-ed contributor on financial regulation and the student debt crisis as well as author of the New York Times bestseller Bull by the Horns, her 2012 memoir of the financial crisis.
For her efforts to protect bank depositors and homeowners during the crisis, she received the Kennedy Library's Profiles in Courage award and was named by Time magazine as the Little Guy's Protector in Chief.
Please join me in welcoming Sheila Bair.
Thanks, Jeremy. That was a really great introduction. I’d also like to thank Dennis Kelleher for all his leadership at Better Markets and for including me in such a distinguished lineup.
And it is so distinguished! Sharing a virtual stage with former President Obama, and so many old friends and allies—John Reed. Senator Dodd. Congressman Frank, Sarah Bloom Raskin, who I’ve known for years, Chair Maxine Waters, who’s done such a fabulous job as chair of the House Financial Services Committee, and of course, my dear friend Elizabeth Warren, who I admire so much. We’re all here today to celebrate 10 years of financial stability made possible by Dodd-Frank and the hard-fought reforms that were enacted a result of that law and its implementation in the wake of the financial crisis.
You know, even after the terrible devastation of the Great Financial Crisis, we still had to fight really hard to get that law done as Senator Dodd and Congressman Frank pointed out in an earlier session. The votes were very close. It was really disappointing to me that only three Republicans, and I’m a Republican, only three Republicans supported it at the end of the day. And once it as enacted, we really had to fight hard to get it implemented, and even once it became law, once it was signed, there were still people that were trying to undo pieces of it—some successfully—mostly not, most stayed intact.
One area where I actually had to try to fend off my former colleagues—Tim Geithner, Ben Bernanke, and Hank Paulson—who really didn’t like the bailout restrictions in Dodd-Frank, (and) pretty much banned it, (and) did ban bail outs with a new process to deal with the failed banks. And they even actually wrote a book dedicated to that whole topic last year, saying Congress should release these bailout prohibitions, and I countered in the Washington Post with an op-ed saying no, I thought they were absolutely fine.
And Congress fortunately agreed with me. They demurred; they didn’t make any changes to Dodd-Frank on the bailout prohibitions, but I think now that we see the massive intervention that the Fed is bringing to the financial markets, my guess is nobody listening to this program probably thinks that Dodd-Frank was too restrictive on bailouts.
So, we kept those prohibitions against bailouts then. That was good…kept most of it. Fortunately, kept the provisions related to capital though as I’ve said, those are—and I will talk about in a little bit—those are under assault right now because the best way to avoid bailouts is to have really high capital levels that will prevent failures and then you don’t have to worry about it.
But even those capital rules are under assault, and I'll be talking about that shortly. There have been some provisions that have been eviscerated, unfortunately mainly by regulators; I'm thinking of the Volcker Rule. Really, there's not much left of it, and that is very sad. For me, I knew and respected Paul Volcker; he was a mentor and a friend.
I think he was right to want to prohibit risky proprietary trading by institutions that had access to the safety net: FDIC insurance; access to the Fed lending facilities. And we don’t want them engaged in high-risk activities, and to let them get back into those risky activities, at the same time we’re weakening capital requirements, it’s just an invitation for disaster. I mean, that's what got us into trouble during the Great Financial crisis: Big Wall Street banks taking highly leveraged bets on really risky securities and derivatives related to mortgages. That's what got us into trouble; they were doing that on the government's dime. So, we don't want to go back to that system.
And I think the Volcker Rule also underscores the fundamental question of how broad do we want the safety net to be? Do we want deposit insurance and fed lending to be supporting these risky Wall Street activities? Traditionally, we have not done that. We've supported bread- and butter-lending; taking deposits, making loans: that's what households and small businesses in particular need—that's where they get their credit. They can't access the debt markets, so we've traditionally supported that type of activity but not Wall Street risk-taking.
But again, those barriers are being broken down now, and I do worry about expanding the safety net. That concern may seem quaint right now because of the massive support the Fed's been providing, especially in the corporate debt market. So maybe I'm quaint and old-fashioned in worrying about market discipline, but I do still care about it, and it concerns me that corporate debt markets now (are) wide open to just about anybody's investment grade—or was investment grade prior to the pandemic—and that is because the Fed, of course, has committed to backstop these programs to make pretty much unlimited investments in investment grade debt or even the junk stuff—if it's in HTFs they're also buying ETFs as well.
So that's maybe necessary, maybe it's not. Given the severity of the pandemic, obviously intervention was needed, but I don't think these choices are binary. And this was an issue during the 2008 financial crisis. It seemed like the choices were ‘go all in or don't do anything,’ and those were not the choices; there were spectrums of options to take, and when government intervenes, I think they should try to be tailored and surgical about it. You know, we want a market-based system. We don't want the government jumping in every time there's a problem—bailing out those who have taken risk and saving them from their own mistakes.
It reminds me of a situation I was confronted with during the Great Financial Crisis. The Treasury and the Fed actually asked me—the FDIC—to backstop all liabilities of all financial institutions—even the holding companies not just insured banks… I didn't think we were capable of doing that and didn’t think we needed to do that, and what we ended up doing was coming back with a much more limited proposal. If we had done that, basically it would have been a bail out of bond investors. But those investors had already bought the bonds—they were stuck—that wasn't where the market disruptions were . The problem was with the ability of financial institutions to roll expiring debt. They become too reliant on debt; they become too reliant on short-term debt, (and) they were having problems rolling that debt as it expired to keep access to funding.
So, we did a more limited program designed just for newly issued debt. We set a cap on it; we charged a premium for it; and actually, the program worked very well, and it seems to me that the Fed had a similar choice with intervening with the corporate debt markets. I supported their intervention when this thing started. I saw all these companies that were barely investment grade; I was worried about them immediately falling into junk territory—with this terrible pandemic and the economic damage it was causing— (and) not being able to access credit, having to do wide-scale layoffs because they could no longer fund themselves so I supported intervention.
But it seemed to me where the Fed should have been intervening was again with the primary issuance; again helping those corporations issue new debt to continue their funding, to replace expiring debt, but the primary emphasis has been in propping up the secondary market, which of course has helped bond investors, but that's not where the problem was. The problem, at least I think, for the real economy that we wanted to address was to make sure that companies had the access to funds to maintain operations, and I also think those debt purchases should have been accompanied by restrictions on distributing any capital to shareholders or excessive bonuses or employee executive compensation.
You wanted to keep that government support, the funding being provided by that government support ,into operations, supporting payroll—that's what the economy needs. So again the primary market has opened up through the Fed's secondary market interventions, and that's a good thing, but why are we bailing out all these bond investors? That doesn't make any sense to me, and again, no strings attached, no limitations to make sure that that funding support is going into operations and payroll. So, the safety net really has been stretched to the limit to support capital markets, maybe not so much for Main Street, but it is what it is, and I think we're losing market discipline. We're expanding the safety net dramatically, and I worry that market discipline is going to become a thing of the past, and that's going to be very, very bad for financial stability because government can't do it all. Let's talk again specifically about the financial sector government
Government can't do it all, even with a great law like Dodd-Frank …regulators don't always do what they're supposed to do, and regulators can get captured. Republicans get captured, Democrats get captured; it's not corrupt—it's just the ability of regulators to start thinking like the institutions that they regulate instead of thinking more broadly about system stability and public protection. And this is a bipartisan problem…deregulation started with Mr. Greenspan, but it really reached its apex during the Clinton years when we repealed Glass-Steagall …. So, we need some hard guardrails around regulatory discretion, and if you look at what's going on now, I think again that underscores the point.
Regulators now, well-intentioned regulators, I know a lot of them (and) they're good people. I don't question people's motives, but I think they're very misguided because they're weakening the rules. They're celebrating all the capital the banks had going into this because of Dodd-Frank, and the efforts of a lot of people that predated them but then they're weakening the very framework that led to those much higher capital levels, and they're doing it in a way that's not really transparent. They're adding to complexity; they're making it harder to understand the true impact of their actions. They're saying, and I take this at face value, that they're just trying to improve and simplify and streamline and make sure that access is flowing now with this pandemic. But if you look at what's going on, it's kind of the opposite.
So let's just go down the list for instance: they weakened the stress test assumptions….and Lael Brainard… voted against that (which) would have reduced capital minimums by about $100 billion; they weakened the leverage ratio that would have, will reduce, eventually, capital minimums by about $76 billion at the holding company level, $55 billion at the bank level; they’ve eliminated inter-affiliate initial margin requirements for insured banks—that's $55 billion that will now be able to leave insured banks that was there before to protect them against derivatives exposures of their affiliates; they've been loosening capital rules at the same time they're letting banks and bank holding companies pay dividend, FDIC insured banks, which should be $30 billion in capital and dividends to the holding companies in the first quarter; most of that was distributed on to shareholders; and then there's still a pending proposal—it hasn't been finalized (and) I hope it (isn’t)—but it would reduce what's called the enhanced supplementary leverage ratio, which is a very key constraint on excessive leverage for the eight largest banks. It would reduce their capital, their minimums, on average by a 20 percent or about $120 billion.
So these are big numbers, and nobody's really explained the cumulative impact of all this. I’m sure there's some overlap, but it would be nice to know…I can only assume …this is a substantial reduction in capital minimums.
Personnel is policy … and the best thing we can do to protect the public from financial instability is to appoint regulators and encourage regulators to have the know-how and the willingness to see through self-serving rhetoric of industry lobbyists. Banks have a point of view …they're trying to maximize ROE; they're publicly traded for-profit entities, their lobbyists, their executives are all big shareholders too; they want to maximize their returns. Fine, good for them, but that's not government's objective, that's not the regulators’ objectives.
There's a tension between the two; we want to promote financial stability; we want to protect the public for financial instability; and so we need regulators that understand there’s a tension. They need to be independent; they need to be skeptical of every line that bank lobbyists give them; and they need to listen to other people—people like the folks at Better Markets who have a very different point of view.
And we do need guard rails around regulatory discretion; we need some floor—that's what the Collins Amendment was all about and Dodd-Frank to set a floor wherein that regulators could not lower capital below that floor. And we did that, because you look at what happened in the run-up to the great financial crisis, it was ridiculous how much leverage regulators were allowing. The rules allowed this amount of leverage, and regulators were saying, it's fine…the banks know how to manage their risk, they can deal with this much leverage.
So, we need the Collins Amendment. The Collins Amendment is now under attack. I worry about the bank lobbyists trying to gut it as part of the next stimulus package. And again, that's another battle I hope Better Markets can help fight because I think the Collins Amendment is really important. We need to keep it; we need to keep capital; and we need to let banks keep failing…We need to let them fail; we didn't let them fail during the Great Financial crisis—most of them we didn't—we need to let them fail this time.
We need market discipline; there are new tools in Dodd-Frank that will allow banks to fail and give the regulators tools to manage that failure to protect the broader public. Those are tools that we didn't have during the Great Financial crisis, and regulators need to be prepared to use them because I do worry … the regulatory using capital rules at the same time … allowing dividends to be paid to shareholders. If these banks get in trouble later or regulators feel the desire to do bailouts to save face or whatever, I do worry that could be a dynamic, and I hope that doesn't happen because we need market discipline. And if banks have taken on too much leverage, they've released too much capital (or) they don't have the balance sheet to absorb their losses, then they need to accept responsibility for that.
And finally, I think we need strong market discipline, strong regulations, strong regulators, but most of all, we need organizations like Better Markets. Better Markets does such a good job; they tirelessly monitor and track this overly complex web of financial regulations that we have; they sort through that morass; they've got lots of experts on the staff; they help translate it for the public; they help keep regulators honest; and that's what we need to do.
But their job, our job, everybody's job would be so much easier if these rules could be simpler and more transparent so they could easily be grasped by the public and media. So, there's a lot of good work that went into implementing DFA; a lot of it that made the banking system much stronger going into this is being undone right now, a lot of it in the name of pandemic relief.
No matter how well intentioned, this is directionally absolutely the wrong way for the regulators to go. The next administration will need to change course; fortunately, most of Dodd-Frank remains intact. The tools are there to make sure we have a resilient system; the tools are there, and with the right regulators, I know we can get the job done.
So, thanks very, very much for having me today. Again, congratulations to Dodd-Frank, congratulations to Better Markets and be well.