Former FDIC Chair Sheila Bair says that she did the best “with the tools we had” during the financial crisis.
But speaking at Yahoo Finance’s All Market Summit in New York on Thursday, Bair says there are a few things that she would have done differently if she could go back and redo 2008.
When IndyMac, a California bank, failed in the summer of 2008, it closed faster than the FDIC had projected, which Bair attributes to comments made about the bank’s position by Sen. Chuck Schumer (D-NY), which precipitated a bank run on uninsured deposits.
With a faster than expected failure projected, Bair had to perform an accelerated closure, which was the first major bank to close during the financial crisis. Unfortunately, it was just a bit too accelerated.
“I succumbed to the wishes of the primary regulator, the Office of Thrift Supervision, to close it before regular business was over,” said Bair. The day was a Friday afternoon, a time where people frequently go to the bank to deposit pay or take money out for the weekend, so the move was disruptive.
“Nobody had experienced a significant bank failure in quite some time,” said Bair. “It was never repeated. All the failures after that went very smoothly. Nobody had interrupted access to their insured money.”
‘Things I wish the country had done differently’
Past the FDIC’s behavior, Bair has a few broader regrets about how the country handled the financial crisis, for which she noted, “there is no playbook.”
According to Bair, the recovery effort was too “bank-centric,” and it should have done something far more radical, like the crisis of the 1930s — in which the National Housing Act of 1934 stemmed foreclosures by creating the Federal Housing Authority. Not doing this, she said, was a huge mistake.
“I think we would have had a much more even recovery if we had forced lenders to take losses,” Bair said. “A lot of people say, that’s bailing out homeowners and rewarding risk-taking that they shouldn’t have done. Well guess what? We certainly did that to the banks. We could have done it more for homeowners too.”
Bair said that had they taken this approach, it could have stemmed the bleeding and eased the crisis’s impact on the economy, labor market, and families.
“What was really driving the recession was the huge hit to consumer spending because of underwater mortgages,” said Bair, who noted that every dollar was diverted to cover mortgage payments. “By doing the write down [of consumer mortgages] we would have given people more affordable payments and provide flexibility.”
Bair said she pushed for mortgage modification protocols and help for consumers, but these measures were effectively pushed off the table by the financial arm of the business community. Meanwhile, that same community pushed for and received bailouts from the government, a measure about which much of the general public still remains bitter.
“Freeing up all those underwater homeowners with unaffordable mortgages — providing relief on that level — I think could have been sold if we were more aggressive and certainly would have been more help to the economy,” she said.
“Frankly, we should have also straightened our spine and stood up to the adverse opinion, the way we did [to the general public] with the bank bailouts,” she continued. “Because this, I think, had a much more detrimental effect on Main Street.”
Since then, Bair noted, it’s been a very uneven recovery for Main Street.