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Tags: Bair | Dodd-Frank | Yellen | derivatives

Sheila Bair on C-SPAN — Part V

By    |   Friday, 09 August 2013 11:59 AM

In this concluding segment of Sheila Bair's interview with C-SPAN's Greta Brawner, the former FDIC chair discusses the outlook for mortgage finance and the merits of likely successors to Federal Reserve Chairman Ben Bernanke.

Q: Following up on a caller's question, Brawner asked whether Fannie Mae and Freddie Mac should be dissolved.

A: Bair responded that these were public companies whose activities created "moral hazard" because they could borrow cheaply with the backing of the federal government. She supported a continued large government presence in the mortgage market for first-time and low- and moderate-income homebuyers, as well as veterans, and she supported expansion of the Federal Housing Authority (FHA) and the Veterans Affairs mortgage guarantee programs.

However, she warned that policymakers "need to think really hard about subsidizing other sectors," and support should not be provided through hybrid public-private entities. She advocates an FDIC-type insurance mechanism for mortgages, with the private sector taking the first loss, that is now under consideration by the Senate Banking Committee.

My comment: This is another instance where Bair does not seem to have fully processed the fact that FDIC insurance is one of many government insurance programs that ultimately spun out of control, because it failed to charge the industry high enough premiums, and for years, any premiums at all, to compensate for the risk.

Therefore, this is hardly a model Congress should follow in restructuring mortgage finance. Instead, the authorities should humbly approach Warren Buffet and his colleagues, many of whom are also insurance and mortgage financiers, and ask them to do a deal to spin off Fannie, Freddie and the FHA to private investors.

Q: Brawner asked Bair for her views on a case brought by Ted Olson, Perry Capital v Lew, in which community banks are suing to recover up to $33 billion they invested in Fannie and Freddie on the grounds that it was unconstitutional to wipe them out when the government placed the government-sponsored enterprises (GSEs) under conservatorship.

A: Bair responded, "This is why we need a standard process for resolving large financial institutions," to establish the priority of claims. She insisted that "unfortunately this has to be done ad hoc."

Bair questioned the claim by Olson that the government had encouraged investors to invest in the GSEs, but she ventured that the claim may be based on capital rules that gave preference to GSE paper held by community banks.

My comment: After the 1988 bailouts of failing savings and loans, investors sued the government for failing to live up to promises of capital support. It took years and went all the way to the Supreme Court, but in 1996 they finally won in United States v Winstar. It is also noteworthy that Olson is a former solicitor general of the United States who has argued both sides of these cases. Therefore, tempting as it may be to dismiss his theory, Olson's track record says he could win.

Q: Republican from Kentucky: Please explain derivatives, the purpose of the Dodd-Frank Act and the effect new mortgage rules may have on the availability of mortgage credit.

A: Bair responded that derivatives are a form of gambling on the performance of an underlying asset or index. She said the purpose of Dodd-Frank is to protect consumers from abusive practices by lenders, and she doubted that it would have much impact on mortgage credit once all the rules are in place. She added that the rules for securitizing mortgages need to be tightened.

Q: by tweet: How can investors protect their assets against another crash in the derivatives market?

A: Two of the main categories of derivatives are credit default swaps and interest-rate swaps. These are opaque products whose trading is dominated by the biggest banks, and they have never been tested in this environment. She said she keeps her own money in a bank, because she lacks confidence in other investment vehicles.

My comment: At his book presentation at the Cato Institute, a questioner asked David Stockman whether investors should keep their money under the mattress. Stockman quipped, "No, they should keep it in the mattress.

Q: Another tweeter and a Democrat from California complained about the low savings rates available and the high fees charged to savers.

A: The low rates are a result of the Federal Reserve's monetary policy, including quantitative easing (QE), which she said was helpful in dealing with the 2008 crisis, but it was "a terrible mistake" to maintain QE after 2009. She added that the financial system needs to de-leverage, but instead, interest rates are held at extremely low levels, and savers are being punished.

Q: Brawner asked about a New York Times editorial endorsing Janet Yellen as the next chairman of the Federal Reserve.

A: Bair urged viewers to read the editorial, and she declared that she fully agreed with it. She said it makes no sense to pass over Yellen, and she argued that the "Wall Street Club" has too much influence over policy.

She added that while she disagrees with Yellen on monetary policy, Yellen would probably be preferable to Larry Summers on regulatory issues, and Summers has no experience in monetary policy and deserves blame for the deregulatory policies of the Clinton years.

Asked to grade Bernanke, Bair gushed that she is a big fan, because she credits him for avoiding another Great Depression, but she repeated that she thinks QE has been left in place too long and has distorted the economy.

Q: Independent from Michigan: When will the financial criminals be prosecuted?

A: Bair noted that Dodd-Frank does not deal with this issue. She pointed to the Justice Department as the responsible agency for criminal cases, and she remarked that bringing civil cases against banks, rather than individuals, does not change the behavior of bankers.

Q: by tweet: What is your view on a financial transactions tax?

A: Bair explained that she has "come around on that" and now believes that such a tax, which had been in effect during the mid-1980s, would bring in some revenue and "would make high-frequency trading uneconomical pretty fast."

Q: Finally, Brawner cited a New York Times report that lawyers for Hank Greenberg, former head of AIG, are seeking to subpoena Bernanke to testify in their suit for up to $25 billion in damages due to the government's takeover and rescue of the company.

A: Bair bristled at the idea that Bernanke should be required to testify, called AIG "very mismanaged" and expressed regret that derivatives investors were paid in full as part of government rescues of troubled companies.

She concluded, "At the end of the day, people can second guess," but it is "outrageous" to subpoena Bernanke.

My comment: Bair has successfully positioned herself as one of the most prominent contributors to the debate over the implementation of Dodd-Frank, or lack thereof, and the restructuring of housing finance.

Sometimes her views are refreshingly critical of failed and misguided government policies. Then, almost in the next breath, she will say things that betray a lack of appreciation for the extent of the lasting damage these policies have inflicted on the economy and the financial system.

She seems not to realize that the narrative on which Dodd-Frank is based — that the 2008 episode of the ongoing financial crisis could not have been predicted and the regulators lacked the tools to contain the risk posed by "too big to fail" financial firms — is inaccurate, even fraudulent.

Therefore, solutions based on this flawed analysis are merely cosmetic and will do nothing to prevent another crisis, because the nation has never fully emerged from the 2008 episode, and the same people who have caused the crisis and benefited from it are still in charge of policy.

© 2022 Newsmax Finance. All rights reserved.

In this concluding segment of Sheila Bair's interview with C-SPAN's Greta Brawner, the former FDIC chair discusses the outlook for mortgage finance and the merits of likely successors to Federal Reserve Chairman Ben Bernanke.
Friday, 09 August 2013 11:59 AM
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