Bill talks with financial expert Sheila Bair about the lawlessness of our banking system and the prognosis for meaningful reform. Bair was appointed in 2006 by President George W. Bush to chair the FDIC. During the 2008 meltdown, she argued that in some cases banks were NOT too big to fail — that instead of bailouts, they should be sold off to healthier competitors. Now a senior adviser to the Pew Charitable Trusts, Bair has organized a private group of financial experts including former Fed chairman Paul Volcker, former Senators Bill Bradley and Alan Simpson, and John Reed, once the chairman of Citicorp, to explore ways to prevent the banking industry from scuttling reforms created by the Dodd-Frank Act.
“I worry that the public is getting cynical,” Bair tells Moyers. “One of the reasons I started the Systemic Risk Council is I feel the special interest lobbying is, in a calculated way, trying to slow down reform, complicate reform, water reform down. And the public loses interest — they become cynical about if the regulators in Washington can fix any of this, and they don’t exert counter political pressure to get meaningful reforms in place.”
BILL MOYERS: Welcome. Every day brings another reminder of the awful unfairness that besets our country. Here's the latest that leaped out at me: "Rolling Stone's" report on “The Fallen” - the sharp, sudden decline of America's middle class. In it Jeff Tietz describes a handful of everyday people made homeless, now living out of their cars in church parking lots in southern California. Once upon a time, one of them, Janis Adkins, had a plant nursery business in Utah that grossed $300,000 annually. But two years after the financial meltdown in 2008 sales had dropped by half and the value of her land even more. She tried to refinance, but four banks turned her down flat – four banks.
Makes you wonder about all those big time bankers at the other end of the scale – the ones who came running to the government and taxpayers for bailouts worth hundreds of billions of dollars, then scooped up big bonuses and perks for themselves and went back to business as usual. And what a business! You've surely been hearing about the newest scandal in banking centering on Barclays Bank in London and something called Libor.
That stands for London Interbank Offered Rate and it involves a group of bankers who set a daily interest rate affecting trillions of dollars of transactions around the world. Your home mortgage, your college debt, your credit card fees - these could have been affected by Libor.
It turns out some of those insiders were manipulating the index for their own gain, to make their bank look better off during the financial crisis, to lower their borrowing cost and raise their profits. Picking our pockets, lining theirs. "The Economist" magazine describes it as “the rotten heart of finance.”
Here are some of the emails that have come to light: One banker in on the fix writes another, "Dude. I owe you big time! Come over one day after work and I'm opening a bottle of Bollinger." And another recruiting a colleague in the fix wrote, "If you know how to keep a secret I'll bring you in on it." After being asked to falsify information, an employee writes, "Always happy to help."
Another trader jots down in his calendar, "Ask for High 6M Fix," to remind himself to play with the numbers the next day.
Caught with its hand in the cookie jar Barclays agreed to pay nearly half a billion dollars in fines to British and American authorities.
And as many as 20 other megabanks are now under investigation, including Citigroup and JPMorgan Chase. One MIT authority on finance says, "This dwarves by orders of magnitude any financial scams in the history of markets."
All this explains why I wanted to talk to Sheila Bair. She's a hero to many of us for her long fight for an honest and accountable banking system. After years working on Capitol Hill, at the Treasury Department, the New York Stock Exchange and the Commodity Futures Trading Commission she was appointed by President George W. Bush to head the Federal Deposit Insurance Corporation, the FDIC.
Now as Senior Advisor to the Pew Charitable Trusts, Sheila Bair has just organized a private group of financial experts called the Systemic Risk Council. Among its members: former Fed chairman Paul Volcker, former senators Bill Bradley and Alan Simpson, John Reed, once the chairman of Citigroup, and Brooksley Born, the former CFTC chairman who back in the 1990s accurately predicted an economic meltdown.
Its mission: to prevent the banking industry from scuttling the reforms created by the Dodd-Frank Act and hopefully prevent another crash. She has a book coming out in late September about the need for reform called "Taking the Bull By the Horns." She's also written two books for children about money and entrepreneurship: "Rock, Brock and the Savings Shock" and "Isabel's Car Wash." Sheila Bair, welcome.
SHEILA BAIR: Thank you, happy to be here.
BILL MOYERS: If you were trying to help some of those young people that you write for understand this business called Libor how would you begin? What's the “once upon a time?”
SHEILA BAIR: I guess I would try to explain to them that when you borrow money there's something called an interest rate which is your cost of borrowing money and there are different mechanisms for setting what that interest rate should be. And one of them is something called Libor. And we are discovering now that a lot of unscrupulous people were manipulating that interest rate apparently to line their own pockets. And that is something that should be severely punished.
BILL MOYERS: If there's any, is there one thing in particular you've learned so far that caused you to hold your breath?
SHEILA BAIR: This one caused to hold my breath, I mean, you know, Libor always troubled me. There's always been judgment associated with what some people call a fudge factor, there's always been judgment associated with Libor, the Libor survey. You were supposed to look at various factors, what your recent transactions were, what other transactions are, what the market conditions are. You can use judgment. You don't have to tag it exactly to a transaction.
But using judgment, and have a potential bias in judgment is profoundly different from open collusion with other banks to lowball or highball the rates to profit. I mean, these emails quite acknowledge that they were trying to manipulate the rate to benefit their trading position. And what's ironic is the trading desk of these banks were probably hurting the part of the bank that does the bread and butter lending.
Because if they were lowering their interest rate that would reduce the interest rate on loans, a lot of loans that the lending part of the bank conducts to benefit the trading desk. So they were even hurting themselves internally by doing this.
BILL MOYERS: So there are real world consequences--
SHEILA BAIR: Yes, yes, there are. Absolutely, there are.
BILL MOYERS: --to this? I mean, "The New York Times" reporting, "As unemployment climbed and tax revenue fell the city of Baltimore laid off employees and cut services in the midst of the financial crisis. Its leaders now say the city's troubles were aggravated by bankers' manipulation of this key interest rate linked to hundreds of millions of dollars the city had borrowed." So there are real world--
SHEILA BAIR: There are absolutely real world consequences to this. There are counterparties through all these swap transactions which is what they were trying to manipulate, and those counterparties were being hurt by it, absolutely.
It's shocking. It should be punished very severely. And I think there probably is going to be more information coming out about it so I think it's just starting, I don't think it's over.
BILL MOYERS: You say they should be punished, but the Justice Department the other day in this settlement with Barclays let the bank off if it paid the fine. So that doesn't suggest severe punishment, does it?
SHEILA BAIR: Well, you know, I think another thing that troubles me about all the enforcement actions that are brought-- and there haven't been enough of them, but they generally, just, they tag the shareholders, right? So Barclays Bank, the shareholders ultimately pay this. There should be punishment of these traders and higher up in management depending on how high it went.
There should be, not only clawbacks of compensation but severe civil monetary penalties against the individual traders. Make them pay out of their own pocket. It doesn't-- it's not much of a deterrent for them if their bank's paying for it. The consequences of their mistakes, not them personally. So I hope there is more of that. There should be certainly be more civil actions against the individuals and there may be criminal activity involved here too.
BILL MOYERS: Let me play for you something said the other day by the former regulator, Bill Black, whom you may know. He's a hawk on holding banks, bringing banks to the bar of judgment. Take a listen.
BILL BLACK: What you’ve just seen is a cartel in operation, which -- not maybe -- did distort Libor for the benefits of the largest banks in the cartel. It is the largest rigging of prices in the history of the world, by many orders of magnitude.
BILL MOYERS: That's quite an indictment. Barclay and possibly, he says, a dozen other banks operated as a price fixing cartel for their own financial benefit. What does that tell us about our financial system?
SHEILA BAIR: Well, I don't think we know all the facts yet. But certainly we do know that from 2005 to 2008 there were documented instances of Barclays according to Barclays traders colluding with other banks to influence the Libor rate. I think just that by itself shows a culture of greed, of people feeling they're above the law, above ethical standards, basically justifying anything to make a buck. And I don't think-- I don't want the government setting interest rates, I don't want that at all.
But I do want government regulation of how the market sets interest rates. And there were red flags about Libor back in 2008 and then the simple fix would have been to say that if you submit a rate to Libor it has to be based on an actual transaction that you actually borrowed money at that rate not your best guess, you know, today what I'm going to pay. 'Cause the process itself opened itself up to abuse and then it completely spiraled out of control. So that, you know, that's one of the main thing's that's frustrating about this crisis.
So many of the problems, the fixes were so obvious and we just didn't have the political will and fortitude to just tell the banks, "You've got to stop doing it this way. You've got to, you know, start basing this on an actual transaction." The fix was not hard, it was just never done.
BILL MOYERS: So humor me for a moment. I'm the proverbial Martian coming to earth sent by Martian control to report back home on what I can learn about this banking and political culture down here on this weird planet. And I come to you for help because you have this interstellar reputation for telling it as it is. How would you sum up this financial and political culture so that I can give a believable report back up there?
SHEILA BAIR: Well, I think we lost our way in the mid-2000s between free markets and free-for-all markets. We forgot that you need some basic rules and standards to regulate financial markets. We deferred too much to bank judgment. Libor is one example where we left it to banks to themselves to set important benchmarks.
So we need to rein that back in. And the things that worries me is that Washington, not withstanding all of this we still, and this horrible crisis and the horrible economic devastation that it has wreaked on so many individuals, we still don't have the political will and fortitude to get tough and say, "You can't do it this way anymore. I'm sorry if you're making money this way, but this is not a good, safe way to make money. You need to stop these types of activities." All the reform is still just around the edges. We just don't seem to have the fortitude to stand up to these banks and tell them they need to start doing business differently, profoundly differently.
BILL MOYERS: Where is the indignation index in this country?
SHEILA BAIR: Where's the anger? That's right, I know. I think I worry that the public is getting cynical. I think there's been one of the reasons I started the Systemic Risk Council is I feel the special interest lobbying is in a calculated way trying to slow down reform, complicate reform, water reform down. And the public loses interest, they become cynical about if the regulators in Washington can fix any of this and they don't exert counter political pressure to get meaning reforms in place.
BILL MOYERS: There is a group at Treasury supposed to be doing this.
SHEILA BAIR: They are.
BILL MOYERS: The Financial Stability Oversight Council led by Timothy Geithner, and wasn't JPMorgan losing billions of dollars on its risk under the eye of the Office of the Comptroller of the Currency? I mean, if their regulation, their oversight failed, what makes you think outsiders can have impact?
SHEILA BAIR: Well, I think that's a very good question. I think there's a real problem at OCC. They are the main regulator for the largest banks. I think there's a very difficult cultural issue at the Office of the Comptroller of the Currency in terms of whether they protect the public or whether they protect the banks. If they're trying to protect the banks they're going to miss things because their perspective is going to be wrong.
If they're in, you know, and these banks have huge government exposure with all their insured deposits. The OCC in particular has a fiduciary obligation to protect the government purse, to protect the government exposure from these insured deposits. And the JPMorgan Chase trading, that was being done with excess deposits. That they were playing around with insured deposit money.
And yes, they have enough shareholder capital to absorb the losses, so this is not going to be an event that costs the government money. But it's problematic because these are clearly inappropriate risks that we're taking with government-backed funds that should never have happened. Never should have happened in the bank and the OCC should not have let it happen.
BILL MOYERS: But given how egregious and consistent and repetitive all these scandals are, how can we say there’s no political will? Why is there no political will?
SHEILA BAIR: I think the political money is corrupted. The Congress, I think in fairness to regulators, when regulators try to get too assertive they frequently get batted down by Congress. We're seeing it now the CFTC again, the derivatives regulator, that is the one that unearthed this Libor scandal and is working very hard to tame the derivatives market which is-- it's a terrible source of systemic risk. And the House is trying to back their funding, whack back their appropriations so they won't have enough money to carry out their responsibilities. So I just--
BILL MOYERS: Explain that.
SHEILA BAIR: I know, I don't understand it--
BILL MOYERS: You've been an insider.
SHEILA BAIR: I don't understand it. I think, you know, when in Dodd-Frank one of the chapters in my book is called “The Orwellian Debate.” And it's about the way financial reforms, the discussion about financial reforms were turned completely upside down. So things that would help stabilize the system were transformed into things that would hurt, you know, people when it was just the opposite.
You get this now trying to raise capital standards. Banks need to put more of their own money at risk. That would help tame risk taking if they stopped using so much borrowed money and used more of their own money in their operations. That's what raising capital is all about.
But the banks say, "Oh, you raise capital it'll hurt our ability to lend. It's going to raise, you know, costs for your mortgage or whatever." That's nonsense. But you know, say it often enough it becomes true. So I think there's been a calculated effort to confuse the dialogue, to confuse the public about what is in their interest to do. And people who know and understand these markets really need to stand up and speak the truth and let people know what needs to be done.
BILL MOYERS: Despite all of this there are still in Washington some politicians who cling to the free market ideology. If I were one of them and I was sitting here with you how would you try to walk me back to earth?
SHEILA BAIR: Well, we did not have a free market in 2008. I am sorry, but we had crony capitalism in 2008 and 2009. We bailed out basically anybody over $100 billion. We said the taxpayers are going to make sure you don't fail no matter how stupid you were. So that's not free market. And I think as a Republican I view myself as a markets-oriented person. I don't ever want to go back to that kind of situation again.
There are important new authorities in Dodd-Frank that will make sure we don't do bailouts again, that mismanaged banks do go into a bankruptcy-like process where they and their shareholders and their creditors take the losses, where their boards lose their job, their managers lose their job, their salaries are clawed back. That is all in Dodd-Frank. And so for people to say, "I'm a market-oriented person," but not want the market to punish mismanaged institutions, that -- again that's Orwellian. That's just upside-down. That's not a market. You have to suffer the consequences of your mistake if you have a market.
BILL MOYERS: But I think we're at some kind of dysfunctional crisis here. A Gallup survey done last year reported that Americans' trust in banks is down to an all-time low of 18 percent. And a recent Pew research survey reports only 22 percent of Americans have faith in the government in other words to do this, people don't trust the financial industry and they don't trust the government to do the right thing in regulating the industry. I mean, isn't that a recipe for paralysis and eventual decay?
SHEILA BAIR: It is. It saddens me greatly. I don't blame them for being cynical. I really don't. I fought for five years, made a lot of enemies.
But I did what I thought was right. And we did make a difference in a number of areas, not as much as I would have liked, but we did stop a lot of bad things from occurring.
BILL MOYERS: This is really why I wanted to talk to you, because you never really got your due. You wanted to break up the big banks, some of them. You resisted bailing all of them out. You tried to warn everyone about the abuse of sub-prime mortgages, you saw the impending housing crisis and sounded the alarm. You tried to put a stop to predatory lending. You were, if I may say so, the champion of ordinary people, and over and over again, you were right and you lost. So people are saying, “What can we do? What do we do? Do we take to the streets? Do we--
SHEILA BAIR: Well, we can put people in who are independent of the financial sector. And I do want to say it's not all banks. I hope people do differentiate. There are smaller banks out there and not all the big banks are completely complicit in all of this. So I think people should differentiate. But there is a cultural problem, no doubt. And I think it's more in the trading side, on the securities side of these very large financial organization than the traditional commercial banking side.
BILL MOYERS: Is Dodd-Frank a good thing?
SHEILA BAIR: We are better off having it than not having it. We absolutely are. There are things I don't like about Dodd-Frank. Like any piece of legislation it's a compromise. I worked on the Hill, you know, they say legislation's like sausage so you get a lot of stuff in there. But we're better off having it than not having it. A lot of it it's up to the regulators in terms of how they implement it. And I think there have been some strengths and weaknesses. There's not been enough coordination. I think the Financial Stability Oversight Council, which is comprised of all the individual regulators, needs to exercise more leadership in coordinating these rule makings and prioritizing them. I had actually suggested the Financial Stability Oversight Council when I first testified on Dodd-Frank before it became law.
But I had envisioned an independently chaired council that had its own rule writing authority to write system-wide rules. So you end this interagency negotiation that the industry frankly exploits, I mean, they will play-- try to play one regulator off of another. So that's one of the things in Dodd-Frank I'd like to see changed. But not withstanding that, FSOC, this council does have significant powers and they need to exercise leadership in getting these rules done.
BILL MOYERS: Is it even possible to regulate these big banks now?
SHEILA BAIR: Well, that's a good question. I think they are too complex. I think the complexity is more of a problem than size. A bank, even a very large bank that takes deposits and make loans, I really don't worry that much about them. But a bank that's into investment banking and securities trading and derivatives market making and insurance in addition to doing the bread and butter commercial banking, I think those are too complex to manage.
At a minimum, I think there's regulatory authority to get this high risk activity outside of the insured bank, the bank where there's direct government exposure with insured deposits. It's called ring fencing, but I wish for insured banks we would just keep their business to making loans, you know, payment processing is legitimate, trust activities, those are the kinds of traditional things that commercial banks do.
This derivatives market making, securities trading, investment banking, all of that should not be done inside of an insured bank. Insured deposits should not be used for that activity. Whether that activity has economic worth or not we can debate another day.
But at least make people who want to do those types of high risk activities go to the market, convince private investors to fund it. Don't use insured deposits that are government-backed and there's no market discipline whatsoever in that. Don't use those types of government-backed funds to take these kinds of risk.
BILL MOYERS: So is your new group going to try to-- going other advocate for these changes?
SHEILA BAIR: Well, I hope so. We're certainly going to-- we'll be presenting these issues. I mean, Too Big to Fail is front and center. And again I think Dodd-Frank, just so we don't go too far into these fear, I think Dodd-Frank has started making progress in ending Too Big to Fail. The funding costs, the costs to these very large institutions of issuing debt, funding themselves, those costs have gone up.
Their ratings, the credit ratings have gone down. The credit rate agencies as well as bond investors are starting to recognize that there's a reduced likelihood that they would get bailed out if there's another problem. So that's a positive sign.
If you increase their funding costs you're going to constrain their growth right there. But there's certainly additional measures that can and should be considered and there are a lot of good proposals out there, some on the Hill, Senator McCain has one, Tom Hoenig at the FDIC has one, Senator Brown has one. So I think we'll certainly, we'll be discussing all of those and hopefully taking a position on that, yeah.
BILL MOYERS: How do you break up these big banks when they're down to just six banks controlling so many of, so much of our assets?
SHEILA BAIR: Well, that's a real problem. And I think one thing that regulators could do as part of the-- one of the things Dodd-Frank required is for these large banks to submit what we call living wills, so they’re basically breakup plans. So if you get into trouble how can the government break you up and sell you off in an orderly way without broader systemic ramifications?
The problem is these banks have thousands of legal entities. The organizational structure itself is so complex, I've heard people call it a poison pill. How can you break them up? You can't even figure out how they're organized or structured. So simplifying those legal structures and dividing up the legal structures in accordance with business lines to facilitate a breakup I think would be very good market information to get out there.
'Cause I think, you know, shareholders, that's another possible pressure point on this. Shareholders are getting frustrated. The megabanks do not deliver good returns at all and they may well be-- I think they are worth a lot more if they were broken up into pieces. But again shareholders cannot be empowered to break them up if they can't figure out what the organizational structure, how to do it.
BILL MOYERS: The shareholders in Barclays and any other complicit banks are going to be paying for this, right? Because there's—
SHEILA BAIR: They, well, yeah. They are--
BILL MOYERS: --going to be huge, billions of dollars in--
SHEILA BAIR: That's exactly right. This is going to be a terrible consequence for Barclays shareholders, I can only assume. And again, you know, the risk management controls, the internal controls are so much more challenging when you're dealing with an institution of this size and complexity. Break them up, you know, have a commercial bank, have an investment bank, have a broker dealer. It's a lot easier to manage.
BILL MOYERS: Why do you keep going?
SHEILA BAIR: Well, I care about it. I mean, I think, you know, the human face of this tragedy was something that, still troubles me. And the fact that we never really dealt with the root cause of the problem, the mortgages, and we still have so many issues there. You know, the interface between this risk taking and the real world consequences that it had for Main Street folks is something that I find very troubling.
And maybe-- I view myself as a capitalist. I know that's a bad word these days. But I do believe in capital markets if they're appropriately regulated. You need some basic rules and the rules need to make sure that when people do stupid things they suffer the consequences, not the taxpayers, not their customer, they, they suffer the consequences. And that's the kind of system I would like for us to have again. And I do care about that deeply. I care about our markets and I want them to function correctly again, but they're not functioning correctly now.
BILL MOYERS: Do you see the increasing and vast inequality that's opened up between the top and the bottom in America and between the top and everybody else, do you see it connected to what we've been talking about, to the banks?
SHEILA BAIR: Yes, I do. I think with the inequality in income you've also seen inequality in debt. So the higher income people have much lower debt loads than the lower, middle income folks. So again this is something that needs to be corrected. We need to reinstate a culture of savings and wealth accumulation and have a financial services industry that supports wealth accumulation, not wealth stripping.
You know, some of it's in the tax code though, too. I think there do need to be the favorable treatment for capital gains. No, I don't think we need it. I think people who work for a living, what they do is just as valuable as people who invest for a living and, you know, why should, if you're a hedge fund operator you pay 15 percent and if you're a young person discovering the cure for cancer you're paying 35 percent on your income? I don't get that. So, you know, I think equalizing, making the capital gains on parity with income or income produce from work is something that could also help adjust this income inequality.
BILL MOYERS: I grew up surrounded by Republicans like you. You may be the last one standing.
SHEILA BAIR: Well, Reagan, you know, '86 we got rid of it, of the preferential treatment for capital gains. There needs to be some transition, you know. But it's-- there's really no-- I've looked at this a lot. There's no credible economic literature that says that the slower capital gains tax produces jobs, it's just not there. And it does produce a terrible income inequality. And it skews incentives.
So what do you want to do? Do you want to do, you know, be a professional investor and get your 15 percent rate or do you want to work for a living? I mean, why do we want to incentivize, we have too much investment dollars out there frankly already. And we don't have enough work. So I think realigning these tax incentives are very important. And this would-- I think that's a more direct way. You know, the millionaires tax is, that just adds more complexity to the tax system. And your problem is the capital gains preferential treatment.
BILL MOYERS: Many years ago when I was in Washington, we worked effectively with moderate Republicans. And you can't find many like you now. What do you think has happened to your party?
SHEILA BAIR: You know, I think they're still there. I do think they're still there. But it does trouble me. You know, I worked for the Senate in the '80s, for Bob Dole. And I look back at what we did during that time period. We did the '81 tax cuts, the Deficit Reduction Act, the '83 Social Security Compromise, the '86 Tax Reform Act, so much got done.
So I look at then and I look at now and I scratch my head. I think, and frankly this is both parties. I think there's just this rampant short term-ism that's kind of taken over decision making. And people are worried about their election cycle and not making their mark on history, not being statesmen, not governing the country.
There's this wonderful line in "The Iron Lady" movie when Margaret Thatcher, an elderly Margaret Thatcher is approached by a young woman and she thanks her for the great role model she was. And the elderly character played by Meryl Streep says, "Well, you know, back then it was about doing. Now it's about being." And it does, it seems to be about having the job, having the title, having the office but not about doing anything with those government responsibilities that you're entrusted. And I think that is on both sides of the aisle unfortunately.
BILL MOYERS: But Bob Dole and even Ronald Reagan believed that government policy made a difference people's lives.
SHEILA BAIR: That’s right.
BILL MOYERS: He cut taxes, he raised taxes once he saw the debt. That's gone.
SHEILA BAIR: But he did it in the right way, he took away loopholes and special interest provisions. Which is exactly what we should be, you know, raising revenue through closing loopholes, I think. And everybody says this is what needs to be done. But getting the people to make the decisions and take on the special interests and, "No, I'm sorry, you're going to lose your special tax break, but everybody else is too." Nobody's willing to show that kind of courage and say this is what's best for the country and this is what we're going to do.
BILL MOYERS: How can my viewers follow your work?
SHEILA BAIR: You go to the PewTrust.org website and you can find a link to the SRC, it's the Systemic Risk Council. And we will be putting there our Call to Action. And our press release and our members and our Call to Action is all on the website. We'll be making additional pronouncements over the coming weeks and those will all be publicly released and go on our website as well.
So I hope we can be a source of information too for people who are confused about what we believe are the appropriate reforms that need to get done, reforms that will help them. And I think the public education function of this group is going to be very important.
BILL MOYERS: Sheila Bair, will you come back when your group is up and running and full steam and let's talk about what's happening?
SHEILA BAIR: I would be happy to do that. That would be great.
BILL MOYERS: It's been a pleasure to have you.
SHEILA BAIR: Thank you.