There have been numerous books on the financial meltdown, and I have read a number of them. Some of the best among those I have read are in the form of an educated observer of the financial world providing the history about some particular institution that played a major role in creating the meltdown. The ones that come to mind are Fleckenstein's "Greenspan's Bubbles" (Federal Reserve), Michael Lewis' "The Big Short" (financial derivatives industry) and Gretchen Morgenson's "Reckless Endangerment" (GSEs).
Sheila Bair's book is from a quite different perspective, that of a government regulator at a high enough position that she was able to wield a fair amount of influence on not only US Government policies but also international negotiations intended to deal with the ongoing crisis and to prevent its recurrence in the future.
The heart of Bair's story about her serving at the helm of the FDIC begins in Chapter 2, "Turning the Titanic" in which she describes how she found that she had inherited a dysfunctional organization with low morale. Her first task was to straighten out management of the organization itself. According to her story, she achieved a dramatic turnaround, and she provided enough corroboration to leave little reason for doubt that she had indeed achieved that.
A number of subsequent chapters discuss Bair's role in working with other regulators in dealing with policies such as mortgage standards and bailouts of the megabanks. If one believes Bair, which I do, some of the key regulators were little more than lackeys for the banking industry. In particular, the Office of Comptroller of the Currency (OCC), and Timothy Geithner, Secretary of the Treasury. Bair appears to have been largely a "lone wolf" arguing for more robust banking regulations. The other key player, Federal Reserve Chairman Ben Bernanke, comes across as somewhat mixed, but a little bit more on the good side than the bad. (aside: It is an obscenity that Tim Geithner still serves as Treasury Secretary)
In the chapter "Stepping over a Dollar to Pick up a Nickel", Bair discusses the efforts to develop mortgage remediation programs. From her perspective, even though aggressive efforts by lenders to refinance salvageable mortages made a great deal of economic sense, on account of the large losses incurred in the foreclosure process, refinancing was largely paralyzed because of such factors as upside-down financial incentives associated with the tranche structure of mortgage derivatives (in which some stakeholders actually benefitted when the mortgage wound up losing more money), as well as a plethora of mortgages being owned by fly-by-night "servicers" without the staff to competently pursue the refinancing of individual mortages. Bair advocated for governmental intervention to perform refinancing en masse on apparently qualified mortgages, but was shot down by objections that without going through the conventional refinancing process on an individual basis, some of the "bulk" refinancing would be unjustified- e.g. go to "house flippers" or people who actually could easily pay their mortgage. Her assessment of the situation was the basis for her title to that chapter.
A considerable amount of the book involved discussion of the particular efforts to bail out Citibank, apparently the worst of the megabanks. Tim Geither, whose "mentor and hero" Robert Rubin had been head of Citibank, appeared to have devoted a tremendous amount of his time at Treasury toward finding new ways to bail out Citibank, as well as to try to tailor new banking regulations to try to camouflage how sick the worst of the megabanks, Citibank and Bank of America, truly were.
Bair covers a good deal on the negotiations associated with the development of the Dodd Frank financial reform bill. This was very enlightening to me, since I didn't know much detail about Dodd Frank but was skeptical based on claims that it didn't fix what mattered but added unnecessary nuisances to the banking industry. Bair makes a compelling case that it is, to the contrary, an essential piece of legislation which plugs many of the holes in the system exposed during the meltdown.
She expresses exasperation at the Tea Party, which opposed the banking bailouts, but also was negative toward Dodd Frank. Much debate on Dodd Frank centered around whether it genuinely eliminated "Too Big to Fail". From this book I conclude that Bair overall makes a pretty strong case for her side.
Although she does not expound on this in detail, I think this exposes a flaw in the Tea Party mentality. They appear to want a free market based financial system, along the lines of the Austrian school of economics, with the most prominent political exponent being Ron Paul. However you cannot pursue policies that were designed for one system when you are operating under another. Perhaps if you didn't have a Federal Reserve that doles out financial heroin in the form of zero interest rates, bankers wouldn't become leverage junkies. But that is nor our system.
I think this gets at a fundamental problem with Alan Greenspan's role at the Federal Reserve. As head of about the most anti-libertarian organization that could possibly be conceived, the Federal Reserve, a quasi-governmental central bank that manipulates the financial system in an attempt to smooth out the ups and downs in the economy, he pursued libertarian policies with regard to banking regulations. It's like applying the rule of Football to a Basketball game.
Although I have considerably changed my opinion of Dodd and Frank based on this book, I do believe there is a lot of evidence for them having played a negative role leading up to the financial crisis, but I now see them as mixed bags rather than villains as I had before. (or perhaps "reformed villains" is a fairer way to put it)
This ties into some points made toward the end of the book regarding this same issue. In Bair's opinion, the problems associated with megabanks tend to be associated with their complexity, not their size. Thus, she believes that there is not a need to break up the large banks, but in some cases they may need to be restructured so that the divisions within the company line up with the specific lines of business it is engaged in.
What appears to be the most important tool in Dodd Frank to eliminate the "too big to fail" problem is the requirement that the megabanks formulate a "living will" for how they would be broken up in an orderly manner if and when the company found itself in dire financial straits. I am inclined to believe that the extent to which the too big to fail problem has genuinely been resolved will be determined by whether the mega banks come up with bona fide living wills.
Bair played a role in developing the banking standards known as Basil III. Earlier in the book, she discusses the Basil II European banking standards and how they were far too lax and contributed greatly to the European banking crisis. Bair emphasizes the importants of capital requirements for banks. She and her allies were able to turn the tide in Basil III against the advocates of lax banking standards, so we can hope that Basil III provides a more stable banking system in the future.
While much of the book is about Bair's efforts to influence new regulations under development, in the chapter "Too Small to Save" she discusses some examples of the FDIC's actual bread-and-butter work, the orderly shutdown of failed banks.
In the final chapters Bair gives her views on reforms of the financial system as well as US fiscal policy. A number of her views agree with ones I have come to believe, which naturally enhances her credibility as far as I'm concerned. Examples are: She disagrees with advocates of increased debt (no names, but it sounds like she is referring to Krugmanists), on the basis that further borrowing at current low (and thus supposedly benign) interest rates belies the fact that the bond market is a highly distorted one in which interest rates are artificially low for various reasons, and when the inevitable reversal of that trend occurs, the fallout will be all the worse the more debt there is. On fiscal policy, she dislikes the popular bipartisan "temporary holiday" on social security taxes (as an undermining of the revenue base for that important entitlement program, exactly my sentiment), and believes in broadening the tax base (e.g. eliminating the differential treatment of capital gains versus regular income, and even phasing out the mortgage interest deduction. I also support the latter, although it is one of cases where what is right will probably never prevail, because it is far too entrenched in the system.
The general feeling I get from this book is that Sheila Bair very likely has the deepest understanding of our financial system of anyone alive, and perhaps also the best understanding of anyone alive about how to improve it. In addition, her writing style is outstanding. She covers dry technical topics as succinctly and readably as they can be, and has also included a goodly amount of material that is enjoyable to read on a human interest level. Her outstanding writing ability combined with her unique perspective on the financial crisis created by her tenure as head of the FDIC, makes it a safe bet that this will be recognized as one of a handful of classics that document the financial crisis of our time.
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Top reviews from other countries
Robert G McPherson
When are we going to start listening to smart women?
Reviewed in Canada on August 29, 2020
ian
interesting comparison to geithner's book
Reviewed in Germany on October 14, 2015
DOPPLEGANGER
WALL STREET V MAIN STREET
Reviewed in the United Kingdom on January 2, 2013Ally Miller
especially interesting for finance people
Reviewed in Germany on November 7, 2016Nick
It makes this book a good read in the heat of the summer
Reviewed in Canada on August 27, 2015