MReport September 2015 - Cool Under Pressure

TheMReport — News and strategies for the evolving mortgage marketplace.

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Th e M Rep o RT | 15 cover story A s Federal Deposit Insurance Corporation (FDIC) chairperson from 2006 to 2011, Sheila Bair felt the pressures of the financial crisis squarely on her shoulders. Rather than buckle under this immense responsibility, she rose to the challenge and in the process racked up an impressive number of accolades, including being named the second most powerful woman in the world by Forbes (2008/2009) and one of Time magazine's 100 most influential people in 2009. Now, as she is poised to assume her role as the first female president of Washington College, Bair took a moment to talk with the MReport—giving us an insider's look at the high-profile decisions she made, as well as what she sees for the future. M // Your book "The Bullies of Wall Street" was written for the young adult audience and examines the ways in which millennials continue to be affected by the financial crisis. What inspired you to reach out to this demographic? Bair // I think it's important for young people to understand what happened and how it impacted them, which is why I used stories that were inspired by true life events. I thought this kind of nar- rative was the best way to depict, in real life terms, the impact that the crisis had on young people. I wanted them to understand what happened because I want them to do better. I was seeing a lot of what was going on in the years leading up to 2008—the greed, the mistakes—and I wanted something in the historical record. I hope this will be an educational tool that finds itself in school libraries 20 years from now. If young people understand what happened and the underlying causes, hopefully they won't fall into the same kind of mistakes that my generation made. M // When explaining the financial crisis to younger americans, what do you site as the origins? Bair // In terms of the emotional behavior, it was short-term think- ing. In terms of financial behavior, it was that everybody was bor- rowing too much money. It was a crisis waiting to happen. There was a lot of head-in-the-sand at- titude. Excessive borrowing was making the system less resilient. Too many debt-laden banks and households had no cushion to fall back on when the housing market turned. Easy credit also fueled the asset bubble. By making credit so widely available, we dramatically increased demand. That increased demand led to home prices rising. M // in addition to pointing out what led to the financial crisis, you have also made the criticism that the institutions that led to the crisis never had to answer fully for their actions. Can you discuss this? Bair // I do think there has been a lack of accountability. The people running the high profile institutions that were driving this kind of very weak, if not fraudulent, mortgage lending were never held to account. And no, I don't think that was ever really addressed. The key economic incentives that led this behavior in the securitization market have certainly not been addressed. The banks have de-levered somewhat, but it's not enough. I think that the capital requirements are still too weak. We've completely backed off on risk retention for securitizations, which again would help address the skewed economic incentives that led to all this unaffordable lending. We've also pretty much thrown in the towel on requiring down payments. That might sound harsh for young people who are just starting off and haven't accu- mulated savings. I think for first- time home buyers there is some justification for having very low down payments along with very careful underwriting. But low or no down payments should not be the norm. Low down payments are not in the borrower's interest because if home prices decline, they are quickly underwater. Then they can't get out of that mortgage; they can't move; they're stuck. M // in your role as FDiC chairperson, you were fighting for the greater accountability that you just spoke of. What do you feel are some of your most important initiatives during your time serving as FDiC Chairperson? Bair // I'm very proud of the contribution we made. People kept faith in the FDIC. They left their in- sured deposits in the banks. Insured deposits actually increased during the crisis. The bank failures were handled smoothly. We guaranteed access to insured deposits within one business day if a bank failed. I'm very proud of the way the agency efficiently handled hundreds of bank failures. They were un- eventful for main street depositors. I'm proud of the work we did fighting off the lower capital requirements. That was an ongo- ing battle when I got there. Other regulators were pushing for the new capital standards based on banks' internal models, which all of our studies showed would dramatically reduce capital levels at the largest financial institutions. Ironically, the SEC implemented these new capital rules with investment banks, which is one of the reasons we saw investment banks so highly leveraged going into the crisis. Stopping it for "people kept faith in the FDIC. They left their insured deposits in the banks. Insured deposits actually increased during the crisis … I'm very proud of the way the agency efficiently handled hundreds of banks failures. They were uneventful for main street depositors."

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