Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself
FDIC chair's own account of seizing WaMu and selling it to JPMorgan.
Summary
Bair chaired the Federal Deposit Insurance Corporation from 2006 to 2011 and this is her account of the crisis from inside the agency responsible for resolving failed banks and protecting insured deposits.
Her institutional position gives the book a distinct view. The FDIC resolves banks by closing them, imposing losses on shareholders and unsecured creditors, and transferring deposits to an acquirer, which it did for hundreds of institutions during the crisis including Washington Mutual and IndyMac. Bair argues this mechanism worked and should have been applied to the largest institutions rather than recapitalising them, and she documents her disagreements with Treasury under Paulson and Geithner and with the Federal Reserve over the terms of assistance, over the debt guarantee programme, over Citigroup specifically, and over whether shareholders and creditors should have absorbed losses.
Her other main theme is loan modification. She argues the mortgage servicing industry had no incentive to modify loans, that the programmes designed to encourage modification were structured to protect servicers and investors rather than borrowers, and that a mandatory systematic modification programme would have reduced foreclosures and the resulting economic damage substantially.
The book is a participant's account and settles scores. Bair's characterisations of Geithner and of the Treasury position are contested and other memoirs from the period tell it differently. Her substantive positions on resolution authority and on creditor loss allocation have been substantially adopted in subsequent regulation.
Key takeaways 7
- The FDIC's resolution mechanism, which closes a bank and imposes losses on shareholders and unsecured creditors, worked for hundreds of institutions during the crisis.
- The largest institutions should have been resolved rather than recapitalised, with losses imposed on shareholders and creditors rather than absorbed publicly.
- Assistance terms during the crisis protected creditors of large institutions in ways that were not applied to smaller banks that were closed.
- Mortgage servicers had no financial incentive to modify loans, because their fee income came from servicing and foreclosure rather than from recovery.
- Loan modification programmes were structured to protect servicers and investors rather than to reduce foreclosures, which is why they achieved so little.
- Deposit insurance and a credible resolution mechanism are what prevent bank runs, and both depend on the resolution actually being applied.
- Regulatory agencies with different mandates reach different conclusions from the same facts, and the crisis response was shaped by which agency prevailed.
Who should read it
Investors and policy readers who want the bank resolution perspective on the crisis and the case for imposing creditor losses.
Where it sits in the reference 2
Who recommended it 1 · 1 direct
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