PDF Summary:Bull by the Horns, by Sheila Bair

In the aftermath of the 2008 financial crisis, Sheila Bair played a central role in shaping reforms aimed at preventing future economic turmoil. In Bull by the Horns, Bair recounts her efforts to strengthen bank capital requirements, advocate for risk retention in securitization, regulate credit default swaps, and end "too big to fail" policies that led to government bailouts.

Bair provides an insider's account of her work leading the FDIC and collaborating with policymakers to increase oversight and institute safeguards for the financial system. Her narrative sheds light on the complexities of developing regulations to stabilize markets while facing resistance from financial institutions and other government bodies.

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The author was dissatisfied with the removal of the resolution fund.

Bair expresses her discontent with the decision to remove the $19 billion resolution fund during the conference committee discussions between the House and Senate. Sheila Bair suggests that Geithner might have swayed the Republican opposition to the fund, with the intention of creating a credit facility under the Treasury's control, on which the FDIC would rely should its funds prove insufficient to handle the failure of a major bank. She argues that such a move would bolster the Treasury Department's role in deciding outcomes and also give the Treasury control over the financial operations of the FDIC. Sheila Bair, working alongside Senator Corker, remained steadfast in her determination to ensure the inclusion of the resolution fund in the legislative process during the conference committee's deliberations, underscoring that the primary intent of this provision was to impose a fee on large financial institutions to fund resolutions, thus preventing taxpayers from shouldering the costs.

Sheila Bair advocated for the implementation of the third Basel Accord as part of worldwide reforms.

Bair recounts her efforts collaborating with international regulators to advocate for stricter capital requirements within the global banking system under the newly established Basel III standards. Financial institutions were required to strengthen their stability by augmenting their holdings of solid, non-hybrid equity capital, phasing out hybrid debt instruments, establishing a leverage ratio, and ensuring that globally significant financial institutions implement extra protective measures. Sheila Bair offers an in-depth narrative of the intricate negotiations required to finalize these reforms, emphasizing her engagements with representatives from Europe.

Strengthening the quality and quantity of financial buffers by mandating higher levels of Tangible Common Equity.

Bair recounts her efforts to champion the increase of capital reserves for globally operating banks under the newly established Basel III regulations. She elucidates that banks build up tangible common equity (TCE) by either offering common stock or through the accumulation of retained earnings, emphasizing its unique ability to withstand economic adversities. Sheila Bair narrates her active participation in shaping the U.S. perspective on global banking rules, particularly by taking part in dialogues and assemblies with national regulators, a process that culminated in her steadfast support for the implementation of stringent capital standards by the Basel Committee. She also conveys her irritation with the hesitancy of certain regulatory bodies to adopt a more proactive stance.

Establishing a benchmark for the leverage ratio and concurrently ceasing the use of various forms of financial leverage tools.

Bair delves into the debates over setting worldwide constraints on borrowing and ending the practice of classifying hybrid debt as equity. Sheila Bair suggests implementing a worldwide leverage ratio as a straightforward and clear measure for significant financial entities globally, designed to be more resistant to tampering than the complex capital mandates that banks took advantage of during the Basel II era. Sheila Bair strongly advocated for the requirement that banks hold stronger capital reserves, particularly omitting instruments of debt that blend characteristics and generally offer weaker protection against losses.

The author was resolute in ensuring that principal financial institutions shouldered additional ancillary expenses.

She supported the notion that, although there was agreement on setting a global leverage ratio and excluding hybrid debt instruments from being counted as capital, the Basel III capital standards could be strengthened, and she advocated for increased capital reserves for banks deemed essential to the financial system. Bair recounts her efforts to work alongside international colleagues, including the head of the Bank of England and Phillipp Hildebrand from the Swiss National Bank, while also describing the opposition she encountered from Geithner and Walsh as she sought to introduce the extra charge.

Working alongside international regulatory agencies to reduce the sway held by the sector.

Bair recounts her collaboration with global regulators to surmount opposition from the financial industry to the newly established Basel III framework, which imposes a substantial capital surcharge on systemically crucial financial institutions, underscoring its critical role in fortifying the worldwide banking infrastructure. Sheila Bair emphasized the necessity for banks to hold substantial capital reserves, highlighting research that underscored the critical role of a leverage ratio, even though the banking sector argued that higher capital mandates could restrict their lending capacity and impede economic growth. Bair highlighted research showing that banks with lower levels of borrowing were often more at risk in times of financial distress, whereas those with higher levels of borrowing tended to be more stable, a fact she thought contradicted the deceptive claims by industry groups that regulatory actions would restrict credit access.

Other Perspectives

• While Bair opposed lowered bank capital requirements, some might argue that overly stringent capital requirements can limit banks' ability to lend, potentially slowing economic growth.
• The use of internal models by banks to determine capital reserves is criticized by Bair, but proponents argue that these models can be more sensitive to risk and tailored to the specific business model of each bank.
• Bair's advocacy for a worldwide leverage ratio is seen as a way to ensure stability, but critics might suggest that a one-size-fits-all approach may not account for differences in national economies and banking systems.
• The postponement of Basel II in the U.S. could be viewed as a prudent move by Bair and the FDIC, but some could argue it put U.S. banks at a competitive disadvantage internationally.
• Bair's push for stakeholder participation in the securitization process is intended to align interests, but others might contend that it could also lead to reduced innovation and flexibility in financial products.
• The requirement for risk retention in securitization could be criticized for potentially increasing the cost of borrowing for consumers.
• Efforts to improve transparency and loan management regulations are generally seen as positive, but some might argue that they could lead to an increase in compliance costs for financial institutions.
• Regulations to curb speculative activities in Credit Default Swaps aim to reduce systemic risk, but critics might argue that they could also limit legitimate hedging activities that can protect against financial volatility.
• The Dodd-Frank Act's elimination of bailouts is intended to prevent moral hazard, but some argue that in times of crisis, the ability to enact bailouts provides a necessary tool for government intervention to stabilize the financial system.
• The FDIC's advocacy for a dedicated reserve funded by the industry to manage crises is seen as a way to protect taxpayers, but some might argue that such a fund could be insufficient in the face of a large-scale financial crisis.
• Bair's dissatisfaction with the removal of the resolution fund from Dodd-Frank could be countered by the argument that the existence of such a fund might create a moral hazard, encouraging risky behavior with the knowledge that a safety net exists.
• The third Basel Accord, which Bair advocated for, includes higher capital requirements that some argue could constrain lending and economic activity, particularly in developing countries with emerging financial systems.
• The establishment of a benchmark for the leverage ratio and the cessation of using hybrid debt could be criticized for potentially reducing the financial instruments available to banks to manage capital and risk.
• The additional expenses shouldered by principal financial institutions under Basel III could be viewed by some as a disincentive for banks to grow and become more efficient, potentially leading to less competition in the financial sector.
• Efforts to reduce the sector's influence through international collaboration, as supported by Bair, might be criticized for potentially undermining national sovereignty and the ability of individual countries to tailor regulations to their specific economic contexts.

The author encountered obstacles while striving to implement more rigorous banking oversight and to undo the financial interventions established in 2008, in addition to increasing the mandatory capital holdings for banks.

The primary focus of this section is the author's advocacy for enhanced oversight by regulators and the fortification of financial reserves that banks must maintain. Bair recounts the difficulties encountered while collaborating with banking regulatory bodies, such as the Office of the Comptroller of the Currency and Tim Geithner. Sheila Bair firmly supported the FDIC's push for increased insurance premiums, the requirement for financial institutions to strengthen their capital reserves more than what other regulators had established, and consistently advised that the nation's leading banks should uphold a capital to non-risk-weighted assets ratio of 8%. Bair emphasized the importance of addressing moral hazard by making sure that the fallout from bank failures impacted the investors and lenders, rather than rescuing struggling financial entities.

Ensuring strict criteria for maintaining financial reserves.

Bair details her approach to implementing stringent financial protections, including requiring banks to augment their insurance contributions to the FDIC's depositor protection fund, urging financial institutions to strengthen their capital reserves following their exit from the TARP program, and promoting an 8% leverage ratio among her regulatory peers. In her role leading the FDIC, Sheila Bair was responsible for ensuring the agency had sufficient funds to manage the anticipated rise in bank failures projected for 2010, while also circumventing the need for the FDIC to request additional funding from public funds. The approach entailed increasing costs for the industry and establishing a mechanism to collect these fees beforehand.

The FDIC adopted measures to strengthen its reserves by increasing premium assessments.

Sheila Bair carefully crafted a plan to convince the directors of the FDIC to boost the contributions from banks for deposit insurance, aiming to replenish the reserves of the Deposit Insurance Fund, thus providing the FDIC with the necessary funds to handle anticipated bank failures during the turmoil without depending on taxpayer-funded bailouts. Bair voiced her annoyance with the banking industry's trade organizations, which claimed that the FDIC, despite the banks' self-described "exceptional" state, was in a strong financial position and thus should keep premiums low. Bair believes that building up a financial buffer during times of economic expansion and requiring banks to share in the costs related to collapses can strengthen the system's robustness and diminish the chances of future financial crises.

She recommended enhancing capital reserves for stress assessments and proposed ending the Troubled Asset Relief Program initiatives.

Bair outlines her approach to ensure that major banks did not exit the TARP capital program prematurely without first obtaining private capital to replace the government's investment. She clarifies the intricacies of the Federal Reserve's stress tests, highlighting her concerns about specific capital calculations that, in her opinion, were too forgiving to organizations with poor governance, such as Citigroup, among others. Additionally, she outlines her strategy to require stress tests that are dependent on the compulsory sale of troubled assets via collaborations between government and private stakeholders, thus hastening the enhancement of the principal financial institutions' balance sheets. Bair also emphasizes her firm belief that the only way to ensure that banks' exit from TARP truly strengthened their financial stability was by requiring them to enhance their capital by offering new common shares to the public market.

Sheila Bair encountered disagreements with both the Federal Reserve and the Office of the Comptroller of the Currency on matters concerning Bank of America and Citigroup.

Sheila Bair was a strong proponent of bolstering the financial buffers of Bank of America and Citigroup, the two largest institutions with the thinnest capital layers, in her conversations with the Federal Reserve and the Office of the Comptroller of the Currency about assessing financial solidity and the criteria for returning TARP money. The conversation focused on the importance of leveraging capital increases driven by the market to strengthen the robustness of these financial institutions. Sheila Bair was against the idea that Bank of America could make up for a lack of adequate capital by selling off assets, and instead argued for a significant capital raise from market investors. Sheila Bair achieved prominence by persistently urging banks to improve and resubmit more robust plans to fortify their capital, which was a condition she set before giving the green light for them to reimburse the government's Troubled Asset Relief Program funds.

The writer persistently championed the principle that financial entities should uphold a capital adequacy ratio of eight percent.

Sheila Bair was a persistent proponent of bolstering capital reserves, frequently recommending that major domestic banks uphold a baseline leverage ratio of no less than 8%. Sheila Bair recommended that to maintain the flow of credit during economic hardships, major financial institutions should maintain a capital adequacy measure similar to the 8% held by robust banks prior to the financial crisis. Sheila Bair stressed the importance of bolstering capital buffers to protect the FDIC against monetary losses if a member bank fails, highlighting that banks, because of their government-backed insurance, should contribute to meeting the economic needs of the broader society.

Choosing strategies for resolution instead of employing financial rescue measures addressed the issue of moral hazard.

Bair outlines her struggles with the concept of moral hazard, emphasizing the aid given to Citigroup and argues that those responsible for the institution's shortcomings, such as shareholders, creditors, and particularly the executives, ought to face the repercussions of their mistakes. Bair firmly believed that, despite the size of some institutions suggesting they were too big to fail, individuals who faced financial hardships as a result of a faltering institution ought to be accountable for the consequences of their decisions.

The author argues that the restructuring of Citigroup should have resulted in the private sector absorbing the losses.

Bair recounts her numerous conflicts with the Treasury Department and the Federal Reserve over the financial bailouts of Citigroup, emphasizing that shareholders, creditors, and particularly management should bear the consequences and suffer losses due to their reckless risk-taking. Bair contends that it is unjust for taxpayers to shoulder the consequences of the decisions made by investors, executives, and board members of collapsing financial entities. Sheila Bair insisted on significant reforms at Citigroup, including the augmentation of capital reserves, better transparency of its protected asset pool, restrictions on bonuses, and a revamp of its leadership team, as prerequisites for her support of any rescue measures, even in the face of resistance from some colleagues.

The FDIC's approach to handling the circumstances at WaMu and Wachovia involved solutions that did not rely on government aid.

In the fall of 2008, Sheila Bair persuaded other financial overseers to avoid bailing out two struggling financial institutions, specifically Washington Mutual and Wachovia. The significance of those resolutions stemmed from several factors. First, by managing the transition of the banks to new ownership through a process of competitive bidding when they collapsed, without relying on FDIC guarantees to absorb the losses of shareholders or creditors, the FDIC effectively facilitated a rapid transfer of the institutions, thus diminishing the need for financial support. In both cases, every individual with insured deposits was fully protected, whereas parties other than the failed banks' creditors did not suffer financial damage. The continuity of banking services for the numerous clients at each bank was instrumental in averting the market chaos and pervasive anxiety that followed the downfall of other large institutions such as WaMu. In managing the process, the FDIC was responsible for choosing the alternative that would minimize the cost to the government, taking into account the implications for its deposit insurance fund. Motivated by strong incentives, the Office of the Comptroller of the Currency and the Federal Reserve, as the main overseers of banking entities, tended to favor particular acquiring parties. The New York Federal Reserve indeed commenced discussions with Citigroup about the potential acquisition of Wachovia. Sheila Bair's involvement in the discussions, while intended to protect the interests of the general populace, unintentionally reduced the incentive for potential buyers to devise a resolution that would eliminate the necessity for government financial support. The decisive handling of the difficulties faced by WaMu and Wachovia, which did not involve taxpayer money, conveyed a clear message to the financial sector that not all faltering institutions would be saved by the government.

She was against channeling bailout money toward CIT and GMAC.

Sheila Bair, during her tenure as chairperson, firmly resisted any attempts to involve the FDIC in bailout initiatives targeting entities such as General Motors Acceptance Corporation and the commercial lender CIT. Sheila Bair argued that the FDIC's debt guarantee program aimed to enhance the lending capabilities of financially solid institutions, not to support those nearing collapse. Additionally, she challenged the idea that the failure of either institution would lead to extensive consequences throughout the economic system. Sheila Bair emphasized the variety of choices available in the market and pointed out the FDIC's insufficient funds to save every financial institution. Ultimately, in both of these instances, the FDIC's opposition compelled the other regulators to explore more market-oriented solutions to mitigate the impact of their deficiencies, which included obtaining additional capital from private sources, restructuring banking operations to prevent potential threats to the FDIC-insured institution from hazardous lending practices, and ultimately allowing the firms to fail in a managed bankruptcy process where the entities could reconcile their obligations with creditors.

Restructuring the Regulatory Bodies: Improving Supervision

Bair suggests several reforms designed to improve the supervision of America's key financial institutions. The recommendations included restructuring the Financial Stability Oversight Council to operate independently of political influence, dissolving the Office of the Comptroller of the Currency, and merging the Securities and Exchange Commission with the Commodity Futures Trading Commission, in addition to ensuring that both the SEC and CFTC have their own stable sources of funding. The recommendations highlighted the need to strengthen oversight by creating a solid federal oversight system to preemptively handle risks that could affect the whole system, and to promote diverse viewpoints within governmental agencies to avoid undue influence from the regulated institutions on their regulators.

Proposed changes aimed at strengthening the autonomy of the FSOC, thus shielding it from political influences.

Bair proposes that to increase the independence of the Financial Stability Oversight Council (FSOC) from political influence, its chairperson should be appointed for a fixed duration by the president, with the primary responsibility of safeguarding the financial system's stability, rather than promoting the goals of the incumbent government or the political agendas of officeholders. Despite Sheila Bair's attempts to create a body to oversee systemic risks, the Dodd-Frank Act was passed with measures that reduced the council's impact by requiring the Treasury Secretary to lead it rather than an independent individual, and by limiting its authority to regulate the financial sector comprehensively. The creation of these rules emerged from thorough and prolonged discussions among principal financial oversight bodies, culminating in regulations that are exceedingly complex and can span several hundred pages. Bair emphasizes the crucial takeaway from the crisis: an independent entity, shielded from political pressures and endowed with the power to moderate the exuberance of the financial industry when needed, is vital to avert a repeat of the mistakes and misconduct that precipitated the economic downturn.

Arguments supporting the disbandment of the Office of the Comptroller of the Currency.

Sheila Bair argues that the Office of the Comptroller of the Currency (OCC) has so poorly overseen financial institutions like Citigroup and Wachovia that its regulatory functions are so lacking it warrants being disbanded. Bair conveys her concern about the OCC's tendency to prioritize large banks and its continuous endorsement of softer regulations, using its resistance to initial modifications aimed at preserving home ownership for those with troubled mortgages as a prime example of its consistent prioritization of industry interests above public welfare.

Sheila Bair suggests strengthening the oversight system by recommending that every bank handling insured deposits be under the supervision of the FDIC. Regulatory oversight might be modified to allow for less frequent examinations of larger and more stable entities, whereas smaller organizations would undergo more rigorous monitoring. Institutions with a history of problems would, as a result, be subject to more stringent regulatory scrutiny and undergo more thorough inspections. Sheila Bair advocates for the Federal Reserve to supervise major banking organizations and important nonbank institutions, citing its independence and crucial role in upholding the stability of the financial system. Sheila Bair underscores the duty of the FDIC to protect the interests of individuals who hold insured deposits in banks. She concludes her book by urging Congress to contemplate dissolving the Office of the Comptroller of the Currency and stresses the necessity for President Obama to appoint a head who understands the necessity of valuing the public's needs over the desires of major financial entities.

Recommended Merger of the SEC and CFTC

Sheila Bair suggests merging the agencies responsible for securities markets and commodity futures into a single organization to enhance the oversight of financial markets that encompass both equities and futures trading. Bair argues that by merging the knowledge from different agencies, a more unified organization will emerge. This strategy would not only diminish costs but also facilitate the redirection of resources to improve staff wages, which in turn would attract more qualified professionals.

The case for the Securities and Exchange Commission, which oversees the securities markets, and the Commodity Futures Trading Commission, which is responsible for commodities markets, to have independent financial resources.

Sheila Bair recommends that the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) should be financially independent to shield them from external political pressures and the influence of industry lobbyists. She notes that unlike other financial regulatory agencies, the budgets for these organizations are set by congressional appropriations committees, which are frequently targeted by industry groups seeking to weaken regulatory actions or obstruct the provision of funds necessary for creating new regulations. She contends that the ability of either agency to adequately supervise financial markets is severely compromised by their constant struggle for survival. Additionally, she notes that congressional committees with jurisdiction over financial issues, rather than the appropriations committees, are much better suited to providing regulatory oversight of both agencies.

Other Perspectives

• Increased capital requirements and insurance premiums could potentially reduce the profitability of banks, which might lead to higher costs for consumers and reduced credit availability, especially in times of economic downturn.
• The 8% capital adequacy ratio, while intended to ensure stability, may not be suitable for all banks, particularly smaller ones with different risk profiles, and could stifle their growth and competitiveness.
• The focus on stringent regulations and oversight might not fully account for the dynamic and innovative nature of financial markets, possibly hindering the development of new financial products and services.
• The dissolution of the Office of the Comptroller of the Currency (OCC) could lead to a loss of specialized expertise and a potential gap in the oversight of national banks, which the OCC is specifically designed to regulate.
• Merging the SEC and CFTC could result in a loss of specialized focus and expertise in their respective areas, potentially leading to regulatory blind spots.
• The proposal for the FSOC to be led by an independent chairperson with a fixed term could introduce its own set of challenges, such as reduced accountability to elected officials and the potential for regulatory overreach.
• The argument against bailouts and for private sector absorption of losses does not fully consider the systemic risks that the failure of large institutions might pose to the broader economy.
• The push for market-oriented solutions for CIT and GMAC overlooks the unique circumstances of each case and the potential broader economic implications of their failure.
• Advocating for independent financial resources for the SEC and CFTC might not address the root causes of regulatory inefficiency and could lead to budgetary excesses without proper congressional oversight.

The author concentrated on promoting reforms to the mortgage issuance process and addressing the widespread problem of home repossessions.

This section of the book emphasizes Bair's commitment to decreasing foreclosure rates through modifications to problematic mortgage contracts and her willingness to confront organizations responsible for mortgage servicing and regulatory oversight to achieve her objective. Bair suggests that a well-rounded approach to adjusting loans would benefit homeowners in keeping their homes and also provide substantial economic advantages to the mortgage handlers and investing institutions.

Encouraging loan servicers to modify the conditions of lending agreements.

Bair details her comprehensive work to initiate a strong governmental program mandating significant loan servicers to adjust mortgages in distress. She details a variety of meetings and dialogues convened by the FDIC, which brought together mortgage servicers and investors, underscoring the mutual benefits of creating a program to modify loans and tackling some investors' worries about possible adverse effects on bondholders. She also describes a proposed initiative led by an agency responsible for insuring bank deposits, designed to motivate investors to adjust loans exceeding the value of the underlying properties by offering government-backed safeguards against further defaults, thus providing a motivation to address the economic challenges leading to early foreclosures rather than anticipating a natural market correction, such as a recovery in the housing market or chances to refinance.

Initial talks focused on promoting the exchange of loans between those who service them and the investors.

Bair recounts her efforts beginning in 2007 to pressure the nation’s largest banking organizations to modify unaffordable loans held by low-income borrowers. At the time, mortgage-related delinquencies were surging across the United States, particularly those associated with subprime and hybrid-ARM mortgages, which allowed borrowers—often from lower-income brackets—to obtain loans with initially low payments that would, however, increase significantly once the initial period concluded, frequently resulting in payment levels that became unaffordable.

Despite these trends, other financial regulatory agencies had barely started initiating actions to encourage their banks to modify these particular types of mortgage contracts. The entities responsible for managing these services, often subsidiaries of banks, generally preferred to commence with the repossession of property, despite situations where modifying the terms of the loan might have been more advantageous financially for everyone involved. In early 2007, Bair began a series of discussions with key figures in the mortgage sector to encourage loan modifications, with the goal of averting the looming wave of home foreclosures. In the course of those conversations, it was evident that the sector had both the lawful authority and the duty, which arose from contractual agreements, to modify the conditions of a mortgage. The securitization process required that those managing the mortgages focus on maximizing returns for investors, a directive that was at odds with the assertion that investors with senior stakes were legally or contractually prevented from consenting to loan modifications due to potential reductions in their profits.

Disputes arose due to varying levels of concern among investors.

Despite recognizing that the mortgage industry had both the capability and the obligation to adjust mortgages, Bair was disturbed by their consistent inclination to proceed with property repossessions instead of altering the loan agreements. This was occurring as numerous individuals within the industry minimized the significance of aiding homeowners in financial distress and expressed concerns about possible legal challenges from certain investors, particularly those in the highest-ranking tiers, who could potentially see their returns diminished should there be alterations to the loan conditions. Sheila Bair and her colleagues at the FDIC recognized the diversity of opinions among these investors.

Other Perspectives

• Loan modifications may lead to moral hazard, where borrowers may intentionally default to benefit from more favorable loan terms.
• Governmental mandates for loan modifications could interfere with free market principles and lead to unintended consequences in the mortgage industry.
• Encouraging the exchange of loans might complicate the securitization process and affect the liquidity of mortgage-backed securities.
• Pressuring banks to modify loans could potentially undermine the banks' financial stability if not managed carefully.
• There is a risk that loan modifications might not be sustainable in the long term, leading to re-defaults and further financial distress for homeowners.
• The focus on modifying loans for low-income borrowers may not address the root causes of the mortgage crisis, such as the lack of financial literacy or systemic issues within the housing market.
• The assertion that the industry has an obligation to adjust mortgages could be contested on the grounds that the primary duty of servicers is to the investors, not the borrowers.
• Disputes among investors regarding loan modifications could reflect legitimate concerns about the impact on their investments and the precedent set for future lending practices.