Sheila Bair Oral History

All right, this is the Sheila Bair interview. It’s a part of our [Barack] Obama Presidential project. We’ve done a lot of recordings on [George W.] Bush and are in the early phases of Obama. We appreciate your coming to be with us.

You could apply this for both, actually. [laughter]

Exactly, exactly. We’ve talked about the ground rules in advance, the most important one being our agreement related to confidentiality. As a housekeeping measure, we need to identify for the transcriber, who won’t be seeing the video—He’ll be using audio—our voices. I’m Russell Riley. I’m the cochair of the oral history program.

I’m Bob Bruner. I’m a professor at the Darden graduate business school.

I’m David Leblang. I’m professor of politics and public policy.

And I’m Barbara Perry, and I’m a professor here at the Miller Center and cochair of the oral history program with Russell.

OK. And I’m Sheila Bair, former Chair of the FDIC [Federal Deposit Insurance Corporation].

Terrific. Thank you so much.

Sure.

Here’s where I would like to begin: I wonder if you would tell us a little bit about your upbringing. I’m interested in how you’re developing your political ideas, your affiliations and so forth. You have an interesting career path, but your kind of Republicanism, as it was manifest later—

Yes, I know.

—it isn’t—

It’s different from—

It was different. So—

Different from today. [laughs]

I wonder if you could help us with that a little bit by telling us about Kansas and your childhood, and how you were raised to think about politics.

Yes. It was definitely a typical, traditional, Republican Midwestern family. I think Kansas has always had a strong streak of populism—more in the William Allen White sense, not in the [Donald J.] Trump sense, [laughs] but it was—so that’s kind of ingrained, I think, in political discourse. But traditionally conservative, fiscally conservative, balanced-budget, traditional values. But also, at least in my family, and I think most families, it spilled over into personal choices, too, so my parents never borrowed. They were products of the Great Depression. They didn’t even borrow to—They never borrowed. I think Dad maybe finally got a credit card [laughs] later in life, but they bought their house—

But never had a mortgage?

—with cash. Never had a mortgage. Never had a car loan. Saved money for me and my sister to go to college. We never had to borrow. So, yes, I grew up with a wariness of debt. Later in life, as I entered financial services, I became more appreciative of the benefits of debt, because certainly it makes sense to borrow in many situations—but never borrowing to the point where you can’t afford to pay it back, [laughs] which a lot of people have forgotten.

Your father was a physician?

My dad was a physician. My mother was a nurse, but spent most of her time as an at-home mom. And they were [Barry] Goldwater Republicans. They’ve both passed away now, but they were still mad about [Richard M.] Nixon. And I look at that—Well, it’s just a different world out there. Democrats were actually hurt by that whole mess, and I think a lot of people are saying now that they don’t understand how—because that was viewed by people out in Kansas as a way to accomplish what they couldn’t accomplish through the democratic process. Obviously, we all know that Mr. Nixon had some serious issues, but just how that filters out into west of the Mississippi, I think, is something—

So they were angry that he had to resign?

That he was forced out of office, yes. They felt that it was a railroad job, and the elites in D.C. [District of Columbia] never liked Nixon, and that whole thing. So anyway, they were also big [Ronald] Reagan people. I remember Ronald Reagan actually came to our house once. [laughs] Ronald Reagan, back then at least, was terrified of flying, so he took the train everywhere. And he was going cross-country—Golly, let’s see, that was probably in the late ’60s—would he have been Governor then? I can’t remember. But I do remember he came to the house, because his train broke down in Independence, Kansas, [laughter] so they needed someplace to put him, and Dad was the mayor at the time, and we had a nice house, so they brought him over to our house. I was young, and I remember I got to come out—It was late at night and I was already in bed, so I got dressed and went out and met them briefly. And then they were in the living room with lots of townspeople, and I snuck back into our spare bedroom, where they had put Nancy Reagan’s sable coat—which later became the lining of her—do you remember that whole thing, where she had the sable lining for a raincoat? Well, she was wearing the coat then, and I tried it on. [laughter]

Did it fit?

No, no. [laughter] Even though she was petite, I was pretty young then. So, yes, they were just very traditional—and conservative in a good sense—traditionally conservative, fiscally conservative, family values. It sounds cliché, but it had meaning and content then. Yes.

And you said just now—and in your work—that they grew up in the Great Depression—

They did, yes.

—and therefore were wary of debt.

Yes.

But were they impacted by the Depression personally, either—

Oh, yes.

—of their families?

Yes, definitely. So my mother lived on a farm during the Dust Bowl, on top of the Great Depression. And my father—Oh, yes, they both came from very impoverished families. My father’s natural father died in the Spanish flu epidemic when he was about one. What was it, 1919, ’20? Whenever that—

Oh, the big flu epidemic of World War I.

Yes, it was about a third of the global population. It was a lot of people. So he got it, and almost died. He survived, but his father died, so his mother brought him up. She cleaned houses and she took in ironing, and that’s how she made a living—and then later married my grandfather, who drove a Sinclair gasoline truck, so they then got on a little better financial footing. But yes, and my mother’s parents were very poor farmers and struggled a lot. She would tell stories about waking up covered with dust during the Dust Bowl, and how their big treat for Christmas was getting an orange, because those are—Fresh fruit was not that available, and expensive.

So yes, they were quite poor—which is, I’m sure, another reason why they were so conservative with their finances. But they saved enough to take care of themselves, and left not huge amounts of money, but left something for us, too. That was part of calculated planning on their part. They wanted to make sure they were never a burden on their daughters, and they also wanted to leave us something. And I try to do the same thing now.

Great story.

Yes.

And were you raised to be a professional?

No, I wasn’t. That’s a really good, perceptive question. But it probably digresses into women and our saga to enter the professions. I wasn’t, and I regret that. And I don’t fault my parents. They were from a generation where women basically went to college for an enlightening experience and then they got married, right? That’s what they did. I was never reared, nor was my sister, in a way to think about having a profession—what I wanted to do, how I wanted to make my mark on the world, or even just financially support myself—so I was a little bit at sea at that. I went to college and I majored in philosophy and had a minor in economics because I liked those areas and they were fun. I didn’t really think about getting a job with them—and of course I couldn’t get a job with them. [laughter] So that’s when I became a bank teller for nine months and decided I needed to go to law school. And bless their heart, they paid for that, too, so again, I didn’t have to take on any debt. But no, I really wasn’t.

I meandered a bit in terms of finding—because I had never thought about that. I kind of always assumed that I’d get married, and wouldn’t—If I wanted to work, fine; if I didn’t, that wouldn’t be a part of the calculus—I would be like my parents. That turned out not to be the case. And I’m glad it wasn’t, because I have had a good career—though I must say, I’ve always struggled with work-life balance. If you’ve got kids, you can’t avoid it. And I have a husband who’s a saint, but it’s still—There’s just stuff that falls on you that makes it really, really hard.

Did you expect to stay in Kansas? Was that sort of the trajectory?

No, I didn’t. No. I kind of always knew I wanted to—I mean, because Independence was a very small, economically depressed town, isolated, bad roads. It was really a very remote part of the state. And so no, I knew I would eventually be leaving.

I went to Kansas University, both college and law school, and I didn’t really think about doing something else. Everybody was a Jayhawk—well, my parents were first-gens, obviously, but they went to KU, KU Medical School; my sister went to KU. So it was, OK, I’m going to KU, too. I didn’t really think about it; maybe I should have thought about it. But I will say, going to a public university, a Midwestern public university, I probably had to work harder to prove myself than if I had had an Ivy [League] degree, so I probably didn’t think that through as carefully as I should—but then it gets back to the fact that I wasn’t thinking long term in terms of my own career trajectory and what would advance me. I wasn’t thinking about it in those terms. I just went to KU. And I got a great education at KU—I don’t fault it for a minute—but you do have to work a little harder if you don’t have that higher pedigree—an elite school education pedigree.

Which would have cost a lot more money.

Yes, it would have. [laughs] This is also true—though not nearly as much then as it would now.

That’s true. I want to circle back to your tenure as a bank teller—I loved the anecdote of the children opening up their savings accounts and having a passbook, and I did the exact same thing. I must have been five or so, and there was a local children’s show that did a deal with a bank that you would go on the show—and it had a cowboy theme—and then you would go to the hitching post, which was at this local bank, and be a cowboy or a cowgirl and get your parents to open up the account and have the passbook. So that really resonated with me—and how you then come to understand banking. You’ve already explained how you came to understand debt, but that must have had a major impact on how you saw the financial world.

Yes. Well, it was my first introduction. And it was the direct customer interface—You’re a bank teller; that’s what you’re doing. But culturally, it was so different then than it is today. Going to the bank was an event. They usually came in Friday afternoon. We’d stay open until seven o’clock, because—Well, this was a thrift, actually—but it was an event. And they would come in to make their mortgage payments personally; they’d come in to make their savings deposits; they’d come in personally to cash their checks, so customers saw their banker or the people who—and the tellers—on a fairly regular basis. That was kind of the good face of banking. That created a positive impression for me with banking—and of course I saw a lot of different sides of it [laughs] later on. But yes, I think that was a positive introduction to it.

I just want to follow up on this a little bit. Do you have memories of customers coming to your window and sharing with you their struggles?

Not really. No, I can’t say that. No, we never got that. The loan officers may have or whatever. Actually, my memory was their pride in coming in and making their house payment or pride in coming in and making a savings deposit—or the kids, just giddy about putting their couple of dollars in and getting that stamp on their passbook. So actually, no, I didn’t. If there was financial distress, that’s not what I saw. It may well have been there, but it didn’t come to me as a bank teller, no. Interesting question.

There can’t have been many women in the law school.

No. Actually, I was among the first. The year before me, I think there were maybe three women law students, and then my entering year, a third of us were women.

A third were?

Yes, yes, so it was that huge jump. That was, let’s see, 1975. So, yes, Title IX [of the Education Amendments Act of 1972], three years earlier, had been enacted, and so we saw—They finally were opening up the doors by the time I got there. So yes, I had quite a few women classmates, which was good.

Bob, anything?

The leap from Kansas to Washington—just culturally, was that a big—Was that a stretch?

Yes, it really was. I still adjust to it [laughs]—I think there’s just—Midwesterners are just very direct people—especially rural Midwesterners and farmers. I mean, they’re just direct. They don’t—There’s a lot of brevity of communication, I guess. At least if you’re a farmer, you’re isolated, so when you do talk, it’s very direct, and you get right to the point. And so I’m still too direct. [laughter] I’m sure I am. I have tried over the years, and I think I’ve gotten better, but I just—I’m an intense person. I think that’s helped me—I have a lot of focus—but I can be horribly direct at times.

On the East Coast the communications are more nuanced and subtle. Instead of saying, “That dress doesn’t really become you,” well, they’ll say, “What an interesting dress.” [laughter] So it’s about finding the code, which was completely new to me. In Kansas, you’d just say, “That dress doesn’t look very good,” [laughter] so that was different.

Whether you’re East Coast, West Coast, whatever, being in a big city—so people feel more time-pressed and are maybe a little less polite to each other. Driving was different, right? And I joke—This is still the case—when you’re driving on an interstate in the Midwest and you put on your blinker to change a lane, they’ll slow down to let you go in; here they’ll speed up, right? [laughter] We’re not gonna let her get up front!

So yes, it’s different, and both are endearing in different ways. But yes, it was a bit of a culture shock, for sure. Yes.

Getting to Washington—I want to get to your view and thinking about representation, and your view of public service. But I want to start there by asking how you connected with Senator [Robert] Dole. How did that come to be? And talk about where that passion came from.

Look, the civil rights movement was very much a part of my awareness when I was growing up, and Kansas has a unique history with civil rights and desegregation, going back to the Civil War, so I had always kind of identified with that issue. And I had also identified government as a force for good. So I don’t quite remember the details, and Kansas was the—In Brown v. Board of Education, my criminal law professor argued that case for the state, much to his shame; [laughs] he apologized for it. No, I mean, that was his job, and he was a very thoughtful man. But because of that, I think I always identified government as something positive, not a bad thing—as something positive that would step in and help people when they needed help—and was there for more vulnerable people—not for powerful people, but for more vulnerable people. So I always had that mindset.

Actually, right out of law school, I got a job teaching, on a teaching fellowship at the University of Arkansas School of Law in Fayetteville. In fact the Clintons [William J. and Hillary Rodham Clinton] were there at that time.

Oh, we didn’t know that.

Yes, yes.

I’m going circle that to come back to.

Yes. [laughter] Well, we can talk about that later. The career progression was I did that for nine months. It was just a nine-month fellowship, but it was kind of a nice transitional job.

Then I went to work for the general counsel’s office at the old Department of Health, Education, and Welfare—Do you remember them? You probably don’t remember them, but I do, [laughs] anyway—as a civil rights lawyer. Title VI [of the Civil Rights Act of 1964], Title IX, Section 504 [of the Rehabilitation Act of 1973], they were still all relatively new laws. Title IX and Section 504 in particular, handicapped discrimination, there was still a lot of pushback and adjustment and enforcement challenges. That was actually the original job that took me to Washington, and then once I was there, the Department of Education split off, as you’ll recall. Then I just was doing education work, which was interesting, but it was much narrower than the full gamut I had before.

I always liked Senator Dole, and the Senate Republicans had just taken over, and he was on the court subcommittee of the Senate Judiciary Committee, and he had an opening for his counsel on the Judiciary Committee—so it was the committee staff. And my family knew him, and Rosemary Mong was a very close family friend who worked for him in his Senate office, so we reached out to him, and he interviewed me. It was just being in the right place at the right time, because in 1981, the Senate Judiciary Committee went from Ted Kennedy to Strom Thurmond in terms of its leadership. And Dole was always pretty good on civil rights. I think he struggled with it a bit when he was in the House, but then he was always a big-tent Republican, and that was always important to him. The Voting Rights Act was up for extension in 1982, and he was very worried about how that was going to be handled and how it was going to look—Strom Thurmond kind of handling it—and I think the Republicans didn’t think that was a good idea. Even Strom realized it probably wasn’t a good idea, so they kind of were hoping for Dole to step in and take the lead. And he needed somebody to staff him, so it really was a perfect—being in the right place at the right time. A Kansas civil rights lawyer—who would have thought? [laughter] Just at the time he needed one.

It was great. I still stay in touch with him. He was a good boss, a good mentor, and we got the Voting Rights Act passed, too. Yes. And Strom voted for it. Orrin Hatch was unhappy [laughs] for some reason. We kind of got in a tangle with him over this intent standard, but Thurmond was actually—With his segregationist background, he had a bad taint around all of that, but he had a huge black constituency in South Carolina, and was, I think, more sensitive and responsive than people gave him credit for.

I’m curious about how you view your role as a—Let me ask the question broadly: When we think about representation, we think about how we are representing interests, and we have constituents, especially if we’re thinking about elected officials, right? You go from working for an elected Representative and doing service for an elected Representative, and then you move to being in the bureaucracy—a regulator, right? When that shift occurs, how do you think about the role of a regulator, the role of the bureaucracy within the context of representative democracy? Who are your constituents, in a sense? Who are you responsive to?

Right. That’s a good question.

I thought a lot about this as I’m reading your book, right? Because there’s conflict in there—There’s conflict with folks who—

Oh, yes. You’re right. [laughs]

But conflict with folks that I was surprised—not surprised, but surprised—that there was as intense conflict with folks that you were accountable to, in a sense. I’m wondering if you could talk a little bit about how your view of your work as a regulator is framed by or shaped by your view of public service growing up and working for the Senator?

Yes, yes. Well, Dole was—He almost gave his life to his country—That World War II generation, we just didn’t appreciate as much as we should what great leadership we had in the ’80s, when that generation really came to the fore. He knew how to put country first, and he knew the balance of power between government and the people who lobby government. And he knew the people that lobbied government are not necessarily the people he represented out in Kansas or more broadly. He’d give them an audience; he’d listen to them, but he always knew who was boss. He always knew who the decision maker was, and he never did anything that he thought was not good public policy. That’s just who the guy was. So that was an important lesson for me to remember—to learn.

I worked for him on the Senate Judiciary Committee; he was also the Chair of the Finance Committee, so they did all the tax work. We were right across the hall from each other, so the staff interacted a lot. I remember—and this was in the papers—it was hysterical—I was walking down the hall with him one day. He was going to a markup for the Finance Committee, and they were doing the deficit—He did several loophole-closing bills, including the DEFRA, the Deficit Reduction Act [of 1984]. They were truly loopholes, corporate loopholes, mainly.

There was this line of lobbyists—You’ve been in Dirksen [Senate Office Building]—all the way down the hall. He’s looking at them, and they’ve got this huge press contingent right in front of the door to the committee room. So he starts to approach the committee room, and some reporter says, “Hey, Senator, what do you think of all this?” And he said, “Yes, I’ve never seen so many Guccis.” He said, “They’ll be barefoot in the morning.” [laughter] And I’m not doing it justice, because he had such a great sense of humor. He was a closet comedian—and he had great timing, too. But it kind of showed. He liked sticking it to them. He did like sticking it to them.

He understood who had the power, and he did what he needed to do. He knew how to balance constituencies. He knew it was important for him to fundraise; he knew it was important for the party to fundraise. So he juggled all that, but he never did it in a way that compromised his principles or what he viewed was good public policy. And I joke that—I see some of the lobbying that goes on on the Hill now with the financial sector today, and I just think if some bank lobbyist had come in to Dole and said, “Would you write a letter to the Fed [Federal Reserve Bank] telling them to reduce my capital requirements?” Dole would probably introduce a bill the next day raising his capital requirements, [laughter] because he just knew—It was just—That’s the way it worked. It doesn’t work like that anymore. I think that’s part of the problem.

I learned from him to never lose sight of what your job is, and your job is protecting the public. We have different pieces of that in the Senate, the FDIC, but that’s what you keep your eye on. And then again, I think my philosophy major, actually, that noneconomic philosophy major actually helped me later, because there were so many crosscurrents and pressures and people wanting us to do this and people wanting us to do that. I said, “Look, the FDIC is supposed to protect bank depositors, and that’s the thing we’re going to do the most. And then we’ve got to focus on the economic impact of this for the real economy, and we’re going to focus on that, too.” I truly believe that everything we did on mortgage foreclosures, prevention of foreclosures, was not only the right thing to do from a public policy perspective but also necessary to, ultimately, stabilize the system and our economic growth. We did not do enough there, and that’s one of the reasons why the recession lasted—For most people, the recession lasted ten years, not 18 months or whatever the official people say it did.

Well, speaking of representation, can you tell us about your run for—

Oh, for Congress?

—elected office?

Yes. Yes, it was good. I’m glad I did that. It was painfully close—It was less than 1 percent. It was a primary race that was a safe Republican seat. Whoever won the Republican primary was going to win this seat. [laughs] Do there again, Dole—and he still apologizes for this—he encouraged me to go out there and do it. “Well, why don’t you go out there and meet with all the county chairmen—party chairmen—and kiss the ring, and meet with the newspapers, and just get a sense and tell ’em what you think.” He said, “You ought to do this. It’s wide open, and you’d be great”—blah, blah, blah.

I go out there and I go meet with all these party officials and the media and everybody else, and they’re all encouraging me. They said, “Yes, get in. You have as good a shot as anybody.” So I go back and tell him I’m going to run, and then he starts getting all this pressure from some of the other candidates to not endorse anybody, and he totally wimped out on me. [laughter] Anyway, I took a lemon and I made lemonade out of it, and I said, You know what? I don’t want Bob Dole’s endorsement. I’m gonna do this on my own. And actually, it worked. [laughs]

That was a good experience. It was retail politics at its best. I did a door-to-door campaign; I didn’t have much money. The guy who beat me, a banker, ironically, spent a lot of his own money—and then lost two years later to Dan Glickman when they redistricted. [laughter] But yes, I went door-to-door. I probably visited three thousand houses. It was a very effective way to campaign. We had voting lists of the people who voted in the last primary, so it was a very active base of Republican voters, people we knew who voted in primaries. So I did that. Then I go out there on my bicycle, and I had a little flag on the back—it said, “Bair for Congress”—and so I was, like—In these little towns of two or three thousand people, I was the talk of the town. I may have hit maybe fifty or a hundred houses in that town, but the coffee shops, the barbershops—“Did you see Sheila Bair?”

Then we kept that list and we kept doing mailings to them, reminding them that I visited them, and wasn’t it nice to see them, or sorry to miss them—I had a little care package I’d leave if they weren’t home. And it was good. It was a really good get-out-the-vote strategy, because then we just kept mailing them more and more to get them to make sure they voted. I think that’s one of the reasons why I came so close, even without much money. But yes, it was good.

So back to Russell’s question to you about how your parents were preparing you or not preparing you for a professional life. I can’t help but zero in on Senator Dole’s comment to you: one of the reasons he thought you lost was that you were single.

Yes! That’s right.

So how did that feel?

Well, that was probably—Yes, let’s see, that was 1990, so people were still adjusting to the idea of women in Congress—a single woman in Congress. That may have had something to do with it. I was kind of oblivious to that being an issue at the time, because that’s the kind of issue people whisper, right? They don’t tell you, “Oh, you’re a single woman.” I was the only pro-choice candidate too—though actually, I think that helped, because there were six candidates total—so I just had that vote, and I think that helped. Yes, it probably had something to do it. Life’s unfair. [laughs] I tell young women that, because you still run into attitudes like that. I tell them to speak against it, but don’t dwell on it, because you’ve just got to live with it. It can kind of eat you up if you get mad at the unfairness of it all.

Was your opponent in the primary ideologically very different from you? What was the opposition like?

We were all balanced-budget Republicans, so those were just kind of litmus-test issues. On guns there was a difference—I was definitely the more centrist of the candidates. On abortion, clearly, I was different from the other candidates. I think we were all pro–agriculture spending—we never sacrificed a balanced budget for that. [laughs] So there wasn’t that much differentiation, except on those social issues. On the fiscal issues, it was pretty much the same. I think a big advantage—I think I got votes because I was a woman, too—so you never know. And as I said, I think my position on choice drew some votes. It gave me a base that the others didn’t have, so it might have helped as much as it hurt. You just don’t know. But there wasn’t that much differentiation on policy issues, other than those two.

I do think I had a better command of the issues, because I had worked on the Hill; I did policy. That’s what I did. So for the people who were listening to the woman, I think they understood I had a more complex understanding of the issues and how Washington worked than my opponents, which helped me. Definitely. Yes.

Before we leave this completely behind, you had mentioned Arkansas, and you said you knew the Clintons there, or crossed paths?

I did a little bit, yes. As I recall, after he was Governor—They had two-year terms in Arkansas, I believe, so he was Governor two years, and then he lost reelection, so he was in the wilderness for two years, and then won reelection two years later. During that two-year period, he and Hillary taught in the system—They were on the Little Rock campus, not Fayetteville, but they would come up to Fayetteville occasionally. And I remember Hillary being [laughs]—Poor thing, she got a rap for—She didn’t dress up; she wasn’t the gubernatorial wife, right? And back then she had the Coke-bottle glasses and the tie-dyed jeans. I thought it was great. Then, of course, she got the headband and suits and got the contacts—and good for her for doing what she realized she needed to do in Arkansas to help her husband get elected again. But yes, I did know them a little bit. Yes. Yes. Small world. [laughs]

You didn’t have any observations beyond that about whether they were—There was so much noise about the Clintons in Arkansas that—

No, it seemed like a good marriage in the sense that they each knew who the other was and were a power couple in the sense of furthering—They both wanted power in a good way, and worked together to achieve that. I think, actually, his reputation was back then the same as it was later. [laughs] But I never really saw tension. Again, I didn’t know them well—When I was with them the few times, my sense was that he was the warm, friendly, engaging politician and she was the serious policy wonk, and I think that still holds. It was pretty obvious even then. Yes. Definitely.

So we’re getting you into an appointed position here pretty soon, right?

There you go. Right.

After the loss, how do you end up in the regulatory environment in Washington?

I had actually worked for a couple of years for the New York Stock Exchange. I’m trying to remember the sequence of events. I left Dole’s legislative staff—that would have been ’87—to work on his Presidential campaign, which he lost, in ’88. And then I worked for a couple of years at the New York Stock Exchange. Actually, I had gotten to know them—Because we had the market crash of ’87, and I was his policy director, I had to get up to speed really fast on the stock market, so I got to know some of them, and they offered me a job in the Washington office after the campaign was over. I did that for a couple of years before I ran for Congress, but it really wasn’t my cup of tea. I went back there later, and I’m glad I got that well-rounded experience in the private sector, as well.

So I ran for Congress, came back, really wanted to get back into public service, and there was this CFTC [Commodity Futures Trading Commission], and it just seemed, since I had worked for the New York Stock Exchange—After the ’87 market crash, there was a big issue about whether stock index futures had caused the crisis, had caused downward pressure on selling—with the cash market or the equity market—and I had worked on those issues. Having somebody who understood the equity markets on the CFTC seemed like a logical thing to do, so the [George H. W.] Bush people—H. W. Bush was a quite distinguished person in dedicated public service, and I was proud to be in his administration or be his appointee—It was an independent agency—because he really did recruit—You were in good stead, because he was known for recruiting good talent—and just getting to know some of his other appointees. That was nice.

But yes, that’s basically how I got to the CFTC. I was proactively looking to get back in government. It was where I wanted to be.

Did you push aside, though, Sheila, at that point, I don’t think I’m ever going to run for office again, particularly since—

Yes—

—since what you saw in ’88—

—people still—

—with Lee Atwater, you see the coarsening of—

Yes. Oh, that was awful. That was just terrible. Yes, I think I repressed it. Yes, that Presidential campaign was a heartbreaker. He was. One of the reasons President Bush lost again in ’92 was because he didn’t have Lee Atwater anymore. He was amazing. And Jim Baker [III] was just as smart, but in a different way. He didn’t have that same competitive instinct that Atwater had. But yes, oh God, did they play us. Those “Senator Straddle” ads—They accused—All that brave work on deficit reduction and closing loopholes? Well, he was the Mr. Tax Man in those ads. They called him “Senator Straddle” on tax increases, very unfairly. But they outmaneuvered us, too. Not only did they run those vicious ads but they bought all the airtime so we couldn’t get on to respond. It was terrible. Because he had won Iowa, he was going up in the polls in New Hampshire, and as soon as those ads ran, just—You could feel it. There wasn’t anything we could do about it.

Yes, that was traumatic. And it did sour me a bit, yes. But my ’90—My own personal small campaign was net-net a positive experience, so I can’t say overall I was soured on electoral politics, but I did have a sense of what it took. It took a lot out of you. And I absolutely hated the fundraising—just despised it. We beat up on Members of Congress, but what we do with the way we finance elections these days—I probably spent close to half my time on fundraising. That’s not why you run for Congress. You don’t want to be on the phone. It’s degrading, too. Somebody hat in hand—You know they’ve got an agenda; you know they’re going to expect something when you get elected. It’s awful. That would be more of a deterrent than anything.

And people have asked me—It was so funny, a friend of mine is active with the Girl Scouts in Kansas, and they do a big annual fundraiser, so she asked me to come out and speak and help them with their fundraiser. I said sure, so I schlepped out to Wichita—This was actually just last weekend—to give a speech. It went very well, and they had a huge crowd, and I was delighted. And it generated all this speculation I wanted to run for Senate. [laughter] No, I’m here because my friend Kathy Webb asked me to be here.

Yes, so people still ask me from time to time, but I just don’t—It just takes too much out of you. I’m still published a lot—I write a lot of op-eds—and I do a lot of public speaking still, so I still have vehicles for speaking out on public policy issues. That’s a lot easier than [laughs] running for Congress.

Do you guys have any questions about the CFTC?

I’m curious about not so much day-to-day at CFTC, but your role at CFTC, and then looking ahead to your time at [the Department of the] Treasury. Can you talk about what the nature of interactions was with the Fed, especially the New York Fed, with Treasury? When I was writing down the question, I thought, Tell us what this is in normal times, but this is still not normal times. I mean, we’ve got 9/11; we’ve got Enron.

That’s true, yes.

So in the noncrisis times, I’m wondering about what the nature of communication is, what the nature of deference is—Basically, how does the day work when you’re working with these other agencies?

At the CFTC, there wasn’t that much interaction. There probably should have been more, but there wasn’t. It was kind of an enclave unto itself. We did interact a lot with Treasury. Wendy [Lee] Gramm was the Chair during most of the time I was there. She had a very positive relationship with Lloyd Bentsen, who I believe was the Secretary of the Treasury at the time. Actually, the one time I remember engaging with him was when the SEC [Securities and Exchange Commission] was making a move to get jurisdiction over equity futures. There was a constant battle on that, and Treasury actually sided with the CFTC.

In our day-to-day, there really wasn’t that much reason to interact with Treasury. Because since Treasury staked out the administration’s policy positions on legislative issues—like what our jurisdiction over equity derivatives should be—we did engage. Obviously, there was a lot of interaction with the Fed when I was there. We had weekly luncheons one place or the other—at the staff level, well, the senior appointed, the PAS [Presidential appointment needing Senate confirmation] level—just to get to know each other and share notes. I don’t know if they still do that or not, but I thought it was pretty valuable. Yes.

And then there was a President’s working group, too—I actually was a member of the President’s working group. So when Bill Clinton came in, Wendy stepped down—which back then was standard practice. It’s not so much anymore, but then, even an independent agency would typically offer their resignation, which she did. And she kind of made a deal with one of the Democratic appointees to go at the same time, so we had three Commissioners left, and I became the Acting Chairman. It wasn’t for very long, but because of that, I became a member of the President’s working group. It was the CFTC, the SEC, the Fed, and Treasury. So at the Chair level, there was more interaction.

That was an interesting experience. Even back then, I was very focused on financial derivatives. I chaired the Financial Products Advisory Committee at the CFTC. You could see this market exploding. Back then it was interest rate swaps. The CDS [credit default swap] stuff was what really got us in trouble later, but even with interest rate swaps, there were some concerns. And through the working group, we crafted an exemption for interest rate swaps—retained antifraud and antimanipulation authority, as was appropriate—and had some better disclosure and information-sharing agreements with all the regulators. I think that worked out pretty well.

That was an interesting experience. [Alan] Greenspan was there, and Bentsen—and Arthur Levitt. So that was good. And then, of course, later, [laughs] Brooksley Born tried to foray into that field again and got her fingers singed, but at that point, I thought that was a pretty positive working relationship.

Does that answer your question? I’m kind of meandering a bit.

Well, maybe you’ve answered this, but I’ll ask again, just to be clear: So what about the New York Fed? Because I would imagine that—

So I knew Tim Geithner, actually, when he—[laughs] I had great relationships with all these people until we started—

Until you didn’t.

Until we didn’t, right. Exactly. [laughter] Yes, so Tim was the international affairs guy at Treasury, as I recall. He kind of worked his way up. Let’s see, after I left the CFTC—so from 1995 to 2000, because this was after I left the CFTC but before I went to Treasury—I went back to the Stock Exchange as their head of government relations. And we made rounds at the Treasury a lot, so I got to know Tim a little bit then, but never at the CFTC.

Actually, I do remember Tim at the CFTC. This is a funny story. There was this big derivatives conference in Tokyo, so I was going to meet and speak. Tim was the Treasury attaché at the time, and he got assigned with the job of squiring me around while I was there. [laughter] He took me to lunch. I remember we had sushi and it was, like, $40. I was glad the Treasury Department was paying for it. [laughter] That was kind of a lower-level thing, and then he really worked his way up. But he had a great relationship with Bob Rubin, and I think that served him well. But yes, that was my contact with Tim at CFTC. [laughs]

In the biopic, that’ll be a really important episode.

There you go. [laughter]

I’m wondering less about the personal interactions than—If I think about the regulatory environment, especially as derivatives are starting to really roil, right, you’ve got the SEC and the CFTC and New York Fed—Maybe talk about this less from a descriptive position and more from a normative position. Did you have inklings at the time—and maybe even after Enron hit and you might be looking with hindsight—do you have a sense of how you might have wished things could have been different—or kind of being prescriptive about what the regulatory environment could have looked like with regard to those agencies?

Oh, yes, my history goes back on those kinds of issues quite a ways. So off-exchange financial derivatives were growing when I was at the CFTC, and we put some things in place that I think were helpful at the time. And actually, the interest rate swap market wasn’t a problem—knock on wood that continues to be the case. So we did that.

Then when I was at Treasury, I actually did work—The subprime mortgage thing was getting legs back then, and when I went to my confirmation hearing, Paul Sarbanes, who was Chair of the Banking Committee, had sat me down and talked to me about what was going on in Baltimore. So I started researching what was going on in Baltimore, and it was terrible what was going on in Baltimore. These were perimeter mortgage originators—a lot of home-improvement loans and stuff. And they would actually troll—They would identify minority, working-class neighborhoods, people who had equity in their homes and bad credit histories, and they would go in there—And a lot of these people had these nice, safe, FHA [Federal Housing Administration] 30-year fixed-rate mortgages. They’d go in there and say, “OK, you want to do a cash-out refi, get a new roof, take a vacation?”—whatever. And these were payment-shock loans; they were designed to refi after a couple of years. That was the whole game; of course, the borrowers didn’t understand it.

I was on that early, in 2001. And actually, Ned [Edward M.] Gramlich, who had the consumer portfolio at the Fed at the time, had been speaking out about this. The Fed had rule-making authority to write rules for—The excuse was, well, this is a nonbank lender that’s doing this; it’s not really the banks, though some of the thrifts were doing it. And technically, that was true; at least at that point, it was kind of nonbank, perimeter people. So the Fed was the only one that had authority to write rules for all mortgage originators, not just—Bank regulators could only hit the banks and the thrifts, and they just didn’t want to do it. I think Greenspan was rapped for that, and he said later it was a mistake—and [Ben] Bernanke later said it was a mistake—for them not to use that rule-writing authority. It was a mistake, and good for them for acknowledging it. But in fairness to Alan Greenspan, the staff didn’t want to do it. I remember some uncomfortable conversations with the consumer affairs staff over at the Fed. They did not want to do it.

So Ned and I created this task force, and we brought in the consumer groups and the mortgage securitizers and some of the lenders and the rating agencies, and we said, “Look, can we at least—” The Fed wasn’t going to write rules; there was legislation pending in Congress, that wasn’t going to go anywhere, either— “agree on some voluntary principles? Right? Let’s all agree to this. Let’s agree to what’s best practice and publish this, and then at least consumers will have a benchmark, right?” So that was the idea. But at the end of the day—And I tell you, it was the big securities firms—Merrill Lynch, all of them—They didn’t want anything to—They were making so much money on this, and they just didn’t really want anything to muck up the works. They came to our meetings, but—

So we tried. We didn’t get very far, but it was—I was working on this back then. You could see—but I saw it as a consumer abuse issue. I never in my wildest dreams would have thought it would have gone mainstream the way it did when I came back in 2006 and saw what was going on.

And why did the Fed staff not want to do this?

Well, I’ll be honest with you. I think regulatory capture, cognitive capture. And it’s not venal; it’s not corrupt. People think that—it’s just, regulators start having a tendency to see their world through the lens of people they regulate and who they interact with. And then lenders—And when Wall Street was saying, “You’re going to constrain credit,” or, “We’re helping people get access to credit. You don’t want to mess that up, do you?” they kind of bought into it.

I write about this in my book. As late as March 2007, when things were really starting to sour, Barney Frank hauls us all up, wanting to know what we’re doing about it. I’m—again, as I had been since 2001—saying, “The Fed could really write some rules here—” I was trying to get the bank regulators to write rules, at least for the bank lending. And the Fed representative was there saying, “You know what? We had a schedule to do revolving credit, so we’re doing our revolving credit rules now, and when we get done with our revolving credit rules, then we’re going to take on home mortgages, but we don’t want to constrain credit.” And I’m looking at her going, “Have you—?” The insularity of the Fed staff, too, I think, was a problem. And I think the crisis maybe had a healthy impact, in the sense that I think it really woke them up and they realized they needed to look out in the world to see what was going on—because they missed a lot, and they missed that.

OK. Well, let me come back then to David’s original question about the various roles of people. In your mind, in a properly functioning system where each institution is playing its right role, where would the pressure have properly originated to deal with this problem proactively, before it metastasizes?

Right. The Fed. The Fed absolutely, because the Fed is the most powerful of these. It’s a hugely powerful entity. This worked until it didn’t. Everybody was making money on this in 2001 and 2002. Even homeowners thought they were getting a good deal; they didn’t realize how toxic these mortgages were. So the Fed, really, I think, was in the best—They had the power and the influence to really call a halt to it. But also, they should have acted early. I mean, they had authority since the early ’90s, I think; I’d have to go back and look. But again, it was starting—You could see it festering. And credible consumer groups were on this and calling them out on it, and they just looked the other way.

In fairness to them, we got into this golden age of banking, and [William] Phil Gramm’s “First do no harm”—So if the private sector’s doing it and it’s making money, it must be OK; don’t get in the way. So there was that mindset, and that infiltrated the Fed. And of course, Alan Greenspan was not a fan of regulation—though again, I think he got a bad rap on that. But they had the power, and they could have—which is, I think, why both Bernanke and Greenspan said later it was a mistake. And it was. Yes.

Bob, did you have a follow-up?

I’ve got a question, but I want to pivot in the topic, if you want to finish up here.

OK. My follow-up was, looking at the timeline and listening to when this is occurring—I mean, September eleventh happens. Is it fair to look back and say everybody gets distracted, takes their eye off the ball?

No, that’s an interesting—Yes, that was—

I’ve got Bob and David here because they know the stuff; I’m asking very naïve questions, because I don’t know the field really as well, but it strikes me that it’s plausible to think that we could have been distracted. But maybe that’s an improper reading of these institutions that are—People are still getting up and going to work every morning, dealing with whatever’s on their plate, so—

Yes. It’s a fair point. All I can say is that I was up to my eyeballs in 9/11 and Enron, too, but I found time to focus on this. So we all have to multitask, and especially since at the Fed, this was the consumer unit, which was pretty different from the safety and soundness people or the market stability people. They were not impacted, really, by Enron or 9/11, so their portfolio was not loaded down the way others’ were.

OK, so there is a consumer unit there—

There was a consumer unit there separately, yes.

—and so one might reasonably ask the question: Why is the consumer unit not—? And your answer was capture.

That’s why we have the CFPB [Consumer Financial Protection Bureau] now. There’s no doubt in my mind that’s why we have the CFPB now, because I think it’s just—They dropped the ball. There’s just no question about it. And so will the Consumer Financial Protection Bureau do a better job? We don’t know. Because they’ve got a single director—which I thought was a bad idea—and so that place is going to bounce back and forth a lot, depending on who’s President and who they put in as the single director. But I think that is why you have a Consumer Bureau now. That’s why the Fed lost it.

One further question on this, and then Bob, I’ll defer to you, and that is: Was there a material change in the environment of this issue between 2001 and 2006 or ’07, or was what we were experiencing merely an accretion of kind of normal development in the issue? I don’t know whether this even makes any sense—

No, it makes a lot of sense.

In other words, from 2001 to 2006, are we sort of on a gradual upward slope of a problem accreting, or is there something important for us to understand about the interval, either in the commercial environment or in the regulatory environment, that we ought to be paying attention to?

Yes. So there were things that were going on. The two that come to mind—And if you look, there’s a pretty rapid rise in private-label mortgage-backed securities. And we had always had mortgage-backed securities through Fannie [Mae, the Federal National Mortgage Association] and Freddie [Mac, the Federal Home Loan Mortgage Corporation], but getting Wall Street into this was new. So two things happened that facilitated that.

First was—I was not involved, thank God, but I remember, because it happened toward the tail end of my tenure there—the [George] W. Bush administration, working with Fannie and Freddie and HUD [Department of Housing and Urban Development], decided to give Fannie and Freddie affordable mortgage credit if they invested in the triple-A tranches of these private-label mortgage-backed securities. So Fannie and Freddie didn’t want to take the credit risk themselves—They didn’t want anything to do with it, backing them themselves—but they were happy to let Wall Street securitize them, and then they would invest in the triple-A tranche, thinking those would be perfectly safe, right?

Actually, I was on the other side of this, because Fannie and Freddie were acting like a big hedge fund. So yippee-do; I can issue my debt to finance myself at government rates, basically, because everybody thinks I’m backed by the government—which it turned out they were, in fact—and then I can take that money and I can invest it in Wall Street’s mortgage-backed securities, and look at this nice spread I’m getting, right? That’s why they were so fat and happy and profitable for so long. And of course, they were building up these huge—So they had this huge portfolio of private-label mortgage-backed securities, and the losses of those, that’s what brought them down, not the stuff that they were securitizing directly. The market losses on those brought them down. So that was the first problem.

And then the second problem was changes in capital rules that basically gave big banks huge capital advantages if, instead of making mortgages and holding them, they securitized them and bought the securities back. So those two things fed the market. Absolutely.

Thanks.

What I’d love to explore in this conversation today—and we can do it in various ways, but—regards financial innovation as a potential contributor, cause, or side effect of the great crisis. When you look at the history of the ’80s, the ’90s—just growing new markets, new institutions, new kinds of instruments, new services and the like—was it apparent to Washington, to the regulatory establishment, that the U.S. [United States] economy was in the midst of this incredible flowering of innovation? Was it viewed as a threat? As a good thing? As a—

Yes, that’s a good question.

Just general comments to begin with.

Yes. So it’s essentially like the famous Paul Volcker quote, [laughs] “The best innovation we’ve had in banking is with the ATM [automatic teller machine] machine.” Because I think these credit default swaps—So securitization—Look, I still support securitization. I don’t think securitization is a bad thing. I think we went off the rails, because we didn’t have enough consumer protection, so you had Wall Street basically interfacing with a highly vulnerable mortgage borrower population, and you didn’t have sufficient retained risk, so—and the whole thing was volume driven. I think with the alignment of economic incentives, securitization is actually a good tool, not a bad one, so I want to be clear on that. But the way it was done and the lack of regulation and rules around it—and especially mortgage lending standards—the model did not work. So that innovation I don’t really fault; I think how it was implemented was the problem.

Credit default swaps, on the other hand, I pretty much have no sympathy for. I mean, and why you needed to do them over and over and over again—CDS-squareds and then squared again—and you couldn’t even find out who owned the damn mortgages, and then nobody had a sense of how much basically gambling there was on top of the underlying mortgages. And I think [Henry] Paulson and Bernanke and Ben have yet another book—I think they’re trying to get their story straight—no, I’m kidding. [laughter]

But they admitted—and I had said this before—I was glad to see—Wow, OK, you’re finally saying this—The system could have absorbed the losses on the underlying mortgages. That was real, but for our economy, that wasn’t huge. It was the trillions in derivative exposure—and synthetic derivative exposure—that was lying on top of the underlying mortgages. And people say, “Well, that’s a zero-sum game; somebody wins, somebody’s going to lose.” Yes, but what about the people who are losing, like AIG [American International Group] or Citigroup or whoever?

So I have no sympathy for credit default swaps. I’ve long advocated—and it never happened, because again, the horse is so far out of the barn, but—It’s insurance; there should be insurable interest. People shouldn’t be using the CDS to speculate. And it really—It’s a terrible innovation. It’s not a—I wouldn’t call it innovation. I think it’s just a new way to gamble with money. But there have been no meaningful constraints on it. And we tried to at least get it out of the insured banks as part of [Christopher] Dodd-Frank [Wall Street Reform and Consumer Protection Act of 2010].

Then later, Citigroup and their lobbyists come in, and JPMorgan Chase, too, and got that part overturned, so now you can do that business—ironically. So the root of this framework under Dodd-Frank is, basically, if it’s a standardized product, if it’s sufficiently standardized that a central clearinghouse can clear it, you have to send it to central clearing, but if it’s nonstandardized, meaning that the clearinghouses don’t understand the risk well enough to clear it—they don’t want it—it stays with the banks. And now it stays inside the insured banks, so it’s completely upside down. And does Congress understand they did that? Absolutely not. But no, I don’t think that was a good innovation; I think it was a terrible innovation.

Then securitization—Again, the way it was implemented and then the false sense of security it gave—And of course, all of this was—The controls banks should have had around these risks—They were deferring to models. They were telling them, “Oh, mortgages are safe. Look at the low default rates on mortgages.” So their models were no good, because they were feeding data, historical data, into models that had no relevance to what was going on currently. So that was not a good innovation, either. I don’t know if the models trumped human judgment so much as gave humans an excuse to look the other way, because I think anybody looking would have seen what was going on.

Is it the fate of regulators to react to innovation? We’ve heard criticisms that regulators are like generals, prepared to fight the last war, et cetera.

Yes. [laughs] That’s true.

You were telling some stories there a few moments ago, in the ’90s at the CFTC, beginning to raise the alarm on this and that and draw people’s attention, but are we—? Because the markets will just continue to innovate—they will—regulatory arbitrage, try to scoot around the edges, et cetera.

They will. Yes, that’s true. Yes.

Are you an optimist or a pessimist about the ability of regulation—

I’m pretty pessimistic right now. [laughter] Look, you need regulation of the financial sector. Adam Smith said you need regulation of banking. I write about this in my book; my nirvana is to have something like the Foreign Service was—just have this elite group of highly trained, really smart, well-paid examiners and supervisors that go in and keep these banks in check. We don’t have that. And the political will, it’s—You’re right. Regulators always—They’re procyclical, so they’ll—Right now we’re seeing deregulation again, you know? And so the Fed’s doing most of it, and they say, “Well, it’s just little stuff here and little stuff there,” but it’s kind of adding up to a lot—and some of it’s big stuff, too.

But they always do this at the end of a cycle. We did it in 2006. You start easing up. Good times—Oh, look at all this capital the banks have! The asset quality is good, performance rates are good on the loans, everybody’s making money. We don’t need all this regulation! And then as soon as the crisis comes, they’ll do exactly what they shouldn’t do: again, it’s just tighten up the spigot—don’t lend. And it’s just completely upside down. They should be tightening now. We’re toward the end of this cycle. I think the markets are open for another year, maybe because the Fed has stood down on interest rate increases, but I don’t have a lot of confidence in what’s going to happen after this year. I’m hoping we make it with reasonable economic growth this year. But the Street knows that, and so all these highly leveraged companies—You can do an IPO [initial public offering] now, you’re going to do it now. You’ve got a highly leveraged company, you’re going to borrow money, you’re doing to do it now, right? So this is when all the silliness starts. And they should be tightening, not weakening. But they’re weakening again.

So yes, I’m really discouraged. It’s just amazing how short the memories are on all of this. And I’m also scared that—and I’ve written about this—on the leveraged loan market, the similarities between leveraged lending and subprime are really eerie. Just from the superficial level, it’s a $1.3 trillion market, which is about what subprime was at its peak. But we’re hearing the same thing: Oh, the nonbanks are doing it; it’s originator-distributed; when we are doing it, it’s off our balance sheet; we’ve got very limited exposure—We’re hearing all of that again—risk is dispersed. And I don’t believe it for a New York minute.

What really scares me about it is, with subprime, there was a shock—not so much from the mortgages defaulting; it was the losses being called on these derivative instruments that created uncertainty about the solvency of these banks, so they lost their short-term funding, and so that’s what caused the short-term crisis. The longer-term economic crisis—and there’s a great book called House of Debt [:How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again]—I don’t know if you’ve read it, but I recommend it—was the flow-through to consumer spending when people started losing their houses. They couldn’t use them as ATMs anymore; they were struggling to make their mortgage payment; they weren’t spending much on anything else. You see some of that going on with student debt now. And so with leveraged loans, though, these companies—these are like CVS [health corporation: Convenience, Value, Service]—these are highly leveraged household names. They lose access to credit, there’s going to be immediate impact on—They employ millions of people. And I am terrified that when this happens, the regulators, again, are going to tell the big banks, “Oh, don’t lend to them anymore.” Right? “Pull your credit lines.” So it’s just the opposite of what should be going on.

That’s a long answer. Yes, it’s still an issue. I don’t have confidence that we’ve fixed it at all. I think it’s just—maybe it’s not as bad or as obvious—the deregulation—as it was in 2006, but it’s still happening.

I’m wondering if I could take a break.

Yes.

I was just about to ask if you wanted one—

Yes, I could go for that, too.

[BREAK]

Tell us about going back—You were out for a while; you come back in 2006. Why don’t we go ahead and get your nomination story?

Yes. There’s a funny story about that. As I said earlier, the work-life balance has always been a challenge for me, and I had young children at home during this time period. I had a great job with the New York Stock Exchange—a lot of prestige, very well compensated—but I was just always on the road; I was in New York constantly, even though I was based in D.C., so I went into a consulting arrangement with them—because we had just adopted our daughter, Colleen [Cooper], from China, and my son was six.

And your residence is in D.C.?

We’re living in D.C., yes. I had been doing this for eight or nine months. The Bush people call me and say, “Would you consider being Assistant Secretary for Financial Institutions at the Treasury?” I kind of balked and said, “I just got this work-life balance thing right. I’ve got small kids at home, can’t do a demanding job right now.” They said, “Oh, no. It’s nine to five. Your big issue’s going to be whether banks should have real estate brokers.” That was the big issue back then—whether banks should be able to own real estate brokerages—whether that was a financial activity that should be permitted. So I went in and talked to them, and they talked me into it. And for a while, it was a nine-to-five job. And then of course 9/11 happened and then Enron happened, and that stopped—which is one of the reasons why the following year I decided—My husband and I went to UMass Amherst for a quieter academic career.

Then when I came back, it was the same thing; they called me and I said, “I’ve got this nice thing at UMass and a good work-life balance—lots of time with the kids, love the job.” “Well, this will be nine-to-five. There’ve been no bank failures in three years.” [laughter] They said, “Everything’s calm at the FDIC. Your big issue will be whether Walmart can have an ILC [industrial loan company].” That was the big issue. So I said OK; I went back. And of course—So that’s what the joke is: I should stay out of government, because something bad happens every time I go. [laughter]

That’s the backstory. Don Powell had been the Chair. I knew Don; I was actually on the FDIC Advisory Committee. They had a Banking Advisory Committee—

You were in that position when you were approached?

Yes. I was teaching at UMass, but I was on their Advisory Committee—and I had worked with them at Treasury, too, and was a supporter of the FDIC’s at Treasury. And so Don—I just don’t think government service was right for Don—or maybe it was just the FDIC. It just didn’t seem like a good fit. He was a good soldier for several years, and just told them he wanted to move on, so a guy named Marty Gruenberg became the Acting Chair, and he was the Vice Chair. And Marty’s a good friend, but Marty was a liberal Democrat, and it was kind of awkward that in a Republican administration they had this liberal Democrat as their Chair. So they wanted somebody, and then they knew me. I had served at Treasury before, and they knew I had good relations in the Senate with Dole and everything, I could get confirmed easily, and so they basically convinced me to do it. And as I said, I thought, Well, ILCs and Walmart—because I had done a lot of research at UMass on inclusive banking and trying to expand access to lower-income people to banking services, and so I was actually not hostile to the idea of Walmart having an ILC.

For the first few months it was fine. My big issue was actually one I worked on at Treasury, which was, prior to 2001, the FDIC’s authorizing statute prohibited it from charging premiums on banks that had good supervisory ratings—basically, CAMELS [supervisory rating system for banks, with initials standing for capital, asset quality, management, earnings, liquidity, sensitivity to market risk] 1 or 2, if you’re familiar with the rating system. Almost everybody had a CAMEL 1 or 2, and you couldn’t charge a premium to them unless your Deposit Insurance Fund fell below a certain level.

What this prevented the FDIC doing was building up a cushion in good times so you could have more resources in bad times. At Treasury I had helped push for getting legislation to change this to give the FDIC—That was back in 2002. I came back; they were just now starting to implement it, so my first big first battle was starting to charge banks premiums who had gotten used to not paying premiums. The ones that were really going to have pay were the free riders like the Merrill Lynch bank—The people that came in later—because the banks had paid for the S&L [savings and loan] and the financial crisis through their previous assessments.

Anyway, we decided we were going to start charging everybody premiums. And we had a risk-focused way of doing that, but we wanted to start building up our fund. A lot of bank lobbyists are embarrassed now at the letters that they wrote me, but it got quite nasty. It was, “You don’t need any money.” “No bank failures for three years.” “The FDIC is fine.” “You’re kind of irrelevant now, anyway.” “We’re not going to have any more bank failures,” and on and on like that. And that old saw, of course: “We’re going to constrain credit if we increase premiums.” It’s not like they could ever take the money out of their bonuses or their compensation or their fancy offices or whatever; it always had to come out of the pocket of customers. But we did it anyway. I digressed a little bit; that was the big battle when I got there. It was kind of interesting, because it was something I had worked for in Treasury.

But even then, the staff and the economists—a guy named Rich Brown, in particular—were on top of this already. They had been looking at it; they had seen the risk building. The narrative then was that housing crises are regional, so you’d never have a national problem, and they were kind of challenging that assumption. They were very worried about the securitization market and convinced me to go out and buy a database, actually, so we could see what the loans looked like in these securitization pools, because they weren’t on bank balance sheets, so we couldn’t see them.

Let me ask one question—and I know David is eager to jump in on this—again, this is kind of a naïve question from somebody on the outside: Had there been instances since the FDIC was created where the reserve was in trouble? In other words, was there precedent for—

Yes, so I’m sure it was depleted—The S&L crisis—They had a separate insurer, and then we had a banking crisis following the S&L crisis. That’s a good question. I don’t know if it ever got to zero, but it was certainly something that didn’t happen often. And actually, when Don Powell was there, our inspector general had criticized him, because the flipside of this structure that I was talking about before was—You couldn’t really basically charge anybody premiums if your ratio of reserves to deposits stayed above 1.25 percent, but if you went below it, there was a huge cliff, like an automatic 23-basis-point assessment. And there was some suggestion that he had kind of massaged [laughs] the ratio—at least the IG [inspector general] was saying that, so there was that issue coming into it. But—I’d have to go back and look—not that I immediately recall being told that there had been a previous crisis about it.

The more fundamental question was about whether there were historical precedents that you had to be attentive to at this time that would have indicated that you really definitely needed to be worried about the size of that reserve.

Yes, the size of the fund. Yes. I don’t think when I first came there, and when we were doing that rule-making to start charging people premiums, there was a sense of urgency—that we realized—We patted ourselves on the back with how smart we were, but there was no immediate concern; from what you could see, everything looked fine. So it was really just more, again, the idea that regulation, as well as your reserve—like a bank, it needs to be countercyclical: When times are good, banks are making a lot of money, they can afford a higher premium; let’s build up that reserve now. That was more the thinking, as opposed to, Oh my God, the mortgage market’s going to blow up in six months.

That must be a really hard thing to do, thinking countercyclically.

It is. But it’s so necessary. Again, today, they’re not; they’re being procyclical again in their easing up of regulation, as opposed to being countercyclical.

All right, David.

I’m going to jump to the question that I shared with Russell earlier, but before I do that, I’m wondering if you—Your time at UMass Amherst—One of the things that we love about being in the academy is it gives us time to think and to reflect on what we’ve done in the past. I’m wondering if you think that that time away gave you a different perspective on the regulatory environment that you didn’t even know you were going to go back into.

Yes, yes.

Did you do some research—

Yes, good question.

—that made you think about the world differently? Did you have conversations with students or other academics that made you think about the world that you had inhabited through a different lens?

Right. I wish I could say it did, [laughter] but I don’t know that it did. I focused for my research—I taught risk management and insurance there, and I taught a graduate course on governance and banking regulation, but my research was—I did a lot of insurance work, but I also did a lot of work on consumer protection. And maybe that’s why I was so in tune on this mortgage problem when I got back, though actually my research was more on payday lending and the small-dollar loan market and the abuses there, not so much—And that issue is more just a lack of regulatory authority as opposed to regulators not doing anything, because again, these were nonbanks doing these kinds of loans; banks were not allowed to do payday lending. So no, I wish I could say I took the time to be reflective, but I can’t honestly say I did.

But it’s fascinating as you were talking about it, because there’s this wonderful part in the profile of you that Ryan Lizza wrote—and I’ll just read a little bit of it, because this is the part I found just so stunning, but of course, right? The stunning part here is, it says: “At Bair’s direction, the FDIC bought a database of subprime loans from a company called Loan Performance in order to study the problem more closely, something that apparently no other government regulator had thought to do.” [laughter] “The data were worrying.” And then he quotes you: “We just couldn’t believe what we were seeing. Really steep payments, shock loans, and subprimes, very little income documentation, really high prepayment penalties.” So it’s stunning to me—but again, not surprising—that this is—

Nobody looked. [laughs]

—data that’s out in the—

Yes, absolutely.

—in the private sector, right, that’s a commercial product, and folks in government—the regulators—have to go out and buy the data.

Alan Greenspan—and he said this publicly—Alan Greenspan actually told me he didn’t think the Fed had the authority to go out and buy data, because people asked him, “Why didn’t you do that?” But I think people can be very selective in their interpretation of legal authorities, right? So we got really aggressive with the bailouts, right, but somehow we had all these constraints around loan modifications. But I digress. [laughter] But yes, he did tell me—and he said it publicly—that he didn’t think the Fed had the legal authority to buy data. Go figure. Whatever.

But back to my earlier comment about models and whether people believed the models or were just using the models as an excuse to look the other way—because you didn’t have to look very hard to see what was going on. You really didn’t. And I think The Big Short—There are other reasons I don’t like that book, but I do think the basic narrative of The Big Short is right—These guys who were shorting the market, they weren’t geniuses; they were just willing to look and see things that others didn’t want to see because they were making too much money at it.

Yes, and they were able to buy the data and do the analysis, right? That’s out there.

Yes, it was absolutely out there.

It’s, as I said, just stunning.

Yes, I agree. I couldn’t believe it.

So I think this follows on to Bob’s broad question before, and it may be even broader—and just to your point now about the greed—but I’ll also preface it with Russell’s—I’m a layperson in this field: It just seems to me that regulation is like the proverbial Dutch boy and the dam, that you plug one hole, and that the inevitable consequence of that is that particularly greedy people—but this is also part of capitalism and a free market, isn’t it?—but they will find some way to make money. And so in addition to trying to be countercyclical, as Russell says, aren’t regulators also trying to figure out what these greedy people are attempting to do? And isn’t that just the inevitability of regulation? I’m not against it, by the way, but—

Well, I know. My son’s a Libertarian, and a lot of my conservative friends don’t like regulation because they just don’t think it works, or it’s coopted, it’s corrupted by regulatees—and there is some merit to that. I don’t think it has to be that way. I really don’t. I think prescriptive rules don’t work very well, so I like economic alignment of incentives, I like tough capital standards, I like risk retention on securitization, which unfortunately we didn’t do much of. You never know what the next stupid thing is going to be, but if they’ve got a lot of capital, first of all, you’re going to have more market discipline, because there’s more shareholder money at risk, but also you’re going to have a bigger cushion to absorb losses, and less risk of insolvency if whatever stupid thing they do goes badly.

But the level of capital that we need is significantly higher than—People brag, “Oh, we quadrupled capital requirements.” It was at 2 percent before. Oh, gee! Golly gee, it’s at 8 percent now! [laughter] And that’s risk-based. The leverage ratio is only 5 percent for a large banking organization. So 95 percent of the risk can be funded with debt. That’s a lot of leverage. And to say that’s a stable system now—I just don’t buy it. It should be double that, at least.

Sheila, what is your take on the movie The Big Short?

I think the basic narrative was right. I think it made the content accessible, so I think that was a positive. What I hated about it was the way it treated mortgage borrowers, because I ran into this. They kind of lumped them all, the stripper and the flippers, and the only sympathetic consumer in there was the guy who rented from somebody who had a subprime mortgage, not a mortgage borrower. So I hated that, and I fought against that perception.

Some of the political resistance came to loan modifications because the—and the Tea Party thing, and Rick Santelli having his fit on the floor—It was all about these deadbeat homeowners, and that was maybe a third of the market. It was there; I don’t want to suggest otherwise—There were a lot of people gaming the system—but two-thirds of the market were people in their homes trying to hold on to them, so I didn’t like the way it portrayed homeowners.

There were a lot of sympathetic families who suffered for years—and some of them may still be out there. A couple years ago, Zillow actually did an evaluation to see how many people were left with underwater mortgages, that were still stuck with these subprime—because they talk about teaser-rate mortgages, but these things had—Their teaser rate was like 8 or 9 or 10 percent, and there were still a good number in minority neighborhoods out there, people still religiously paying down on these high-interest-rate subprimes because they were underwater, they couldn’t refinance. So we didn’t help those people. I’m sorry, I’m getting angry, but it does get me on my soapbox. It just kind of drives me crazy, because there were just a lot of families out there hurting, and they got tainted with this flipper thing. And I was disappointed that The Big Short bought into that.

Go ahead, do you want to follow up on that, Bob?

No, go ahead, thanks.

I’m wondering—David’s mentioned one what seems to be important passage in the New Yorker piece, but I’m wondering, how early do you get a sense that this is—that there’s a tornado warning that has been missed?

Right. Yes, so I think that was by the fall of 2006. We were sounding the alarms. We were pushing the Fed to write mortgage lending standards; we were pushing the other bank regulators to write mortgage lending standards, to tighten up, because there were—thrifts, especially—there were thrifts that were doing some of this lending. So we saw there was a big problem coming. I think we were not—because it wasn’t in our—and this is the problem with the balkanization of our financial system, our regulatory system, and I hope has improved now with the Financial Stability Oversight Council—but where we didn’t focus, I’ll freely admit. We knew the mortgage losses were going to be big and the impact on the housing market was going to be big, because we saw a wave of foreclosures coming, and that was going to lower prices for everybody.

What we didn’t see was how unstable these securities firms were that were doing these securitizations, including the big banks that had securitization operations. With the exception of Citi, they had insured deposit bases for funding. What we didn’t see was how Morgan [Stanley], Goldman [Sachs], Lehman [Brothers], Bear [Stearns] were so highly leveraged and so reliant on short-term financing.

That became clear with the SIV [structured investment vehicle] thing in August of 2007. That’s when we started really appreciating how severe this was, because they had so much leverage. Again, we didn’t—If they had banks, they were teeny, tiny thrifts; they just weren’t on our radar, because we’re the FDIC. But the dawning of that risk came later. We had a mini-crisis with SIVs in August of 2007 that I think really brought it home.

OK. Let me come back to one of David’s—or—

I wanted to follow up just briefly on this. I’m wondering whether we didn’t see it, or we didn’t know to look for it?

On the short-term funding problem?

Yes.

Yes. Let me think about that. Well, we definitely didn’t—

Because there’s different ways to think about it.

—see it. Well, we had a lot to handle. [laughs] Obviously, our focus was insured banks, right? That was our statutory mandate; that’s where our exposure was; that’s where our public responsibilities were. Again, it’s our balkanized regulatory system. The investment banks? That was the SEC’s issue, and to some extent the Fed, and the New York Fed. There were prime brokers—There was some indirect oversight of—and certainly a lot of information flow to and from those big firms and the New York Fed. In retrospect, the New York Fed was not as forthcoming as they should have been, right? We had to rely on them to volunteer the information—which, frankly, we didn’t get. I don’t fault the—There’s just a general reluctance of regulators to share information. It’s just part of this siloed system we have, and it’s very turfy. And that’s still not fixed, either.

But yes, it would have been expecting a lot of the FDIC to start asking about big investment banks. I do. I do. We were not holding company regulators and we were not the primary regulator of thrifts. You look at Bear Stearns; they had a teeny thrift. Lehman had a teeny thrift—I think that would have been asking a lot, for us to kind of assume ownership of that. We had our hands full already with—There were enough banks that were where we had exposure, so that was where we were focused.

Gotcha. And that actually steers me directly into my question, which is: When you get to FDIC, you’re looking at the regulatory environment from a different perch. Are you seeing things from that new perch that surprise you? You’d been operating in this environment for a while, so presumably you had some sense of the contours of the environment. Are you seeing anything there that surprised you? And then as an add-on to that, I hope you’ll elaborate a little bit more about these silos and what it is that you’re experiencing in the run-up. Describe for us what those silos look and feel like, and the frustrations that are involved in confronting them—or not. As FDIC, are you spending a lot of your time reinforcing your silo?

[sighs] Well, I hope not. I knew you would ask that. In terms of surprises, I was surprised about the animosity and tension among the regulators—and it was almost a visceral reaction. If the FDIC wants to do it, the OCC [Office of the Comptroller of the Currency] didn’t want to do it—or if the OCC wanted to do something, OTS [Office of Thrift Supervision] was immediately suspicious that they were—there was particularly bad blood between the OTS and OCC. And then the Fed, too—I mean, the Fed kind of wanted power over anything, right? [laughs] And so they had their holding companies, so they really tried to exercise their muscle through the holding companies.

So yes, that did surprise me. That was such tricky territory to navigate—and how it got in the way of getting agreements. Because they were always looking for hidden agendas. John [M.] Reich, who said, “the audacity of that woman,” like this was just Sheila getting turfy; it wasn’t like there was a real problem we needed to deal with. It was maddening. So that was a surprise. And they were so late to the game in recognizing that. And of course then they were resentful of me. They didn’t like the fact that I was proven right, right? One would have thought, Well, maybe that would have made it better, but actually, it made it worse: Oh, no, now she’s—It was, Well, we’ve really got to prove her wrong, because she said this early and now we’re just finding it out and our male egos are hurt, or whatever. [laughter] So I think that was hard.

On the silos, we were accused—Ben et al.’s—the three amigos’ [Bernanke, Geithner, and Paulson] new book [Firefighting: The Financial Crisis and Its Lessons], though they’re reasonably nice to me, we still—I get this narrative from them that it was all about protecting deposit insurance funds, so I was fighting my corner. And, I think, [sighs] Yes and no. It was my job. I was already seeing—There was some crank on Bloomberg—It drove me crazy that Bloomberg would run these things—saying the FDIC was running out of money. Right? Gold brokers were saying, “Pull your money out of the banks, put it in gold. The FDIC is running out of money.” So we were fighting this. And yes, to deplete my Deposit Insurance Fund—and we kept saying, “We’re backed by the full faith and credit of the United States government. We can borrow if we need to.” That’s what was going on here. And if we lost the confidence of insured depositors of the FDIC’s ability to protect them, the whole thing was going to fall apart, because at least the banks were stable; at least people were leaving their money in FDIC-insured institutions.

So yes, I was fighting my corner in that regard, but there was a good reason to, and if they had taken a deep breath and thought about it for two seconds, the FDIC was really underpinning the stability of the insured bank—the commercial banking sector—because actually deposits increased; they didn’t decrease. And whether they want to admit it or not, that was because of public confidence in the FDIC, which we were working hard to protect. So if that’s turfy, I’m sorry, but there again, it wasn’t turf for the sake of turf; it was—I had to protect it, or we weren’t going to be able to do our job. And in point of fact, we did take a lot of exposure anyway, right? It was a negotiated process. That’s something I didn’t like, but we did. I mean, we guaranteed—

And they’re so funny—I think I tell this story in my book. Look, I respect them all. I think with women in particular, if you criticize a man or—I’m sorry, gentlemen, but I have to say this—if you criticize a man if you have a policy disagreement, it’s got to be personal, right? We’re being emotional. Oh, she’s got some petty little thing. Right? And it can’t be that I actually have some ideas on policy that are different from—right? So there’s always a tendency to personalize this stuff. And Tim in particular, we had a terrible relationship. It didn’t start that way. I called him an advocate for bailouts—I think I called him the bailouts’ protector in chief. But I don’t think he would have disagreed with that. He’s proud of them. That’s just how he thinks, and that’s not—He sincerely believes that was the best way to protect the public. He sincerely believes that was the best way to do his job.

So we all had our little things that we were trying to protect, and a cynical person would say, Well, the New York Fed and the SEC were trying to protect their reputations with these bailouts, because if these big banks went down, guess who was the primary regulator? So we could all get into that finger-pointing game, but at the end of the day, we needed to do what got the system stabilized—which we did.

But this debt guarantee program—They call me over to Hank’s office, wouldn’t even tell me what the meeting was about, and I’m walking into an ambush. Hank’s sitting there; Ben’s sitting there. There’s a speakerphone on the table. I’ll never forget it. Hank was in a chair and Ben was on the couch, and on the side table in between the two, Tim’s little voice was there. They handed me a script and said, “Here, we want you to have a press conference and read this.” I quote it my book—Hank owned up to it; I’m surprised that nobody picked up on it—It basically said the FDIC was going to stand behind all financial liabilities—not just bank liabilities; boom, everybody—all the big—because we had to, right? The problem was with the investment banks more than it was with the commercial banks, with the exception of Citi. And I said no. [laughs]

We negotiated and came back with something, which eventually became the program. And they leave that part out. They still criticize me because I wanted—Their original plan was “Sheila having a press conference.” So we did a program that made a lot more sense, that was very successful. I did originally propose—and I still think it would have been better—to say the bondholders still had to retain 10 percent of the risk. And I don’t know why they couldn’t take 10 percent of the risk, but even that was, “Oh, you’re going to destabilize the system.” So we did a 100 percent guarantee, but only for new debt. We charged a pretty good premium for it. And it was successful. And it was a net positive. But from an income-flow basis, that wasn’t the reason to do it.

But everybody’s got their perspective. Hank probably more than the other two admitted that when they let me in the room, I made it a better product, because we were seeing things that they weren’t seeing. We had a perspective they didn’t have; we had a sensitivity about the importance of the FDIC guarantee that they, as they were dealing with these larger, complex financial institutions, they just didn’t see.

So you’ve mentioned the gender factor. Early on you mentioned the Ivy League factor; I’ll ask you if that’s entering into it. But the other is the background of some of these people, coming from Goldman Sachs. It seems to me that has to be a factor, too. Are they not seeing things from that perspective?

Well, actually, of the three, Paulson and I probably got along the best. I think it was actually the reverse of what you might expect. I think Tim really had learned at the knee of Bob Rubin and saw the world through his prism—but Tim was learning through Rubin as his mentor; he had never been on Wall Street. I think he was a little naïve. He had too much of a tendency to just kind of believe whatever they were telling him—and they had to do this to save the system, had to write this check to save the system.

Hank, on the other hand, could be a little more skeptical about it, because he had been one of them. So I actually think it was maybe the reverse of what you would have thought—that Hank was a little more—He supported us on dialing back the debt guarantee program, the money market fund thing. He writes about this in his book [On the Brink: Inside the Race to Stop the Collapse of the Global Financial System]. Immediately they were going to provide an unlimited guarantee to money market funds—and that giant sucking sound was all the uninsured deposits coming out of banks into money market funds. We got on the phone and worked it out; they’d just guarantee up to the balance as of the end of the day the program was announced. So he would dial things back once we had a conversation, and I think he admitted that that was a good collaboration.

I just think Tim had a little too much of a tendency to believe the big banks, and maybe if he had actually worked on the Street, he would have had more experience, as well as confidence, to push back and question some of the stuff they were saying about how dire it was and how much money they needed.

Sheila, can you tell us about the morale at the FDIC when you arrived, and how you dealt with it as a manager—and how it’s evolving when you’re facing these issues, as well, directly?

Yes. Morale was very bad when I got there. Again, I think it was the golden age of banking. And Don Powell had many good traits, but he was not a fan of—He was a community banker. Actually, most community bankers don’t like regulation; they view the FDIC as coming in and harassing them, making them wear the helmet, right? Like OSHA [Occupational Safety and Health Administration], right? It’s just, Here comes the FDIC. What are they gonna make me do? And again, we were in the “golden age of banking” and we didn’t need regulation anymore, so his whole push was to kind of deregulate.

He had done something called merit exams the examiners hated. They called them drive-by exams. The whole idea was, basically, if you had a good supervisory rating or exam, then the next year they’d just kind of go in and do a quick look; they wouldn’t do a full in-depth exam. Again, that was procyclical, because at the top of a business cycle, those loans and that balance sheet are going to look really good, and the next year, as the market turns, they’re going to look really bad. So nobody was looking through the cycle, and the examiners hated it.

Then there had been some tremendous, hideous downsizing—really bad downsizing—too much. We had to start hiring again—especially the resolutions team. Again, they had assumed we weren’t going to have any more bank failures—That was the conventional wisdom—so we had to start building that up very quickly. Then just the way that the layoffs had been handled—and who knows what really happened, but there’s always a sense of favoritism and unfairness—so there were some issues there, and a couple of our operational people were really, really in the crosshairs of some of our employees, so I needed to turn it around quickly.

The first thing I needed to do was just find out what the problem was, because I was hearing a lot of conflicting narratives. You can’t rely on your top line, because they’re going to tell you—They’re good people, but in any organization, the top line’s going to tell you what they want you to hear, and they’re probably not always going to have a good sense of what’s going on down below in the organization. So we hired a professional third-party firm to come in and do an employee survey. We made it anonymous. We had all sorts of safeguards. There was a lot of fear of retaliation because of the way these layoffs had been handled. And I actually got some very good feedback about the underlying problems.

So we got rid of merit exams. We started hiring more people. And I was kind of frustrated with the union, because the union always wanted more money, more money, more money. And actually, the survey said our employees thought they were paid quite well; they needed more people. They were overworked. We downsized too much. Well, you can’t—You’re going to either raise salaries or you’re going to hire more people, because you can’t—We’ve only got so much budget, even with our increased premiums, so we opted for hiring more people. We started hiring again, and that took off the workload.

Another problem was that people had been promoted to midlevel management positions because they had done a good job at their frontline responsibilities, but didn’t really—They weren’t very good managers and had never gotten training, so we instituted a training program, a kind of assessment, for that middle level of management, which really is where your organization is going to succeed or fail. And we wrote position descriptions, because—Another thing that came through: people didn’t know what their job was anymore. They didn’t know what their relevance was. Again, because the former leadership kind of implied we don’t need regulations anymore, we don’t need examiners anymore. So we redefined position descriptions—again, provided more training for middle-level management.

I tried to simplify the corporate performance objectives and get them focused on depositor protection. Because the corporate performance objectives had kind of become a wish list of everybody’s pet project—That’s a common game, right? Oh, gee, we want to do project X, so let’s put it in the corporate performance objectives and then we’ll get a pat on the back when we do it, because it’s a corporate performance objective. People just weren’t screening that to see if it really was something the corporation needed to do. So we tried to reduce those and identify things that truly everybody in the company could identify with.

One of my key metrics was that no insured depositor would ever have to wait more than one business day for access to their money if their bank failed. Sounded simple, right? When you’re dealing with hundreds of bank failures, [laughs] it got a little more complicated, but we always achieved it. And we added something to the bonus pool every year that we did, so I think that all those things helped.

And then I was just more accessible. I started doing quarterly call-ins. I’d go into our situation room and we’d open up the phone lines; anybody who wanted to call could call. I’d do Christmas parties. I’d stand for hours and shake hands and pose for photos. And it was worth it, because people—That stuff matters, too. It matters a lot. So I think it was a series of things, but most importantly, just being in tune to what was going down in the lower ranks was really important—and engaging with them—putting a face to the leadership and letting them know that somebody was listening. That was important.

I wanted to ask you—because we sort of skipped over the specifics of your appointment—who was the highest-level person in the White House that you talked with before you took the job?

Oh, that’s a good question. I think Kevin Warsh, actually, who was the head of the—Was he the head of the NEC [National Economic Council] at that point? Yes, he was part of the National Economic Council, and he and I had worked together at Treasury. He was the one who called me. And then, of course, I worked with Dina Powell in [White House Presidential] Personnel [Office]. I did not talk with the President on that one. On the first one I did, but on that one I did not.

OK. And the White House Chief of Staff, you would have talked to?

Well, Josh Bolten I knew. He was a friend.

Oh, of course.

Yes, we probably talked about it. Yes, now that you remind me—yes.

And were there any efforts to communicate understandings about what they were looking at for you in this job, or is the dynamic a very hands-off kind of approach because of the regulatory environment?

No, to their credit, they never said anything like, “We want Walmart to have an ILC charter.” No. Never. Never. And I worry, because I kind of sense that’s been going on now, right? Is that your impression?

Looks like it.

Yes, you kind of get that sense. [laughter] So no—

Independent regulators—

No, not at all.

—not so much.

No. No, it never would have crossed their mind. No.

Well, we started by saying this is part of the Obama project—

Right. We’re going to get there. [laughs]

We will get there. But you are obviously in the Bush 43 administration, and you did say a little bit about your respect for Bush 41. And you are in an administration that’s being led by a President who is our only MBA [master’s degree in business administration] President—

Oh, good point. Yes, good point.

—though he is quoted as having said, “How did this happen?” [laughter]—

Well, a lot of people said that.

—as it’s all going south in that meeting at Camp David in August of 2006. But what is your sense of him as a President and as a leader? Both as you come in—As a Republican yourself—

Yes, yes. This is hearsay, but I’ll share it with you, because it formed my opinions of him. Going back to when I was in Treasury, after 9/11, Paul O’Neill, the Secretary of the Treasury at the time—I had worked with him and we have a really good relationship too—After 9/11, he was part of the Cabinet meetings where they discussed the response. And I remember him coming back and saying that [Donald] Rumsfeld] and [Richard] Cheney were pushing this Iraq thing and the President kept pushing back and saying, “Well, what do they have to do with 9/11?”

Paul didn’t want to—he was opposed to the Iraq invasion. I think maybe he wrote about this later in his book, so I don’t think I’m telling secrets out of school, but he said, “Because they didn’t have anything to do with it.” So Iraq had nothing to do with it, and it was ill advised, and I think somebody who was responding to it and was kind of appalled—because everything that we saw, all the intelligence that we saw, was, Iraq had nothing to do with it. So that made a positive impression on me—although he obviously eventually succumbed, and I think it really hurt his legacy.

So fast-forward to when I was at the FDIC. I did not interact with him much until the crisis broke. And even then—and this is true with the Obama administration, as well—The people at the White House and Treasury, they really—They want to cordon you off, right? They don’t want you to have a lot of direct access; they want the communication to go through them, because they’re part of the administration. So most of my dealings with the administration, those communications, were with Paulson, not with the President. Later, I did meet with him a couple of times. And it was really—It was touching.

I remember we had a meeting with him before that big September press conference when we announced all of our bailout programs. And I had just felt like I had had the you-know-what kicked out of me, because we had just been buffeted; we were butting our heads. I was trying to get more conditions on the banks for mortgage modifications. This debt guarantee program—as we implemented it, there were other regulators—there kept being more and more entities they wanted to qualify for the debt guarantee, and we were having to fight that off.

It had not been an easy process for me, and my agency was taking a huge risk. You didn’t see Treasury or the Fed going out there and saying they were going to guarantee everybody’s debt, right? They wanted the FDIC to do it. And there I even was—Well, we had the legal authority and they didn’t, although I kept asking them for their legal opinion, which I never got. [laughter] Anyway, the President thanked me. He turned to me—He made a point of thanking me, and recognized how difficult this was and how much he appreciated it. And I appreciated that, because frankly, that was the first thanks I had gotten. [laughs]

I treated him well in my book. I treat Mr. Obama well in my book. Whatever did or did not happen, I think the Presidential leadership was focused on the right things and wanted to do the right things. There were errors in execution below them, but I don’t really have any quibble with the leadership of either man. I think their hearts were in the right place, and I think Mr. Bush—43—was very good at identifying core problems and getting solutions to them. I do. Yes.

I’d like to go back to sort of the origins of the crisis, if you would.

Sure.

So you’re telling a story that the run on the banks was due to a dissipation of confidence owing to credit default swaps, and then that is due to the breakdown in the subprime mortgage market, and that was due to the collapse in home prices. Do you have a view on what triggered the collapse in home prices?

Oh! Good question. Yes, that would—

I have to keep going back—

First principles, right?

—and finding the first domino—

It was kind of—It was destined to happen. It was a bubble. This idea you can’t see bubbles—you can see bubbles. You don’t know when they’re going to pop, but you can absolutely see bubbles. My grandmother could see this bubble. It was ridiculous. [laughter] No, it was a symptom of loose regulation and loose monetary policy. And then there’s a big time lag, because the Fed was raising interest rates, but that eventually hit. Then there were just no more mortgages to make; they had saturated the country, [laughs] you know? And home prices could only go up so much. It’s just that debt-fueled asset bubbles are unsustainable by definition. They’re going to pop. They’re going to turn.

So I wanted to go back to something that you mentioned when you were answering, I think, Russell’s question about the working relationship with Paulson and Bernanke.

Could I just add one thing to that question? It’s related to another interesting metric that I wish the Fed would use more: tracking the growth of consumer debt in relation to GDP [gross domestic product]—and in relation to real wage growth. Because if you looked at that, you could see the mortgage debt rapidly escalating, far outpacing real wage growth or even GDP growth. And the IMF [International Monetary Fund] has done some interesting research on that, showing that that is actually an indicator of financial crises—when debt far outstrips real wage growth. And it makes sense—they just can’t service the debt. OK, I’m sorry. I digress. Go ahead.

No, no, that’s great. Let me get at this question in a slightly different way. One of the—Early on, late in 2007, Northern Rock collapses. You advocate for a freeze on interest rates on ARMs [adjustable-rate mortgages].

Right. Well, no, just subprimes.

Oh, subprimes.

Yes, private ARMs, subprime private ARMs.

And this is described by you; this is described by [Roger] Lowenstein; this is described in the [Wall Street] Journal. And I really have two questions about this. One is, some of the narratives suggest that Paulson was strongly against this, and so I’m curious if you can talk about that. Because it sounds like, from what you were describing before, that you all had at least a reasonably good working relationship. Didn’t have to agree, right?

Yes, yes.

So talk a little bit about that. And then I’m curious about—Kind of taking a step back, if that had been possible, who and how would it have been implemented? I’m trying to think about this through the lens of authority.

Right. Well, those are all good questions. We suggested that—for the hybrid subprime ARMs—that you just freeze the starter rate and just convert them into a 30-year fixed-rate mortgage. That was our proposal. And I heard Paulson hated it; I don’t recall he directly gave me that feedback. [laughter] And he kind of got religion later. [laughter] But I can only assume one of the reasons was—

We were talking about turf and silos earlier, so you’ve got to look at Treasury’s role as funding the government. A lot of people who buy Treasury bonds are the same people who bought mortgage-backed securities, who liked those higher interest rates. And even though we argued that with the market turning, they were going to pay—These loans were going to default—and we were proven right. So forget it, you’re not going to get those higher rates; it’s unrealistic to think that you are. But there was a lot of pushback from the bond investment community about doing that. And that flowed through even later—When Obama did his foreclosure modification program, it was basically an interest rate subsidy to bondholders, right? They were finally reducing the interest rate, but the subsidy was basically going to bondholders to take some of the sting out of that. It didn’t work, and we told them it didn’t work. So I think probably Treasury’s institutional interests, as well as the people who whisper in Hank’s ear from Wall Street were really hating that idea. Yes.

If this had worked—I’m curious about this from a policy perspective. When it was decided that deposit insurance was going to be raised from $100,000 to a quarter of a million, it strikes me, as I read the statutes, that this is something within the statutory authority of FDIC.

Oh, no, we had to get statutory authority for that.

Is that right? OK.

Yes, we did. And there’s an interesting backstory on that. They’re, again, not talking to me. I will have to tell you, they didn’t get TARP [Troubled Asset Relief Program] the first time. They had put a sweetener in for Main Street, so they decided it would be $250,000. It was actually more of a sweetener for the community banks than it was for Main Street. Who’s got more than $100,000 in a bank, right? And there were already so many different ways to structure your accounts—so if you had a joint account, it was $100,000—you and your husband; if you had an individual account, that’s another $100,000—I mean, you could get several hundred thousand dollars just through account structuring, so that wasn’t hard to do.

The runs we were seeing—which I would have asked Congress for—and then we actually did do this through a systemic risk exception—were with our transaction accounts, municipalities, small businesses. Those would spike up and down as their cash flow demands and payroll demands determined. That’s where we were seeing stress, and that’s where we were seeing the money coming out of the smaller banks instead of the big banks, because at that point they were being perceived as too big to fail. So I wanted a transaction account guarantee, which I didn’t get in the legislation. We did end up doing it through the systemic risk exception.

The $250,000 was fine. Even somebody with $250,000 in a bank, I don’t think you’re going to get much market discipline from depositors, even at that level. It’s the bondholders that really have the capabilities and authority to analyze these banks and understand if they’re taking an imprudent risk or not. So the dilution of market discipline I thought was pretty marginal, whether you were at $100,000 or $250,000. But the important point was, that didn’t really address where the volatility was. The volatility was in the transaction accounts, which we ended up having to do through regulatory action, because it wasn’t in the bill.

So to the extent that a lot of what’s going on needs to be part of legislation, talk a little bit about what your communication is with Congress—and with which committees, and who do you listen to and—

Oversight issues.

So on TARP, we were pretty much frozen out. We were left out of that process. I would have told him a three-page bill wasn’t going to work if he’d asked me, but he didn’t. It annoyed me, because then this deposit insurance thing, when they realized they needed Main Street, they didn’t ask me about that either; they just—A representative said the FDIC wanted this, so Dodd and Barney Frank and people who were my friends assumed they were helping the FDIC. And again, it was—I didn’t care. It was fine if you’re going to raise it, but it was just—That was one example where we were really left out. The legislative process at that stage—We were very involved in Dodd-Frank. The legislative leadership had learned to work with us directly, but at that point, basically, this was the Ben and Hank show. I don’t even think Tim was that involved with it. I think it was Bernanke and Paulson who were making those communications.

[whispers] Wow.

Yes. I know.

It’s just remarkable.

Yes, yes. Yes. Yes.

Did you ever feel threatened for the independence of the corporation? You weren’t being consulted, but did you ever feel politically at risk?

That’s a good question. I felt the pressure we were getting on Citigroup was completely inappropriate. I’ve been public about that. And again, I don’t assign bad motives to anybody. Hank said, “If we let Citi go down, it’s our fault.” That’s nonsense. If Citi went down, it was Citi’s fault, right? That whole mindset was just so foreign to me. But boy—especially Tim—they really wanted to take care of Citi. And that was inappropriate, I thought. And I thought they had blinders on.

And even Tim, later, in his book [Stress Test: Reflections on Financial Crises]—He was trying to get us to—He and the OCC had basically teamed up and were really putting pressure on us to sell Wachovia to Citigroup—or to support that sale. And I was reluctant. We ran a bidding process, and Wells Fargo came in with a really unreasonable bid, so shame on them, so we had to give it to Citi. Then, of course, later, Wells came in with something that didn’t require any support, and that was a giant sigh of relief. But even then, I felt they were hiding the ball on us. I didn’t think OCC was giving us the true picture of Citigroup. We had an examiner. And actually, OCC’s own examiner—I understood from my examiner; I never talked to this guy directly—was sounding the alarm bells on Citi, and was being squelched a bit at the top levels.

So I do think there was too much—I don’t second-guess people’s motives, but there was way too much focus on Citigroup. And I think a lot of the bailout decisions were driven by the desire to cover up their problems—again, not in a nefarious sense, but in a sense that their view was, if Citi looked like it was unstable, it was going to shake up the whole system, so they wanted to camouflage Citi’s problems. My view was everybody knew Citi was a problem. [laughs] But yes, that’s probably the closest I came to feeling political influence.

So speaking of politics, were you thinking, as TARP was going forward—to your title of your book about Main Street and Wall Street—were you thinking of the politics of your upbringing in Kansas, how was this going to play in Independence, Kansas?

Not really. I knew it was going to be unpopular. You see the parallels now—I get asked about this a lot—between subprime and student debt now. You probably saw that Elizabeth Warren came out with a proposal to forgive about $650 billion of student debt, and she’s getting the same flak we got: This is unfair, bailing out deadbeats, it’s not fair to the people who did pay their loans. We got all of that. And just to put student debt aside, at least with the subprime crisis, we were so far beyond that; the money was out the door. These loans were going to go down, and they were going to be vacant properties in your neighborhood drawing down your property values; it was going to hit the broader economy. We were so beyond whether individual homeowners were deserving of support and help or not. We were so beyond that.

And Santelli’s a friend, but I think a lot of this stuff was being driven by—There were a lot of shorts at that point, and one of them—was it [John] Paulson?—I think went public and then backtracked very quickly. They were shorting the market. They didn’t really want to get it fixed at that point, right? And so Sheila coming in with wholesale mortgage modifications to keep people in their homes and keep them from defaulting, that was going to interfere with their payouts on their short positions. So I think a lot of that political pushback was genuine; I think a lot of it was generated by these shorts in the market. I absolutely do. And there’s still—Social media has made it worse.

Given the fact that we’ve got about a half an hour in the morning session—

I’m sorry, John Paulson, not Hank Paulson. I assume that was clear—John Paulson, the hedge fund man—right? OK, good.

Gotcha. But I just want to make sure that if there are things that you’re interested in delving into, if we can do it without getting too much out of sequence.

I don’t know that this will take us out of sequence—It’s kind of a broad philosophical question. Everybody has their story of the Wachovia weekend, right?

Right.

I was interested to see how many parallels there were, and there are differences of opinion and differences of interpretation, et cetera, so I’m going to ask you a philosophical question: It seemed like during that weekend—and I’m sure there’s other—it sounds like many other events where you’re between a rock and a hard place. Did you think about just walking away?

Oh!

Did you think about resigning? Because when you talk about Wachovia, there’s passion in that chapter.

Yes, yes.

And there’s anger in that chapter.

Yes, yes.

And as we read other narratives of it, it’s—

Yes, there’s a lot of anger.

It’s extraordinarily intense. So at a certain point in time, I’m wondering, because you’ve talked so much about the importance of public service, and that you feel an obligation to protect the homeowners and citizens, how do you balance those tensions? I want to do my job that I was appointed to do and I was asked to do; at the same time, there were just some things I couldn’t do—right? And I’m not trying to put you in a place to say, Yes, I bent or didn’t bend. But did it go through your mind at certain points in time that I just can’t—I’m unwilling—

To do it anymore?

—to do this?

No, I can’t say it ever did, because there was just so much work to do. I couldn’t bail on the agency at that point. If the FDIC Chair had stepped down, that would have been terrible. That would have had a systemic impact, so no, it really never did cross my mind. No. I had no way out, so I just—It wasn’t fun, it wasn’t happy, but I just kept at it. And I stayed in there, and I think we improved the results. We won some, we lost some, but we—and Hank, at least, will admit—when we were part of the process, we improved it. I’m proud of that. And I think there are several hundred thousand people who have homes now who would not have had them if we hadn’t been in there fighting. Was it as much as we needed? Absolutely not. But it was something.

And I wasn’t going to give up on that. Because if I wasn’t there, nobody was going to speak for homeowners. They just didn’t—It was just too hard, right? It was just too hard. It was so far from their reality, which was the big banks and Wall Street. It was just so far from their reality. Nobody would have advocated for them—or it would have been something they wouldn’t have taken seriously, you know? So—anyway. No, I never thought about leaving. [laughs]

That’s fantastic.

Can I—

Yes, please.

—add on to that? So Geithner and others would say that the difficulty of mortgage modification and dealing with the threat of foreclosures was just—Due to the impossible complexity of mortgage-backed securities, just trying to adjust the mortgage on one case that is embedded in a large mortgage-backed security, finding the way back to the original, the ultimate investor in that mortgage to get the investor to forbear to blah-blah-blah-blah-blah—What’s your take on that? Were we stymied by the complexity, or was it politics?

Well, it was certainly a complicating factor. And that was one of the reasons—I think it was March of 2007—we convened all the regulators and the rating agencies and the securitizers and the buy side and looked at the authorities to modify these mortgages. The general legal consensus was that the authority was there if you could prove it maximized the value of the securitization trust—which we argued it did, because if you didn’t modify these mortgages, then they were going to go bad. There just was no way around that, so there was general agreement on that point.

But then it turned out to just be happy talk, because when push came to shove in the fall, when the default rates were really pushing up, they weren’t doing anything. Mark Zandi at Moody’s Analytics did an analysis that said a low percentage—like, 4 percent—of the distressed mortgages were actually being modified; everything was going straight into foreclosure. So was there legal complexity about it? Yes. I think we had found a way around it, or at least to rationalize it—or defend against any kind of legal action—but I just don’t think they wanted to mess with it.

And a huge part of the problem—which is still a problem—is these servicers were just understaffed. They were equipped to take checks and remit them to investors—put them through the securitization trust. A loan workout takes staff. You’ve got to get on the phone with people, you know? And that’s why we said, Do it systematically, have a protocol. That’s what we did with IndyMac [Independent National Mortgage Corporation] Bank. We just converted everybody to a 30-year fixed, right? Unfortunately, we had high redefault rates with IndyMac, because a lot of those borrowers had been delinquent for over a year, and that’s the other thing the data always showed: Do it early, do it fast. If you wait—If you let them have a year of not making any mortgage payments at all, guess what? [laughs] It’s going to be really hard for them to start sending checks in.

But we had a very simplified system. We got the investors to agree to it. Actually, the protocol we used, of reducing interest rates and then extending amortizations—IndyMac actually did not use principal reductions. I came to that later, but at that point, which was still fairly early in the crisis, we used interest rate reductions and extended amortization to get the payments down. And they used that protocol later, for HAMP [Home Affordable Modification Program].

With IndyMac and with other failed banks, we put some insurance against redefault. So putting understaffing of the servicers aside, the other reason you didn’t want to do a—The economic incentives were not aligned to do modifications because, one, if you’ve sent it into foreclosure—The servicers get paid their administrative fees up front, right?—and the house got sold, you got paid right away. Of course, then after a while, that process eased up; those houses weren’t moving, so that was not a problem. That was a big part of the issue. And again, the other problem was that they just didn’t have adequate staffing to do it, and they didn’t want to spend the money to do it.

So we tried to make it simple and idiot-proof for them, but also pay them against redefault risk, because the other concern they had—which was more legitimate—was, OK, what if we do a loan modification now and the borrower pays for another six months and then they default again and the house has lost another 10 percent of value, right? That was a real issue. That’s why we offered an insurance program against redefault losses. So if the foreclosure value of the property dropped after the modification was made, we’d take half the loss for them. And that formed the underpinning of the program we wanted the Obama administration—well, Bush people, too—Hank didn’t want to do it, he said for a lot of reasons—that was really what we wanted the Obama people to do, which they didn’t do.

I’m sorry, I digressed a little bit, but—

Just the small detail has really piqued my interest. So there was a gathering, you said, in March of ’07 of a conference—

It was.

—that concluded that systemic restructuring was possible?

Yes, it did. You can probably find the press releases we did at the time. And then Congress got in on the act, which I actually welcomed, because Senator Dodd got all of the same people together and forced public commitments from them to him, which was more than probably the Chair of the FDIC. So yes, that was all public, in the spring and summer of 2007. Your researchers can probably find press releases about that.

And then in the fall of 2007, that’s when Zandi did his analysis that showed they weren’t being modified. In October of that year, that’s when I did my op-ed in the New York Times that got—Actually, both the New York Times and the Wall Street Journal editorial boards endorsed it. I think rational people looking at this agreed with me. But I got all the Tea Party pushback about helping deadbeat borrowers. That was the sequence of events.

I’m kind of getting ahead on the timeline here—but later—So at that point, we weren’t doing principal reductions, because all of our studies were showing, just get the payment down. It was that really making that payment affordable is what’s going to get the mortgage rehabilitated. Later, as the housing market kept tanking, the analysis was showing that you actually needed to provide some principal relief, because some people were just so in over their head, you were never going to rehabilitate them. They just needed to be able to sell the house and get out, and they couldn’t without a principal write-down.

When the robo-signing scandal broke, I wrote a memo to Tim, which he promptly ignored, [laughs] saying, “Let’s use this as leverage. These servicers have huge liability.” They did; there should have been people going to jail in that. That was absolutely outrageous. “We’ll stand down on bringing regulatory—and we’ll get the Justice Department to stand down, too, if they agree to—for all these distressed mortgages, just write them down to their current appraised value,” because they weren’t worth any more than that anyway. We thought that was consistent with the securitization trusts. Again, that’s what the mortgages were worth; they weren’t damaging value of the securitization trusts, so just write them down. Let people sell them, or they can start making their mortgage payment again. The lender or whoever loaned the mortgage, they could share 50-50 on the upside, but let’s just do that, because this isn’t working, and these dysfunctional servicers—You’ve got this complicated HAMP program that’s not working; they don’t have enough staff to do this. And he just—he wouldn’t even respond to it.

At that point HAMP had not worked out well. They had another program, called HARP [Home Affordable Refinance Program], this interest subsidy they did. It didn’t work. We told him that. So instead of looking to, perhaps, the flawed design of these programs, he just thought, Well, it wasn’t worth it, didn’t want to mess with it. I’m putting words in his mouth, but that was my impression.

Interesting.

David, anything?

No.

You indicated that one of the main things on your portfolio when you took the positions was the Walmart banks and so forth.

Right. Yes, yes.

What happened to that?

That issue was consuming the agency when I got there. It was just consuming—Everybody was obsessing over Walmart and this big, huge company wanting to have an ILC charter—It was basically a bank charter, but ILCs are—Usually commercial entities can’t own banks, but there’s an exception for ILCs. So as I said, when I took the job, I was open to it. I thought, Oh boy, I might get to work on that. Then when I realized we had all of these other problems, I thought, You know what? I am not gonna approve this charter and then get embroiled in two years of controversy on the Hill—unions and everybody else who hates Walmart.

So I just slapped a moratorium on it. I didn’t disapprove it; I didn’t make them withdraw. I think it was originally 18 months or something—I just kind of threw the ball back, the hot potato back to Congress and said, “Here.” Because we had gotten all these nasty letters: “Don’t approve the ILC charter.” Well, this is a law you set up that clearly allows an entity like Walmart to have an ILC charter, so I threw it back to Congress, and then Walmart just threw in the towel and withdrew. And that made the issue go away.

OK. But Walmart threw in the towel after everything started to go bad—

They threw in the towel after I announced the moratorium. It was months later. They just decided to withdraw.

But before all hell was breaking loose?

Yes. Before it was—Well, we knew that—Yes, we were looking at housing problems at the FDIC already before there was any public issue. Yes, absolutely.

Excuse me—

Yes, please.

—do you have any notion—Just play the counterfactual for a second: What if Walmart had gained the ILC charter perhaps just before you came in or on your watch or whatever.

[laughs] Yes, OK.

How severely would they have been impacted by the financial crisis?

Oh, that’s a good question. They probably would have been helped by it, I think, because I don’t think anybody would have assumed a Walmart bank would have gone under. So yes, that’s pretty deep pockets [laughter] to have behind—So, that’s pure speculation on my part. That’s an interesting question. I never thought about it. But yes, I think they probably would have—because they didn’t—They just wanted to do a transaction—accounts—They wanted to issue a card. It was cash management with them. They weren’t going to make loans; they weren’t going to take any credit risk; it was just cash management.

You weren’t going to get a mortgage from Walmart?

No, absolutely not. They had no—Now there were a couple—There were other ILCs—What was the——the big Dutch insurer—

ING [Internationale Nederlande Groep]—

No, I’m talking about—

ABN AMRO [Algemene Bank Nederland-Amsterdamsche en Rotterdamsche Bank]—

I think it was ABN AMRO. They had an online mortgage lender that did get in trouble. Yes. Yes, it did. Yes.

All right. One of the—

But I didn’t approve that. Not my call. [laughs]

That’s quite all right.

Just to be clear. Just to be clear.

When you get into Dutch mortgage lending, you’re way off my radar. [laughter]

Tulips. I know about the tulip bubble.

That’s right, tulips. Yes, yes.

Ratings agencies—That was one of the occasional culprits. Can you say anything about that? What were you—

Yes. So they clearly should have had more accountability in this. They had handed out the ratings that justified the low capital treatment that created all the incentives for the big banks to do this. And they were being paid by issuers, so that whole model—which still exists, much to my surprise—was inherently conflicted. They were kind of hiding when this all started.

Maybe atoning for their sins, I don’t know, but they were actually quite helpful to us on trying to get movement on loan modifications. They came to the meetings I was talking about in the spring of 2007. They were helpful. They really were. S&P [Standard & Poor’s] in particular was helpful. So I don’t justify or defend what they did beforehand, but when things started going bad, they really—They tried to help, unlike the mortgage insurers, who were really difficult. They didn’t want to pay any losses. And they resisted mortgage modifications, because if a mortgage was modified, they didn’t want to pay any losses on whatever the difference in value was. Again, that was creating economic disincentives for servicers to do the modifications to begin with, because if you send it into default, send it to foreclosure, the mortgage insurer was going to pay; if you modified, they weren’t going to pay. So they were—yes. Oops.

I don’t know where that came from.

But the rating agencies—I know. Was that a bug or just a piece of lint?

I don’t know.

It was coming for you. [laughs]

Maybe a marble something or other. Now I’ve completely lost my train of thought. [laughter] I hope you got that on film, guys. [laughter] David, anything else from your perspective that you—

Yes, I’m intrigued with the tenor of things in the regulatory—in the agencies in the run-up to the election.

Right.

Right. So everybody’s curious about what’s happening and how politics influences the regulatory environment. We have models and theories about independence and what have you, but my reading of the unfolding of the campaign and the unfolding of the crisis is such that there really was not a sensitivity to the fact that there was an election going on here.

Right. I think that’s accurate. I was oblivious to it. I wasn’t paying any attention. I think Hank was a little bit—

Just a lot going on.

Yes. Hank was—Again, he was doing the TARP legislation, and obviously Presidential politics played into that, and he will never forgive John McCain for coming out against what he wanted to do. But I’m sure—It was front and center for Hank, but we were not distracted by it at all. We just weren’t. I remember Hillary Clinton called me and offered support when she was—that was still in the primary. Yes. It’s funny, several people called me and said, “We’ve got your back with Tim.” OK, thanks. [laughs] I didn’t quite know what was going on then. I found out later, but—yes, yes.

You didn’t know you needed your back gotten. [laughter]

In fairness to her, I don’t know if she was that explicit about it. But she made a point of calling me and saying she had my back. Yes, she did. Rahm Emanuel did, too, so I should have known something was going on then. [laughter] As I said, I was focused on other things.

I would imagine. We’re in 2008, right? So Northern Rock—We’re doing restructuring; the Presidential candidates suspend their campaigns, come to Congress. You have joint meetings, lots of press, lots of publicity. During that, does that amplify the tension that is clearly there between FDIC, Treasury, Fed—Does the politics shining a light on the crisis—and you becoming more of a public figure—does that alter your ability to do your job, because now you’re a face and a name, as opposed to who you were before?

Oh, that’s interesting. No, actually, I think it helped—at least in terms of doing my job. Because the FDIC was all about public confidence, and the more people were able to put a face with the leadership of the FDIC, I think the more it bolstered confidence. So actually, I think, more people knowing who I was and who my agency was—I think that actually helped. I do. I don’t know that it gave me any more stature or influence with the other regulators. I think they got—and Tim goes into this in his book,not so much me personally, but some of the other people at the FDIC—this paranoia about press leaks and stuff, which we did not—I’ve said that until I’m blue in my face: We did not leak. I don’t leak.

We did defend ourselves when we were leaked against—and frequently, that’s what was going on; somebody else was leaking against us. And when we were called, we would then be very open with information. But we just—We told them. We didn’t leak. We would go on the record and say, “No, if you’ve been told we’re doing this, that’s not what we’re doing; we’re doing this.” And I think that annoyed people. So I think the notoriety created some—And they still are annoyed with me about this, that I survived. They got a lot of public criticism for various reasons, a lot of it unfair, but for the most part, we did dodge that, and I think that maybe that created a little bit of resentment. Well, it did; it created a lot of resentment, actually. But it was doing the job, and I wasn’t going to stop engaging with the media because it made other people feel insecure when, again, I thought it was an important part of my job.

Media is a means to an end; it’s never an end to itself. I think public officials—I’ll talk about government service for a minute—I think when government officials take jobs because they want to be in the media, then they probably fail. If they understand that media—Once you have a well-thought-out policy plan and things you want to achieve at your agency, then you strategically think about your media engagement to accomplish that; you succeed then. If you do media as an end, it never works. And reporters don’t like it, either; you lose credibility with reporters.

That’s an interesting observation, because in all of these multiple accounts, even from people who are your critics, one of the points they put in your plus column: media-savvy.

See, I think I’m media-savvy because I tell the truth. [laughter] No, seriously. I think I have a good ability to break complex things down into simple terms, and I think that’s why—People needed to hear that. You’ve heard Hank. Hank is not a good public speaker. He stumbles; he’s awkward. Ben was a little better. And then Tim later learned at the Treasury. But really, of the four of us, I was the only one who could break it down and explain it.

So whether they want to admit it or not, I was actually helping them, because I went out there; I defended TARP. Everything that we announced in September, I went out there and defended it, saying we’ve got to keep the banks operating, we’ve got to keep credit flowing to the economy. I was bitterly disappointed with how the banks did not really do as much as they should with the support we gave them, but I went out there and defended it. And I think that helped. And I think the only reason I’m savvy is because I’m just open and honest with people—and broke it down in the simplest terms, so it didn’t sound like I was using a lot of jargon and trying to—

Right.

I remember once I was on—was it Ali Velshi? I think maybe it was CNN [Cable News Network]. I can’t remember. I can’t remember what the context was, but I started talking about LIBOR [London Interbank Offered Rate]. Usually I don’t default into that kind of technospeak, and he said, “What’s LIBOR?” And I said, “Four hundred basis points.” [laughter] And then I immediately went, OK, shouldn’t have said that. [laughter] But usually, I was better at it. Again, I think that helped the government generally in its stabilization efforts, because I explained it to people—and they could understand how I explained it.

Which then steers us directly to this question: How good or bad was the press coverage and understanding of the problems that you were dealing with? In other words, was this almost universally an obstacle, that this was so complicated that you had to spend a lot of time out there educating? Did you feel like you did it successfully, or was it—Were there instances where journalists who are no more schooled in these things than I am are having to communicate to the American people stuff that we don’t fully comprehend?

Yes, right. I would say for the most part the press helped. But not all of them. I think especially the Journal and the New York Times—and a lot of those journalists who kind of bought into the, “We don’t need regulation anymore and everything’s great and we’ve managed,” blah-de-blah—they realized that they had fallen down on the job in not covering some of this deregulation and kind of drinking the Kool-Aid. So if anything, they were trying to make up for it, so I think we found some sympathy with them. And being more friendly to—because we’ve talked about foreclosure prevention, but I was also fighting a battle on capital. Thank God we fended that off, but they really helped a lot on bank capital, especially the Wall Street Journal. But there was some guy at the New York Times—and I remember you had an interview he did on PBS [Public Broadcasting Service]—Charles—I can’t remember his name—

Duhigg?

Yes. He really did a hatchet job. He did not like me. He really did not like me. He did a couple of hatchet jobs. There were a few others. You just can’t make everybody happy. And then Andrew Ross Sorkin, with whom I now have a very positive relationship, but he did what I felt was a blindside. We were trying to—Remember troubled asset relief? The original purpose of TARP? Hank just threw that out and did these capital investments in banks. But there was still some money left over to do troubled asset relief—which we thought was a good idea, because it was another way to get those mortgages written down. OK, make the banks sell them.

Since there wasn’t that much money left, we wanted public-private partnerships, and to set up these public-private partnerships and allow them to use a certain level of leverage to take the $200 billion or whatever it was they had left. So instead of doing $200 billion, you really could do $1.2 trillion or whatever—whatever your leverage amount was—and I think we suggested six to one, which sounded like a lot of leverage. Well, guess what? The FDIC is an unsecured insurer, basically. Banks at that time having a leverage ratio of 4 percent—which is 24/1—we were way above six-to-one leverage. Come on, it’s a leveraged sector.

So Tim—I think this came from Treasury—Tim really didn’t like the idea—again, because if we had done this, it would have forced cleaning up a bank balance sheet; it would have forced them to sell into a facility; they would have had to take markdowns on those mortgages, right? They just would have had to. And we didn’t really view that as a bad thing, because that was just more honest, and then you could do a better job—you could get the mortgages into other people’s hands and get them restructured if they bought them at a cheaper level; they could do principal reductions and a lot of things that the banks didn’t have latitude to do.

So anyway, somebody called Andrew Ross Sorkin before this was even public and leaked this thing and got them focused on the six-to-one leverage. And oh, my God! The whole thing was, “Oh, Sheila Bair’s naïve and she doesn’t know what she’s doing and she’s going to be taken to the cleaners by Wall Street,” blah-de-blah-de-blah. He came out with the story—never called me for our side at all, except for at the last minute, did a terrible story in his column. That stands out to me as one of the times where—Usually the reporters who went after us were not very credible, but he was, and I was disappointed in him that he didn’t at least sit down with me if he was going to do—Because it was personal, it was after me—He should have at least sat down and talked to me, which he didn’t do.

And then his book [Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System—and Themselves] later was not particularly kind to me, either. And he didn’t talk to me, again. We’ve patched it up since then, but no, I can’t say he was a friend during the crisis at all.

But an interesting thing you said was something to the effect of, they were trying to catch up because they had missed the story, too.

Yes, they were. Yes. Yes, I think that’s right.

And going back to an earlier question about a properly functioning system, where do the alarms go off? I would think in a properly functioning political system that journalism is one place—

Should have been, yes—

—where this happens, too. So how do we explain the absence of good, accepted journalism on this particular problem?

Well, in fairness to the journalists, I think you’ve got a couple of problems. One, you’ve got the same cognitive capture you get with regulators. All their sources, whether their sources are big banks or people who work there—or big financial institutions; I shouldn’t say “banks.” That’s who their sources are; those are the people they talk to day in and day out. They talk to Sheila Bair, too, sometimes, but I’m not in their daily existence.

Also, when you’ve got the regulators backing up industry, then you’re probably asking a lot of journalists to take—and they’re scared of the Fed. They’re very scared of the Fed, so when the Fed’s saying this, as they were, prior to the crisis: We’ve got these sophisticated risk management controls now and models; we can lower bank capital and still be safe—and you’re hearing that from the Fed now: We can tweak this; we can make the stress tests go every other year; we don’t need all these living wills all the time—When the Fed’s saying that, and you’re asking, you’re challenging—you’re asking for courage from the journalists. And we still need it, because we saw during the crisis that the regulators are fallible, too. But it takes a lot of courage on their part to do it.

And did you find that the reporters who were working your beat were pretty savvy on it? Or—

Yes.

This is a very rarified area. These guys would know it better than I would, but a combination of journalism and financial sensitivity—

Yes. I don’t know. I’m trying to think back on specific examples then. Peter Eavis was good. I’m trying to remember—I’m sorry, what was your question again? I’m free-associating here—

No, I understand. I complicated it by probably asking two or three questions simultaneously, which you should never do in doing an oral history, [laughter] but—

All right, I see.

—it was mainly about the kind of grading or a competency level for—

—or a sophistication.

—journalists who are working your beat. Because they have to be good writers, but also, they have to know their stuff, and in a competitive market, I guess they’re trying to write things that are going to get printed.

Yes. Peter Eavis, I think, at the New York Times, had—A lot of the advocacy groups had kind of always gone after him for being too close to the banks, and I don’t think that’s right, but he was a good friend on bank capital, I’ll tell you—and still is. Yes, still is. Damian Paletta over at the Wall Street Journal—I think he’s at the [Washington] Post now—was very savvy on this stuff.

Citigroup was really paranoid about me and the FDIC and fearful that we were going to downgrade them and put them on the troubled bank list. And in point of fact, my examiners were pushing that, and I wasn’t sure. Citi never understood who I was and always thought I had a personal grudge against Citi, right? That must be my agenda. I didn’t know if that was a good idea, and I was trying to handle that internally. I didn’t want my own IG coming in saying, “So, Sheila Bair stopped a downgrade.” On the other hand, OK, if this thing goes on the troubled bank list—and everybody’s going to know it’s Citi, because the troubled bank list—It was well over a couple trillion dollars, probably, in assets—I can’t remember at the time what exactly it was.

I’m trying to manage this thing, and all of a sudden, I see a front-page Wall Street Journal story by Damian Paletta saying, “FDIC contemplating putting Citi on the troubled bank list.” I thought, Holy crap! Where did that come from? And then the Citigroup management has a press conference attacking me for leaking this to the Wall Street Journal! [laughs] And then a reporter told me later that Citi had leaked the story as a preemptive—They were so scared we were going to do this, they thought it was better if they leak it themselves, get it out there, and then put me on the defensive for taking the blame.

I’m just telling you guys, I was accused a lot for leaks with stuff that people were just setting us up. The leadership at that bank had a bad culture. They’re all gone now, thank God. We finally got rid of them. We got a new board, and the board got rid of them. The reporters knew we weren’t the ones leaking.

Damian Paletta was good. And he criticized me sometimes, too. That was fine. But he was savvy, and, I think, still is. He did a good thing on leveraged lending recently in the Post—I don’t know if you took a look at it. He’s right to focus on that.

I just give a couple of those names as—There was another guy at the Wall Street Journal, Alan Zibel, too, who is no longer there. And James Freeman and Paul Gigot on the editorial board were actually helpful. They were very helpful. You wouldn’t think that, because they don’t like regulators, [laughter] but they were helpful. We were kind of calling out the regulators, so they were saying, “OK, let’s do a story on Sheila beating up on the Fed.” [laughter]

So yes, they were helpful. But some were awful, and you just can’t do anything about that. You’re always going to get that.

In the sieve-like world of Washington—

That’s S-I-E-V-E, not S-I-V—

Leak. A leaking instrument. Did you find a culture of nonleaking at the FDIC when you arrived, or did you have to create it?

No.

If so, how? Or how did you perpetuate it?

We were criticized so much, I actually asked the IG to look into it, and he never found anything. We did have one guy who I hired and wished I hadn’t. He had a lot of expertise in the private sector, in bank restructuring, and understood markets, too, and I thought he would be a good add. And I worried about him a bit. The lifers—no. It is in the FDIC’s DNA [deoxyribonucleic acid] not to leak, because it destabilizes banks. We get that more than anybody does, which is why it was just so idiotic that anybody would suggest that I or anybody truly devoted to the FDIC would leak. We just wouldn’t do it. We just wouldn’t do it.

David, anything else?

No.

All right. We’ve hit our appointed hour.

OK, great. OK.

We’re going to take a break and have some lunch.

Sounds good.

And let you relax and catch your breath. And then we will come back and pick up from there.

Very good.

Excellent.

Thank you all.

You’re welcome. Thank you.

[BREAK]

Afternoon Session

We were conversing off-camera and off-tape about various and sundry things, and a story came up that Bob and I and Barbara think needs to be on the record. [laughter] This is a story about the constitution of people seated at the table. The predicate is that people who serve in government have to develop a high tolerance for long meetings [laughter] that those of us who are academics aren’t required to develop. So it’s commonplace in our oral histories for us to have to break, not because the interviewee needs the time, but the rest of us do. So then you were telling us about your own experience with that.

Right. So this was when I was Commissioner at the CFTC, and for a short period of time, we had an Acting Chair, a guy named Bill Albrecht, who was actually a Democrat, but he was very deregulatory. And so the Enron lobbyists—the infamous Enron lobbyists—came in to see us, to take advantage of that situation and ask for an exemption for off-exchange energy derivatives products, basically, from our antifraud and antimanipulation authority, which we had retained for all off-exchange instruments. Bill decided to grant that to them, and he convinced the other Commissioner there to vote with him, so it was a two-to-one vote. I voted against it.

Anyway, our Congressional oversight subcommittee was quite unhappy about this—A guy named Glenn English chaired it—so he called us all up there. It’s been years, but I would not be surprised if it went a good four hours. I was about eight months pregnant at the time, and being very worried about not being able to go to the bathroom, so it was like prepping for surgery. Right? [laughter] The first 24 hours, I did not drink anything. [laughter] And I made it through the hearing. Actually, it was a cakewalk for me, because they were just killing Bill, and I was there with my little halo on, [laughter] my pregnant halo. So anyway, that’s the story. [laughter]

As male-dominated as the culture is, they’re not going to beat up on a pregnant woman.

Right. That’s exactly right. And they liked the way I vote, so—

Terrific. All right. I have a question about the international dimension of your work that you touched on, but before I get into this, I just want to sort of give Bob a heads-up, in particular. Because what I think we hope to accomplish this afternoon is, we don’t need to replicate the ticktock of the book or go through chapter and verse of everything, but I do think it would be helpful for us to kind of follow roughly the chronology of events, particularly late 2007, and then 2008 being the really big year, leaving time at the end of the day for us to pick up the tail end of things. But that’s really where your historical prominence is most, there, and so I’m sort of giving Bob the heads-up to start thinking about how to approach this.

But the beginning question is about the international environment. My reading of things, as a layperson, is that some of the signals of problems started erupting abroad before they came here. So I have a general question about how much attention are you paying to things abroad, or is the regulatory environment so siloed that we’re focused on what happens in the U.S. of A. [United States of America] and we aren’t concerned about that? And then part of this also relates to the Basel Committee [on Banking Supervision] relevance that, as I understand it, is a part of the landscape when you come on board, but is also in a state of flux and is something that you have to pay attention to.

Again, that’s a bad oral history question, because it’s much too complicated, but I sort of want to leave it open for you to talk us through what the international dimensions are, and how those aspects are unfolding. If it makes sense to hold off on some of this to deal with the chronology, we can, but—

Well, I think in terms of Basel, that was already raging when I came to the FDIC. Those battle lines had already been drawn. And my predecessor, Don Powell, and then our Acting Chair, Marty Gruenberg, had been fighting that good fight already, so that was definitely an FDIC institutional issue.

I’m sorry, the fight?

The fight against the Basel II advanced approaches, I should say. The Basel Committee was set up primarily to coordinate global standards for bank regulation, especially bank capital, which is really key to system stability. There had been an effort for many years—ironically, launched by the New York Fed under a guy named Bill McDonough—to change the framework for setting what’s called risk-based capital. The idea is that you set capital based on how risky banks’ assets are. And under Basel I, it was a very simple, segmented approach: for a mortgage, you got a 50 percent risk weight; a small business loan probably had over 100 percent. Basically, if you had a 50 percent risk weight, that meant if you had a 4 percent, say, capital requirement and $100 of assets, at a 50 percent risk weight, you’d only have to keep 4 percent of $50, not 4 percent of $100. So there was an opportunity, if you lower the risk weights of your assets—make it look like your assets are safe—you don’t have to hold as much capital.

As I said before, the Basel Committee had just very simplified buckets of mortgages and business loans and what have you. I can’t remember what—There were just a handful of buckets. And there was a sense that it wasn’t risk-sensitive enough, so the New York Fed had led this new approach, where basically a bank, using their own internal models, would decide how risky their assets were, and therefore how much capital they had to hold, which was really a singularly bad idea. [laughs] Not surprisingly, since it’s the bank’s own models that would determine how much capital they would have to have, their models were showing that they had to have very low levels of capital, [laughter] because they had all these fancy new risk-management techniques and we hadn’t had any bank failures, blah-de-blah-de-blah.

The FDIC had been fighting this tooth and nail, because that capital protects the Deposit Insurance Fund. So yes, we have a Deposit Insurance Fund, but in front of that, we have bank capital. If a bank fails, that capital is there for absorbing losses before it has to hit the FDIC’s resources. It was really essential to the FDIC—and still is, I hope—to keep those capital cushions strong.

The FDIC had been fighting this off already, and then I walked into this. The Basel Committee, though, had already pretty much adopted this approach. It had been adopted in Europe, so you saw the European banks taking along huge risk. And oh, by the way, this fancy new approach, it assigned a zero percent risk weight to sovereign debt. So Greek debt and Italian debt and all those kinds of sovereign debt from very weak countries had a zero percent risk weight, which meant you could do 100 percent leverage—you didn’t have to have any capital for those types of exposures. And in fairness, that was a weakness with the old system, as well.

In the U.S., it had been implemented by investment banks. Well, funny thing—Yes, it had been implemented for investment banks by the SEC; the FDIC had fought it off for commercial banks. So you had this weird situation where the SEC, which is not a prudential supervisor and was not a member of the Basel Committee—and I don’t think they really understood any of this—they wanted to create—I’m getting in the weeds here; you stop me if you think this—

Go on.

So the other thing that was going on at the time related to this was that when Congress had repealed [Carter] Glass-[Henry Bascom] Steagall [1933 Banking Act], the intent was basically to provide for holding company regulation by the Fed for all the big financial institutions. And that was important, because to have a regulatory system that was recognized by foreign jurisdictions, you needed to have a consolidated, supervised structure, right? So when Congress passed the Gramm-[James] Leach-[Thomas] Bliley bill [Financial Services Modernization Act of 1999], they set up a framework where their—I believe—their assumption was that the Fed would become this consolidated regulator.

Well, the SEC wanted nothing to do with that. Those investment banks were theirs—Goldman Sachs was theirs, and Morgan Stanley; they didn’t want the Fed overseeing them—so they created something on their own called a consolidated supervised entity [CSE]. They just created it, by regulation, out of whole cloth. They created this so-called CSE framework, and then—guess what?—used the Basel II advanced approaches to set capital. And it allowed these investment banks to take an unbelievable amount of leverage. It’s a classic example of where bad regulation is worse than no regulation.

There are people at the SEC who will vigorously disagree with me on this, but I’m going to tell you, my take on it—because this is what happened—they had a net capital rule for the broker-dealer, right? They never had a capital rule for the consolidated industry; they had a capital rule for the broker-dealer. When they created this new framework, and with this new Basel II approach, and allowed for extreme levels of leverage at the consolidated level, guess what? Leverage went up substantially at these investment banks, because you had regulators telling the market, “Hey, we’re OK with this. This is adequately capitalized.”

That’s why you saw these investment banks later, during the financial crisis, having leveraged 40, 50—given all the window dressing they were doing, it was probably more like 60. I’ve seen some analyses of Lehman Brothers—because the games they were playing with repos, moving them on and off the balance sheet, and other subterfuges to hide how much leverage they had—they were quite levered up.

So we walk into this. Everybody’s got the Basel II advanced approaches except for FDIC-insured banks and their holding companies, and it’s the FDIC standing in the way. The investment banks have it; the European banks have it. And so, oh, my God, we were just having the holy you-know-what beat out of us. I walked into it, and it continued. And Chuck Schumer and Michael Bloomberg and the McKinsey [& Company] group and all of these smart people who were supposed to know what they were doing were just hammering us to implement—to let the FDIC-insured banks do the advanced approaches.

The leverage is going up in Europe, too—to answer your question—because of this new framework. We had done quantitative impact studies, and they showed that capital levels would drop, and leverage would increase, particularly against mortgage exposures—not surprisingly, because this whole thing was based on models, and the models were using old mortgage performance data to say mortgages were very low risk.

So we continued to fight that. I continued to fight that. With the idea of having a good counteroffensive, I went to the Basel Committee as a new member and argued that we should have a leverage ratio, which is a simple constraint on leverage. There’s no risk-weighting. It’s just if you’ve got $100 of assets and you’ve got a 5 percent leverage ratio, you have to have 5 percent equity funding your assets. There’s no risk-weighting of the assets; it’s just whatever your balance sheet assets are.

So I did that—I write about it in my book—and I really just got killed. People were quite unhappy with me and really went after me, including my own colleagues at the OCC—John Dugan, in particular, went after me. That was disappointing. Trying to view it from their perspective, they thought I was off the reservation, but I was just carrying on what the FDIC’s position had been. And I was right. We later finally adopted a leverage ratio at the Basel Committee, but that’s what was going on.

The long story shortened is that we held this off until the crisis hit, and then of course once the crisis hit, everything was out the window. People realized, OK, bank models—that’s probably not the right way to set capital, [laughter] although they didn’t get rid of it completely, much to my disappointment. They still have it, but they’ve got all these floors now and parameters around it. I think the banks would actually like to get rid of it now, because the sheer complexity of it is quite onerous, and because of all these parameters and floors now, they don’t really get much capital relief from it at all.

Anyway, that’s what was going on when I walked in in 2006. So those advanced approaches did let European banks take on a lot more leverage than they otherwise would have, and it was a totally unreliable metric. Actually, after the crisis—I think it was 2010—the Basel Committee staff did an analysis of what was a better predictor of financial weakness, a leverage ratio or a risk-based ratio. Hands down, it showed banks that had very weak leverage ratios—so on a non-risk-weighted basis, very low levels of capital, but on a risk-weighted basis, using these new approaches, appeared to have a very high level of capital—that’s what they were showing—were the most likely to fail.

Yes. It makes sense, because they had bad models. And their bad models were saying they weren’t risky, so they were taking on leverage, but the leverage ratio was showing they did have it. And the banks that had very strong leverage ratios were the ones that did not fail. And there again, we were vindicated. I would have rather that people listened to us as opposed to just being able to say I told you so afterward. It’s amazing how many just obvious things—people just didn’t—

But that made it very bad in Europe. The mortgage-crisis was homegrown in the U.S.—We’ve got ownership of that—but a lot of European banks had invested in these mortgage-backed securities, and a lot of them used U.S. money market funds to buy their commercial paper to get themselves funded, so when the money market funds got into trouble here, they got into trouble with that. Plus, they were taking losses on the mortgage exposures. And then when the global economy tanked, they had all this sovereign debt that they had bought, because they had a zero percent risk weight on it, that was really quite risky, and so they got into trouble with that, too. Their banking sector continues to struggle. They let their banks take too much leverage to begin with, but then they never really—They didn’t quickly recapitalize, so it’s just been a long, slow fight to get higher capital levels in the European banks. I think that’s one of the reasons why their economies have still struggled and their banks have still struggled.

It annoys me to no end when our banks here complain about the higher capital rules—and they still could be higher, as far as I’m concerned, much higher. But they complain about it even though—They’ve got world dominance now. I read in the FT [Financial Times]—I believe it was revenue—that JPMorgan Chase last year had more revenue than all of the five biggest European banks combined. They’ve just completely become dominant. Whereas prior to the crisis, Deutsche Bank—They were competitive. Now they’re all on their backs there, and so the U.S. banks are doing quite well, thank you. But they’re still complaining. [laughs] I think that’s proof that, actually, strong capital—It may cut into their bonuses. I know they like high returns on equity because they’re paid with equity, and that’s a whole other conversation, but in terms of being good for their business, high capital is good for their business, whether they—I think that’s what experience since the crisis has proved.

But there were a lot of interrelationships, which, again, we discovered later. I don’t know if you’ve read Adam Tooze’s book [Crashed: How a Decade of Financial Crises Changed the World], but he, in excruciating detail—The book takes a lot of commitment, but he really does the best analysis I’ve seen of all the global interconnections between the U.S. banking system and the subprime crisis and how that just had a knock-on impact throughout the world, especially in Europe.

OK, terrific.

While we’re on the subject of bank capital, some analysts—I think particularly of Anat Admati, professor at Stanford; and Martin Hellwig at Stanford, who have a book [The Bankers’ New Clothes: What’s Wrong with Banking and What to Do about It] that advocates a 30 percent equity-to-assets ratio. Do you have a target number in mind?

Yes. I think I argued for, on a non-risk-weighted basis, 8 to 10 percent. The more honest, rigorous analyses that I saw—to absorb losses—8 percent probably would have covered it; I’d go to 10 percent, just to keep the cushion. I went back on 8 to 10 percent and I talked to some of my colleagues about it, and I talked to Bernanke and some others, and they thought 10 percent was—

The problem with Anat’s book—Anat’s done some amazing analysis in her book and has really raised public awareness of this issue, and, I think, has done a good job of explaining what capital is. And she’s called regulators to task, because we all talk about holding capital—That’s common regulatory policy—hold capital—and it kind of feeds into this idea that capital is something—how that’s locked out, that can’t be lent. That’s just another way to—There are a lot of different ways you can fund yourself. You can do it with debt; you can do it with equity. Money that you raise through equity you can lend out just as easily as debt, right? So I think Anat has really done amazing work to get more public understanding of that, but the 30 percent is just—It will never happen.

One of the reasons I went to 8 instead of 10 was, I was trying to put a number out there that I thought was achievable. Of course, it still was, and we’re at 5, [laughs] 6 for insured banks, so that’s close. But I think 10 would probably do it. I think even at 10, you would probably force some of these big banks to break up, because they’re not efficient. They can’t make their return on equity. That’s why they’re so highly leveraged. That’s why they have to go get bailouts, right? In good times, they can make their return on equity; in bad times, they can’t stay solvent. They’ve got to go to the government.

Is that the financial system we want? Because I kind of feel like we still have it. And my three amigos just came out with a new book—what are they calling it, Firefighting or something like that? I don’t know if you’ve read it. It’s mercifully short; it’s only about 125 pages, so I dutifully read it. But they’re scaring me, because they’re basically saying that all these tools that we used during the crisis were great and we still need to keep them in our arsenal and be prepared to use them again. And I’m thinking, No! These were one-offs. This never should happen again. I never did any of this thinking I was setting a precedent. And if they actually think our system is so unstable that we’re going to need to do all of that again, then we should break those banks up—or nationalize them. One or the other. But to have this be the new paradigm? We’re just going to let them be unstable in good times and bail them out in bad times? I don’t think our democracy can survive that.

Or maybe I’m not seeing it right. I don’t know, but they just seem so disengaged with what’s really going on and how the public perceives this and how resentful people are—still resentful. I think a lot of our political problems here—and the populist uprisings here and abroad—are absolutely related to, hey, the banks got theirs and nobody else did. That’s how they see it.

That book is a product of a series of meetings that they had at Yale and Brookings. Were you invited to participate in that?

No. Not to participate, no. I was invited to attend, and I had a conflict anyway. But no. Yale did engage me initially, and then kind of when Tim took over, that went away. [laughter] I’m not sure what happened, but all of a sudden, I wasn’t getting invited to Yale anymore. So, no. And I think it’s their effort to—They’re writing history for posterity. They want to defend themselves and rationalize what they did and have people say it’s a good thing—We should be able to do it again if we need to—as opposed to saying what most people think, which is that we never should have been in that place to begin with and should never have to do this again. So I don’t think they get that.

But it scares me, because first of all, it’s kind of a politically tone-deaf argument. Who’s going to give—? And is something going—Do they really think it’s going to happen again? The subtext, to me, is that they’re worried that it could happen again. With one breath they’re saying, “Oh, we’ve reformed the system; we’ve got so much more capital.” And then on the other breath they say, “But yes, we need to be able to do debt guarantees and use the Exchange Stabilization Fund to guarantee money market funds, and the Fed needs to be doing one-off bailouts.” All the things where Congress put some rules and parameters around it, they want those shackles lifted.

Tim lost some of those battles in Dodd-Frank—maybe that’s driving part of it. He’s a tenacious guy; he never says die, so maybe that’s part of it. I hope that’s it, because otherwise, it doesn’t make sense to me, unless they really think we’re going to have another big one and need to do it again—which is frightening. I think it’s very frightening.

So if I understand you correctly, then, it would be—with stronger capitalization of banks, the breakup of inefficient banks, large banks, et cetera, you’re an optimist—that it would be possible to prevent future crises?

Yes. Because I think over time it would force the breakup of banks. I think the financial sector would get smaller, and I think they’d get less complex. Yes, so I do think—A capital level that high would force a fundamental restructuring of our financial system in a way that would be a lot more effective than trying to do a new Glass-Steagall or write laws saying you can do this but you can’t do that. But even the Volcker Rule is so hopelessly complex, and it’s so hard to define what’s prop [proprietary] trading and what isn’t. Yes, just whack them. And go higher if you could. I’d go 15—I’d go 20—I’d go 30 if I thought it was doable. But yes, I think even at 10 percent, you would force a breakup. And I think with that level of cushion, you’d have much more conservative bank stewardship and a much greater capacity to absorb losses in a downturn. Absolutely. I do.

So right now, then, under this current system, there’s no incentive, is there, for these banks to behave in a responsible manner?

No. Their incentives are just the opposite—to get bigger, to get bigger and take more risks, to generate more return on equity. And the Fed last year—I couldn’t believe it—they actually let the banks distribute more capital to shareholders than their earnings. They were actually depleting their—If your capital distributions exceed your earnings, you’re depleting your capital, right? To build your capital, you can do it one of three ways: you can issue new equity; you can keep your capital the same and shrink your assets; or you can retain some earnings. And retaining the earnings is the most logical way to do it. But you’re not retaining earnings when you’re paying your shareholders more than you’re actually making. So they let them do that last year. I called them on it; several people did. FT did. Good for them.

I’m just wondering what they’re going to do this year. They should be making them retain more capital, they should be building buffers, because this cycle’s almost at an end, even with this tax bill. We bought a little more time when the Fed decided not to raise rates again—maybe—this year—or sent those signals. But you can see, it’s slowing already. And the problem is, we can deal with downturns, but if you have a financial crisis, then they pull back on credit, which is why you need to have them building the capital on their balance sheets and not the other way around, so when the downturn comes, they’ve got balance sheet capacity to keep lending and absorb their losses, which I don’t think they do now. It is kind of same old, all over again. We’ll see how it plays out.

And we’ve talked a little bit about Tea Party and populism and this newest rise of populism and your Kansas roots in a certain kind of populism, but this international component that you just talked about also plays into that component of populistic movements now—of isolationism, and see what happens when you have this global system. So if this global system has all of these disincentives to be responsible, you not only have irresponsibility in the banks, but around the world. And they’re interconnected, and so everything—It’s a worldwide collapse.

Yes. Well, that’s true. I agree with everything you said. So you’ve undermined trust in our institutions—not just the big banks, but the regulators, and the government, who didn’t contain the risk. The bailouts were heavily skewed toward the wealthy. The bailouts, combined with using monetary policy to drive the recovery, it just increased the wealth and income gap significantly. This has been a worldwide phenomenon—well, not in Asia, at least in China, where you’ve still got a socialist government—but it’s been clearly going on in Europe and the U.S. And I wouldn’t put it all on the financial crisis; I think immigration’s played a huge role here. But some of the upheaval around immigration, too, has its effects—some of the crisis is—and the economic dislocations from the crisis are contributing to that.

So, yes. And just basically, well, Why should I play by the rules if the big banks don’t have to? I think people absolutely think that.

I talk about my son—I hope he doesn’t mind. He’s going back to get his PhD [doctor of philosophy degree] now. He graduated with an economics degree at Swarthmore and then worked for a think tank, AEI [American Enterprise Institute], for three years. I think they started him off at $50[,000]; maybe he got into the low $60[,000]s by the time he—As I said, he’s going back to graduate school. And I looked at this kid’s paycheck when he brought it home—OK, he was doing his full 401(k) match—His mom drilled that into him [laughter]—but just looking at the payroll taxes and the state taxes, and he does pay some income tax, too. After that, plus the savings deduction, maybe he had maybe half of that left, at most, that was his take-home. Rent, gasoline for your car, food, insurance, utilities—you can’t—You just can’t do it—and he is single with no family to support.

I don’t know if you saw the hearing of the bank CEOs that Maxine Waters had, but one of them, a Congressman from Southern California, did this amazing takedown of Jamie Dimon. Did you hear about this?

I heard about that. She’s the new young woman from California in the House.

Yes. She was—

Kathleen? Kathy something [Katie Porter]?

Yes. I should know; I don’t. But I watched the video clip. You should see—Get on YouTube; it’s amazing. She had her little white board out there. Because he set himself up in his shareholder letter—He’s going on about income inequality and we’ve got to do something about this, blah-de-blah, and he didn’t look to see if they were paying their own tellers a living wage. So she gets up—and this is a real constituent who works for JPM Chase, a single woman with a six-year-old boy, something like that—The Congresswoman just started going through it, what her take-home was after all the taxes, the rent—what I just did—rent, food, gasoline, blah-de-blah-de-blah—and childcare. And she was, like, $500 in the hole It was just—She couldn’t afford it. She just couldn’t afford it. And this is just basic, minimum—She wasn’t living luxuriously. So people see that. That’s what’s going on. That is absolutely what’s going on.

To me, then, this is the loss of the American Dream—that you, I thought, just hit the nail on the head with your description of your life and your parents’ lives, coming up from a horrible, Great Depression and Dust Bowl climate, a climate catastrophe, but they came out of it and did a little better, and then you’ve done a little bit better, and then this next generation is not feeling that at all—for a host of reasons, I’m sure, but you are citing many of them.

Yes. No, they’re not. And thank goodness we’re finally seeing a little wage growth and unemployment keeps going down, and we’re seeing some of the disaffected workers getting back into the workforce. But if we’re in a recession next year, what’s that going to do?

I think the crisis just culturally had a huge negative impact on American society and what democracy means. And getting back to those three amigos—I just don’t think they get it. I don’t. Even if they really thought that, the fact that they say it, and they’re saying it over and over again—It’s like, maybe if they say it enough it will become true. And stranger things have happened; look at the silly stuff we were doing in 2006. OK, maybe they’ll eventually convince people in Washington bailouts are the way to go. I don’t know. But I don’t think our democracy can survive it. People are going to see through that.

A publication asked me to write a response to the book. I don’t know if I’m going to do it or not; I get so tired of fighting with them. And Hank and I actually—and Ben, too—we still stay in touch from time to time, and I want to keep a relationship with them, but they’re just—They’re so blind on this, at least the way I see it. So I was going back and looking at banks’ balance sheets in 2008 and 2009, and with the exception of Citigroup, most of them barely missed a quarter. They were paying themselves bonuses by the end of 2009, so people think, What crisis? What crisis? They look at that and think, Well, we had a crisis, but you were helping them, not us.

I don’t think the three amigos can understand why people are just so skeptical, and I don’t think their narrative—that bank-centric bailouts—that’s what we did—didn’t work very well. It stabilized—It took care of the short-term problem, but it was bad for the economy. And to want to do that again—I don’t agree. They just saw a very different recovery than I saw, I guess. I just don’t understand how they think that’s going to work—or why we’d want to do it.

I’ve got a bunch of questions.

Sorry, I digressed.

I don’t know if I can keep all of this on narrative, but—

Don’t worry about it.

Just go through your questions.

Yes, go through it.

Tell us about the title of your book.

Bull by the Horns?

How did you choose that name?

My original title was, We Can Do Better. [laughter] But the Simon & Schuster editors thought that Bull by the Horns would sell more books, and they were probably right. Fighting to Save Main Street from Wall Street and Wall Street from Itself—I cannot take credit for that. Those were the editors. And I was told by my agent that they knew what they were talking about more than I did, so we went with the editors’ title.

It’s a great title.

It is a title. And Bull by the Horns—I did have a bull by the horns, and so I think it was descriptive. It was. I, of course, wanted the focus on the policy—the things we could have done differently and what we should do in the future—so that was why my title was focused on that. But that was a much better title for selling books.

But it plays well to the bull of Wall Street, right?

Yes. Yes, it does. Yes.

But also what you’re citing over and over here—again, the disconnect between Wall Street and Main Street.

Yes, that’s very true.

Bears don’t have horns. [laughter]

They have claws. Bears pull the markets down.

Yes, but that’s not nearly as good a title, Bear by the Claws. [laughter]

Yes. No, no, that’s true.

So the Office of Thrift Supervision was extinguished as a result of the crisis.

Yes, it was.

And there’s an example of regulatory change that didn’t discipline the financial system but disciplined the regulators. Can you offer us any backstory to that—why, and how effective? And in your opinion, was that appropriate to shut it down and reallocate—

Oh, yes. Definitely.

—the authorities and so on?

It was a very captive regulator. And there again, people try to—tend to—personalize this. It was the way the damn thing was structured. The structure created very perverse incentives. You still have the same problem with the OCC; it’s just a little better there, because they regulate more banks now. But OTS had a very small regulated-institution base, and then it was dominated—Their budget came from supervisory fees, which meant that a handful of very large thrifts basically funded the place—and was the power base for OTS. So Countrywide, WaMu [Washington Mutual], World Savings, the outfit that Wachovia bought—It was against their interests to get too tough with those thrifts, because there was always the threat that they could switch to the OCC—They could switch charters—and they couldn’t afford to lose their base, so they had a real blind spot, a real blind spot, when it came to risk-taking by those large institutions. Again, just having just two or three institutions dominate your funding, how you spend your supervisory time, you just start seeing the world through the eyes of those institutions instead of seeing it objectively.

We had a similar problem with the OCC, but the OCC had a broader—and they had a lot of community banks, too, and regionals, which I think served a bit more of a counter to dominance. But they clearly had—or at least at the top levels—they had a blind spot with Citibank. At the examiner level, I think there were people who were a little more vigorous on that.

Yes, it was good that it went away. I argued, actually, to get rid of OCC, too, and just have the Fed for the holding company and the FDIC for insured banks. I think that would work a lot better. I don’t think it’s ever going to happen. Again, what are your incentives? And the Fed and the FDIC have financial risks—the FDIC with the deposit insurance and the Fed with their discount window. So I think everybody made mistakes, but I think the Fed and the FDIC probably proved themselves to be the better-quality regulators and supervisors during the crisis, just because of who they are and how they’re structured and how they pay for supervision. OCC also relies on examination fees for its budget.

So the charge against the OCC was that they became captured and they set standards too leniently on banks?

Yes, they did. I’ll give you an example. When we started trying to get mortgage lending standards tightened, the OCC was all for cracking down on negative amortization loans, these option ARMs. Subprime kind of gets lumped into all of these bad loans, but there were a couple of different things going on. There were option ARMs, or “pick-a-pay”—basically, you get to pick your payment, and your payment might not cover your interest, so your principal with balance would actually be growing as you made these kinds of payments. The OCC was all for getting rid of those. And the reason the OCC was all for getting rid of those is because they didn’t allow big banks, national banks, to do it—but OTS let the thrifts do it, so they were with us on this.

OK, I said, let’s do something about subprime mortgages, too, the subprime hybrid mortgages, which had these very high teaser rates and huge payment resets. Oh, no, couldn’t touch them, because national banks did that. It was just so transparent because people were not arguing what was good policy, they were arguing what their banks did and didn’t do. So, yes, there was a lot of that going on. There was a lot of that going on.

What did the extinction of the OTS—What impact did that have in the Washington regulatory community? Did it—

Not much.

—shock people?

I think everybody—It just—There was such a huge problem with the thrifts—and the small thrifts, too, so many of them—they didn’t have much left, frankly. Countrywide got sold; World Savings got sold; WaMu got sold—all the big ones; they didn’t have much left anyway, so there wasn’t much resistance.

I mean among federal employees—the regulators.

Oh, it’s interesting. Yes, so a lot of the OTS supervisors actually went over to the CFPB, which I thought was interesting—and I was a little concerned about. [laughs] I’m still not sure how that’s working out. Yes, so the OCC took some but did not want to take others, so I think that was a difficult process. And we were happy to provide a home to—Some of the examiners were not as vigilant as they should have been, but they had some good examiners, too, so we tried to take some. So, yes. But I think most of them did find jobs. Because the good news for them was, as OTS was closing, all the other regulators were hiring examiners, so I think they found a certain kind of home.

So shall we get back onto the narrative?

Sure. Sorry.

One of the pivotal events in 2008 was the decision to resolve WaMu—close it and give a haircut to the creditors, which—in Geithner’s book and also somewhat in Paulson’s and Bernanke’s—was viewed as an especially contentious point. As you outlined in your book, the fear was that this would trigger a run on bank capital generally, and so on. Can you replay that episode, and the debate that—

Yes. So there was a lot of—a little bit of—revisionist history on that. I will have to tell you, I never heard pushback, even from Tim, on this. Now apparently Tim was going apoplectic with other people, but I never heard from him directly. I did talk with Don Kohn, who was the Vice Chair at the time, told him what the game plan was, what we planned to do. I told Hank Paulson the same thing. Neither one of them objected to it. They knew we were going to haircut, that we had a bid from JPMorgan Chase that was not going to make all the creditors whole, so they knew that there were going to be some haircuts. This stuff that came afterward about, “Oh, you’re going to disrupt the system and scare everybody”—no, I did not hear that. If they were saying that, they were not saying it to me.

So we did it. And actually, the market was up the next day. So there’s some also revisionist history around it; the following week, when TARP was rejected by Congress, the markets tanked. That had nothing to do with WaMu. We closed WaMu on a Thursday; Friday, the market was up. The market responded very well to it, as is generally my experience. When you get rid of bad management and put a bank into a healthier—under the supervision—management of a healthier institution, markets usually react well to that, not negatively. And yes, we haircut the long-term bondholders at the bank—not at the holding company level, but the bank—which concerned me; I would have preferred there had been some sharing of loss at the holding company level—and that’s a whole other discussion. But there was no disruptive impact.

So then they said, well, this created a run on Wachovia. See, this is why—They keep blaming the government. There was a run on Wachovia because it had purchased a bank, World Savings, that did all these option ARMs in California, and those loans were going bad, too. There wasn’t anything I could do about that. So the question was, do we keep bailing everybody out, or do we haircut long-term bondholders who are not going to go anyplace anyway, but sell the bank to keep the operations running? See, the disconnect between us was, I didn’t really care about bondholders, especially long-term bondholders, because they were there, they were stuck, they had already made a decision, and that’s not our job to protect them. What I cared about was the process that made sure that credit flows to the customers of the bank—not the liability holders, the customers. They could get their mortgage funded or they could make their payroll or they could get their line of credit or whatever it was—Whatever service that bank was providing, that’s what we wanted to continue.

That’s what our process did, and that’s what Title II [of the Dodd-Frank Act] is designed to achieve, as well. And we do not have a guarantee program for bondholders—never have, never will. We have one for Main Street depositors; they pay a premium for that that probably gets passed on to them in lower interest rates or what have you. We want bondholders to exercise market discipline against risky banks. They should not have an expectation of a free bailout every time they get into the soup. It just shouldn’t happen.

So no, I still think—Yes, Wachovia got in trouble, not because we haircut bondholders, because they had a bunch of toxic mortgages on their books. And there the question, again, was, OK, who are we going out bail out now? Are we going to bail out the bondholders, or are we just going to make sure the customers of Wachovia continue to be served? And through a lot of machinations, it ended up being sold to Wells [Fargo] without anybody having to take a haircut. It never had to be closed.

But no, I reject that the haircut on bondholders was some specific trigger that created a run. And the market’s reaction did not weigh into that. And at that point, Wachovia wasn’t—Whether we haircut WaMu bondholders or not, Wachovia wasn’t going to end up getting new investors. Everybody knew they were in trouble, just like everybody knew Lehman was in trouble or Citi was in trouble. It was just like this pretend thing that if the government steps in, we’re going to convince everybody they’re safe. It just wasn’t going to happen.

So fast-forward to Citi. A prologue: I’ve heard comments from people—and I think there’s been some write-up—to the effect that the Citi—Citigroup, Citibank—management were pretty arrogant leading into the crisis.

Yes.

“We know what we’re doing, thank you, don’t tell us how to run our bank,” et cetera, et cetera—

Oh, yes. Oh, they were horribly arrogant, yes.

—and that that engendered some friction with the regulators generally and the FDIC specifically. Did you sense that?

Yes. Well—yes. Can I make just one more point on the WaMu issue?

Oh, absolutely.

The “run”—quote-unquote—on Wachovia was on uninsured deposits, and no uninsured deposits took haircuts with WaMu, so I think that that’s another—This idea that somehow the run was caused by WaMu—It was a run on uninsured deposits, and it was a run because they had a bunch of toxic loans. Anyway, I digress.

So, yes, Citigroup and Citibank—Actually, you really couldn’t find where one stopped and the other began, [laughs] because their systems were so bad. They had done all these serial acquisitions over the years, so this was a huge problem—even knowing where the bank was inside of Citigroup. But yes, they were terribly arrogant. Part of it was, frankly, because they had confidence that they kind of had Tim as their advocate and protector. If they had not assumed that, I think they would have probably been a little more contrite, but I think they felt they held that card and that he was going to contain me however I needed to be contained—which created a lot of friction between us.

But did the arrogance on Citi’s part toward the FDIC staff make the staff sort of harder to—hard-hearted toward Citi, would you say?

I never saw that, no. I think, here again, reaching for—It’s like the Democrats saying the Russians won the election. [laughs] Well, you never want to admit you made mistakes; you never want to admit that there was something maybe you did that was wrong. But no, no, our guys—and again, a lot of this was coming from OCC’s own examiner—Citi had a lot of problems. It had a lot of problems. I think the market understood that and recognized that. We didn’t have it become—I never saw anybody at the FDIC with a personal vendetta or issue with Citigroup. I just didn’t see it. I think, again, people try to personalize this stuff. When they’re trying to discredit what you want to do, they say, “Oh, well, this is personal, and somebody had an agenda.” I never saw that. I never saw that. It’s just factual. Citi had—They were the worst of the banks—the worst of the commercial banks. They were absolutely the worst.

There was a story I heard that Citi’s CFO [chief financial officer] gave some reference to a reporter—maybe it was CNN or something—on the air, even—He said something to the effect that the FDIC was a third-tier regulator.

Oh, yes. I remember that. Yes, yes. And that was the same press conference that they attacked me for leaking the leak that they leaked. [laughs] Yes.

But that guy was then transferred out of his job?

Isn’t that the guy who got caught in the massage parlor in Florida now recently? [laughter] [John] Havens? I think that was who it was. [laughter] Well, that kind of speaks for itself, doesn’t it?

With the guy who owns the New England Patriots, right? [laughter]

So, look, I think there were real problems with that management team. Again, this wasn’t me or my examiners having a personal vendetta; you just had people there who were not at the quality they should have been, did not understand banking as well as they should have, did not have a regulatory culture or respect for regulation the way they should have. Again, the board—I never was able to get the management changed, but I did work with the Fed—and I credit Ben with this—for getting a lot of board changes. And the board eventually moved the management out. It took a year or two, but it didn’t take long for them to see what the problems were. So we finally did get to that point. But yes, there was just some weak—really weak—weak management there.

Give us the story of the Citi rescue.

Which one?

There were two—

There were so many. [laughs]

Yes, well, there were a number of pivotal events in which the FDIC and your decisions really became hallmarks of the crisis episode—the systemic—now I’m having a senior moment—exemption—

Oh, the systemic risk exception. Yes, yes, yes, yes.

Yes. That was invoked at WaMu?

It was Wachovia. That was the first time. We ended up invoking it multiple times, but that was the first time.

In fact, let’s pause on that before I move on. How did you come to that decision? How hard was it to make? What was the pushback, if any?

I didn’t really have a choice. I wanted to—Look, you’re talking to multiple people, so you can get different narratives, and historians can decide.

From my perspective, what happened—and this is what I said in my book—I think Bob Steel, who was the CEO of Wachovia at the time, thought he had a deal to sell Wachovia to Wells; we didn’t have to do anything. And given the options available, that was absolutely the best option there was. Then all of a sudden, the New York Fed is talking about—without even talking to me—that maybe the FDIC will do a supported deal on this. And then Citigroup actually takes a proposal to the New York Fed to buy Wachovia with FDIC support—again, not telling us. I get blindsided by a Saturday morning conference call where, one, the OCC is telling us that they’re hemorrhaging uninsured deposits; two, Citigroup’s got this deal; and three, what’s the FDIC going to do about it?

Because Bob Steel, whom I knew from his Treasury days, had been in touch with me—he said he was meeting with [Richard] Kovacevich the next Sunday morning in New York and he thought he was going to get a deal—Great—I told everybody, “Stand down. Just let this happen.” I said, “We shouldn’t even be talking about this, because if word gets out that we’re talking about a government-assisted deal, we could screw this up.”

Well, guess what? Word got out, and it did get screwed up. And so all of a sudden, Kovacevich said, “No, we’re not gonna do this.” And I think he mentioned that they weren’t sure about their commercial real estate portfolio, and oh by the way, they heard that the government might be able to provide some assistance. Well?

So, Monday morning—or was it Sunday night?—I’m losing the chronology—they’re still losing deposits. I guess it was Sunday night—That’s right, because we were worried about, when they opened Monday, there would be lines at the bank, so we did an all-night process, got both Wells and Citi to do a bid, and Wells just got greedy. They just really—they wanted us to write a very big check. And Citi came in a lot lower.

And so I’m sitting here—Now I’ve got a healthy bank, Wells; I’ve got a sick bank over here, Citi—though Citi’s primary regulator, OCC and the New York Fed, are saying it’s fine, it’s strong enough to buy Wachovia—even though Tim later admits in his books—in this most recent book—that it was like putting two drunks together, leaning each other up. So we have least-cost resolution—you have to go with the bid that’s going to be the least cost to the FDIC, the Deposit Insurance Fund. That’s in our statute, so we went with Citi, and announced it the next day.

And then what was it—I guess that was Monday, and then it was Tuesday night or Wednesday, I get a call from Kovacevich saying that they had changed their mind and that they could do the deal after all without any support at all. Now what happened was, Citigroup, because they were just not a well-managed bank—even though the FDIC had agreed to provide a lot of support—they had some ring-fenced assets that we were going to take losses above a certain level and protect them—so they had all that. They were renegotiating the deal with Wachovia, including the terms of our support, without even telling us. You talk about disdain and lack of respect? This was going on.

So Wells comes in two days later; Citi’s still screwing around—which I didn’t realize. I kept saying, “Why haven’t they closed the deal? Why haven’t they closed the deal?” They still hadn’t closed the deal and I find out because they were renegotiating—including trying to get us to put more in without even talking to us. So Kovacevich said, “Do you have any objections?” I said no. And I didn’t. [laughs] I said, “Go for it. and if it happens, we’ll just say that Citi didn’t close the deal. But you need to go talk to them. And if you’re going to do this—” It’s funny, everybody took credit for this. I will tell you I was the one who said it—maybe other people said it, too— but I told Kovacevich, I said, “If you’re gonna do this, do it in writing. Get a written response. If the board approves it, bim, bam, boom. Don’t screw around with this. Get this done in a couple of hours,” which they did. They did it that night. And of course, Bob Steel was elated, because he didn’t want—Nobody at Wachovia wanted to be managed by Citi.

So we call Vikram Thursday morning and tell him—You can imagine, he was quite upset—Vikram Pandit, the Citi CEO—early in the morning that Wells had done this, the Wachovia board had approved it, it was done, it was signed, it was sealed and delivered. And of course he went crazy and then threatened all sorts of legal action. And then—yes, Havens, I think, was the guy’s name—he actually was one of the people who got arrested at the massage parlor, which made me—yes, that sounds about right. [laughter] Anyway, so they’re going after me. They’re threatening to sue, blah-de-blah-de-blah.

So Wells had to get the Fed’s approval; the acquisition had to be approved by the Fed. And Tim is just bouncing off the walls. And I said, “You know what? It’s out of our hands. If I wanted to object, so what? They made a deal, unassisted. The Wachovia board approved it. What do you expect me to do? I don’t really have any legal authority to stop this. If you want to stop it—The Fed has to approve it—stop it.” And of course, they didn’t—for the same reason I didn’t.

Why in the world would government be coming in there and doing what essentially would be ultimately a government-backed deal to subsidize Citi in buying Wachovia when everybody knew Citi was in trouble? And you had a triple-A-rated—the only triple-A-rated bank at the time, Wells—They’ve had problems since then, but at that time, they were riding high—to come in and buy it. The Fed wasn’t going to get in the way, either. And there, again, was just an example of them wanting me to go out there and take the heat for things that they themselves wouldn’t have even done.

So that was it. And that’s basically what happened.

Why was Tim—I mean, what was his—I can read between the lines and understand what his aggravation was, but even his account in his own memoir, it was that—something about the unreliability of the federal government when it signed off on a deal. That logic sort of escaped me. Can you—?

No, I just think that was the best argument he had. I think he really—There again, it was—People speculated, Well, he had a cozy relationship with them, Bob Rubin and all of that, so—I don’t think it was that. One, I think, he was just very Wall Street–centric in terms of stabilize the financial system, everything else gets stabilized. Two, I think there was some pride—and OCC was not particularly helpful on this, either. Both the NY Fed and OCC were looking for a way out—like, a backdoor bailout of Citi—so their supervisory shortcomings would be a little camouflaged, too, if the FDIC gave Citi a backdoor bailout through this acquisition of Wachovia. So I think those were the two things that were really going on. But he really did—He lost his perspective on Citi. For whatever reason, he had lost his perspective on Citi—and continued to advocate for lots and lots of care and feeding of Citigroup.

Thank you.

I’m going to pause for a second and let my colleagues follow up, and I’ll come back to you.

Do you have something on that?

Well, a more general question—because you’ve made a number of references to working with the principals, but I’m looking at—I think this was the Frontline interview that you did, and it’s in the briefing book, and in this quotation that you’re answering—

It’s in section five of the book.

Yes, it’s at the end. It’s the interview at the end. I think it’s the last piece in tab five. And again, I think it’s the Frontline interview, which I found really interesting and helpful; thank you to our research team. It’s talking about just working with the team and propping up Wall Street. And at the top of—oh, these are not paginated, are they? Oh, I’m sorry.

Wow, so this is a long interview.

Yes, it is a very lengthy interview. So if you start at the beginning, Frontline, “The Financial Crisis”—Again, this is the last piece in tab five in the briefing book. And I will just—

Oh, I’ll get it.

—count off, one, two, three, four, five, six, seven, eight, nine—so I’m looking at the page that says, “We entered into a negotiation. Throughout the crisis—”

That’s the top line? “We entered”?

Yes.

OK, thanks.

So what I’m just wanting to pause on—Again, you’ve made a number of references to conflicts or issues, but—where you say, “Throughout the crisis—” I’m thinking broadly now while Bob is delving into very specifics—you’re saying, “another criticism was that I wasn’t a team player. I was always difficult.”

Yes.

Why? Was it just that you were disagreeing? You obviously saw things that people hadn’t seen early on and you had a different view on capitalization. And as you’re saying now, even today, the three amigos either don’t seem to see things that you saw then, see now, and you don’t think they’re on the right track to addressing the issues that you see. But I’m just trying to get at the heart of the criticism. “I wasn’t a team player. I was always difficult.” I’m thinking—

Yes.

—a little gender issue there, but what are your thoughts?

Well, yes, I think gender probably was a factor, although you never know. That’s never going to surface. I think at least the Fed—the FDIC is kind of subordinate to them, right? So I think Tim definitely—and Hank told me this—that Tim basically felt the FDIC should just take orders, that they didn’t really want to hear what we had to say, they didn’t think we had a right to views. Tim just thought the Fed should be in charge of this and the FDIC should do what they told them to do.

So a regulatory hierarchy—

Yes.

—was in place—in his mind.

In his mind, right. Which is not true, because in a crisis, actually, the FDIC was more—They were the true firefighters. We were the ones who knew how to do it. Others were kind of flailing around a bit, but I digress. But I think when we had control of the situation, we did a pretty good job. There were a few missteps, but for the most part, things were handled smoothly. So yes, I think there was a regulatory hierarchy. And I think there was some resentment that I called it out early and they hadn’t. So as I said, I think that probably hurt me more than it helped me—to be proven right on that—because then that just made them get their back up even more.

And then, I think, philosophically, there was just—It was Wall Street versus Main Street, and I’m asking questions they don’t want to hear: How’s this going to help the real economy? How’s this going to help homeowners? Why are we doing this? These banks perpetuating themselves is not our business. Where’s the economic benefit going to come of all this? And why do we need to be so generous? Why can’t they pay for it? Why can’t bank executives lose a few jobs here and there? They didn’t want to hear those kinds of questions. I think those got in the way of the narrative—their narrative—which was that they needed to save Wall Street to save the system, to save the economy, and any treatment of Wall Street that was too harsh was going to destabilize things and get people upset.

There again, if the system is so fragile the responsible people can’t even lose their jobs—That’s going to bring the system down?—then let’s get rid of the system. The answer is not to keep doing these bailouts, but change the system. And we still have that philosophical disagreement. [laughs] It’s just still there, which is kind of sad, because I respect them a lot, but I just think they’ve got a real blind spot on this. I really do.

Was there anybody else, if not directly on the team, but involved in the conversations, who had your view and would be called—well, we disagree, so they’re difficult, they’re not a team player? Or were you the only person being singled out for that criticism?

Oh, that’s a good question. Well, they didn’t like Elizabeth Warren—later—She wasn’t involved early on, but in the Obama administration, when she headed that TARP oversight thing—so they didn’t like her. They didn’t like Neil Barofsky—but again, those are people who came in later in an oversight role. No, I think it was pretty much me.

Well, John Reich and John Dugan had their disagreements. I think John Reich was actually—and if you read—When we did the board case on Citi acquiring Wachovia, that had to be approved by the board—and I believe those transcripts have been made public—John Reich, who was the head of the OTS, actually did challenge John Dugan. Because again, his thrifts were getting closed, and John Dugan’s were getting bailed out, so he didn’t think that was fair. And I thought he had some pretty effective arguments against John. And that was a relief, so it wasn’t just me saying it.

But no, I bore the brunt of most of it, for sure, for the most part. I think John Reich was helpful sometimes, but then he just got so marginalized, because he had a small agency, and a very uncredible agency at that point, given all the problems the thrifts were having.

There’s a famous line almost at the beginning of Elizabeth Warren’s memoir [A Fighting Chance]—her first memoir—She’s got now a number of books—but she says she had a conversation with Larry Summers. Summers told her something to the effect that there are two kinds of people in Washington: there are those who sort of go with the flow and there are others who stick out and become problems, and the first group of people get along and go ahead and the second don’t. Did anybody ever pull you aside with similar advice?

Say I’m hurting myself? No. I think they were a little bit afraid of me. [laughs] That Midwestern directness.

You can say that.

I think they would have been afraid to say something like that to me, because they knew that I wouldn’t appreciate it. And I am surprised Larry said that to Elizabeth. Maybe he didn’t know her. I guess he knew her from Harvard, so—because I think Elizabeth probably would have reacted the same way I would have if somebody told me that. And I have paid for it since. A lot of unkind things have been done to me—and still occasionally are done to me. People have long memories, especially on that Citigroup thing—with the old team, not the—I actually have a pretty good relationship with the current—well, I did—with Mike O’Neill, who just left as Chair—He was the guy that we put in there—and Michael Corbat, who’s head and shoulders above the previous CEO.

But yes, I’ve been punished for it. But I’ve been rewarded, too. People say I had a good crisis. I don’t think I did. I think the agency did well and proved its worth. But I received a lot of awards and recognition, and have continued to be offered opportunities that I don’t think would have happened if I didn’t obtain some national prominence. That’s not why I did it, but I’m happy to say overall, I don’t think I was really hurt by it. I think probably I would never—well, I don’t know.

It’s kind of sad to me. I remember when Dan Tarullo was leaving and Elizabeth called me, because at that point, the Obama administration was consulting with her on some of these appointments and wanted to suggest me as Vice Chair of Supervision. We talked about that, and so she floated it, and got nowhere. And I thank her for making that effort. It would have made a lot of sense. But my guess is that word got out that big banks would never let it happen. And that continues today. Why they should say who gets jobs and who doesn’t, but I think that’s conventional wisdom—even in the Obama administration—that they can stop a confirmation. Tom Hoenig is another person, a brave soul, who’s really spoken out for higher capital, and same thing—a lot of people thought he would be really good for one of the Fed vacancies, and word was out: the banks will never let it happen. Gary Gensler would have made an excellent Treasury Secretary. Tarullo was actually never nominated for the Vice Chair of Supervision over concerns of a confirmation battle. You hear that— “banks will never let it happen.” And it doesn’t happen.

That’s a sad commentary. There’s “too big to fail” and there’s just too big, and they just have too much political influence—in a lot of venues—political, some academic—some think tanks. They’re influential in a lot of places. And that’s not to say their point of view shouldn’t be listened to, but they shouldn’t dominate. That’s the way it was in 2006, too, so it’s kind of happening all over again.

[Perry passes treats]

Let me bounce something off you—since you were talking about Geithner and the friction there—Thank you, Barbara, for keeping the sustenance going around.

No, can we please leave it over there, because those are really good.

Talk about temptations.

I was trying to move it away from my temptation. [laughter]

You’re looking after our nutrition.

Exactly. Yes, yes.

In Geithner’s own account, the emphasis is always on the panic. And here I am, sitting next to probably the preeminent expert on panics in the world. But when Geithner is addressing his responses to each episode, it’s almost always couched in terms of that panic, so I think for him, the highest demand on his time was stopping the panic—which I think from his perspective means trying to do something right, but doing something decisive that will have a calming influence on the herd, if you will—We’ll go back to Kansas for this. [laughter]

In reading your account, there seems to be a different emphasis. And this is where I think in the various accounts you take incoming. David Wessel’s book [In Fed We Trust: Ben Bernanke’s War on the Great Panic], for example, where he says—and I’m paraphrasing this, but it’s pretty close—Everybody thought that Sheila was more interested in preserving her fund than in solving the problem. I’m just sort of throwing that out there for you to comment on—and what your sense of the panic was. Is it the case that there are opportunities for reform in panic, or is Geithner more nearly right—no, reform is unfamiliar; we need familiar to make the panic go away? Does that make any sense?

The last part—reform will make the panic go away—I noticed his picture’s in your hall, so I’m feeling like I’ve got an uphill battle here, but let’s go ahead and try to—

No, no.

Yours will go up soon. We just put up—

Oh, you rotate them? [laughs] Do I get his place? [laughter]

No, we just put—When we take pictures of our oral histories—Is that what you meant? You saw his picture in the hallway?

That’s not a permanent thing? [laughter] I thought maybe he was one of your donors. [laughter]

That is not an endorsement.

Oh, I didn’t realize. I’m just teasing you.

I think I actually did think about that.

No, I’m glad you put it out there for me to respond to. I appreciate that. [laughter]

But the question is sort of whether the—In Tim’s sense, the panic dominated everything else, and if I’m interpreting him correctly, to calm the herd in a panic, you need to do something calming, which is something that’s familiar; you don’t go in and try to revolutionize—You don’t take the—go on.

Right. But we did the unfamiliar. I mean, it had been a while since they had a bank failure, but anybody who knew the FDIC knew, yes, we haircut creditors. It is a bankruptcy process, so—And I will always dispute his assessment that the WaMu closure caused a problem. It did not. We had a playbook and we followed it. And I actually think a lot of the market confusion was because their decision making was highly ad hoc, one-off—bailout there; let Lehman go down; nationalize Fannie and Freddie; effectively nationalize AIG; do everything we can to keep Citi propped up; we’ll anoint these eight banks as systemic and give them all this love and care and capital and debt guarantees and everything. They were all over the place. We had a playbook. So he’ll never agree with that. And it’s me against the three amigos, so probably—I don’t know if you’ll ever believe it. But that’s how I saw it. I lived through it.

That’s not my job. [laughter] My job is to hear it.

We had a playbook. And Dodd-Frank has given them a playbook now. They don’t want the playbook; they want to be able to do anything they want again. And that was not good for democracy, but I suggest it was not good for the financial system. People were confused: OK, who are they gonna bail out? Who does Tim like? Where’s Bob Rubin these days? Let’s go find him. [laughter] That’s not fair to Tim. And Hank got the same thing—He let Lehman go down. Everybody knew there was this long-standing blood feud between Goldman and Lehman. [laughter] So why did Hank let Lehman—?

Seriously, I don’t think that that drove their decision making. You don’t have a process, you don’t have a rulebook, you don’t have a playbook, you don’t have oversight, transparency—people are going to speculate about what’s really driving the decision making. So I don’t buy any of those, just like I wish they would not buy this idiotic argument that I was all about protecting the Deposit Insurance Fund. Well, yes, it was my job, but was that the only thing? I took huge exposure for the FDIC, and they insist on making it look like somehow they had a gun to my head—The little lady was just—You know, “We had her hostage, and we were just—She would do what we told her to.” [laughter]

It was a give-and-take. And I understood we needed to take risk. I could have told them to go forget it. I did on the debt guarantee. On those other things, I engaged. We negotiated. I wasn’t wild about it, but yes, I could see there was a problem in the short-term funding markets. That had nothing to do with my Deposit Insurance Fund. I didn’t guarantee Goldman Sachs or Morgan Stanley—or Citi, for that matter—Citi could have gone down; it wouldn’t have cost us a penny. They didn’t understand that. Citi only had about $250 billion in uninsured deposits, and under the FDIC’s process, if we had wanted to put Citi into receivership, we’d have first claim on all their assets; there’s no way in the world we would have lost money on a Citi failure, so this idea that this was all about me manipulating to protect the Deposit Insurance Fund—We were following our rules, we were following our playbook, and we did step up and take some significant additional risk to assist in bailing out institutions that had nothing to do with us. But we did it. And they still take credit. But, “Oh Sheila, you’re small-minded.”

And by the way, David Wessel never talked to me. He was very close to Tim. Andrew Ross Sorkin, the same thing. Those are the two books out of the box. They had all their Wall Street and Fed sources; neither one of them talked to me, so I would just ask you to take that into consideration—

Thank you.

—when reading what they’re saying about me. Just so you know, they never got my side of it.

And the “you”—you’re looking at me, but the “you” should be—

Everybody.

Yes, whoever is reading—

Yes, whoever has read that book—

One who reads the book should—

Yes, right. Anyone who reads the book should understand, they never talked to me.

Let me try out, then, one interpretation that I think I’m hearing from you, which sounds very reasonable to me, which is: When you’re in a panic or a crisis like this, you have to select which unfamiliar implement you’re going to use is going to be acceptable. Your implement would have been haircuts—when necessary—and increased requirements on banks to protect a lot of these mortgages, where—that there would have been a trade-off in property rights, that the banks would have lost some money, but that that was an acceptable outcome to do something unfamiliar, which is to lock in those rates. That, on the evidence from all of the sources, was not something that the three amigos were willing to accept. They wanted some other kind of unfamiliar rather than this unfamiliar. Is that—?

I think that what we wanted to do was harder than what they wanted to do. I think just writing a big check and putting capital in banks is a really easy thing to do. You can execute that very easily. A debt guarantee program is more complicated. I was fortunate to have a very strong operational team at the FDIC—and I think far more so than at the other agencies. So that was harder to do. We did it, and we got it—It was our program; we designed it. We decided who got it and who didn’t, what we were going to charge. And I think it was successful. And I don’t want to do it again. [sighs]

A lot of what was easy to do—Even within that framework, there were still opportunities to impose some accountability. For instance, when Citi needed their second round of capital—There were three or four bailouts. I think there were really four bailouts; I’d have to go back and count them up now—but there were steps along the way—they could have said, “OK, we’re going to stand behind Citi. We’re going to stand behind Citi, get capital in there. But you know what? Some debt holders, you need to convert to equity now and take some of the losses.” They could have done that.

That wouldn’t have had systemic impact. They could have made management changes earlier; that would not have had systemic impact. Everybody knew what a weak management team they had; I think the market would have responded well to that. So even if they wanted to do the easier, quick things, there were still steps along the way where you could have imposed some measure of accountability. They just didn’t want to do it.

Because it was unfamiliar and not precedented? Or—

Well, the argument was—So, there were two things you could have done. You could have let the banks differentiate—say, “You know what? JPMorgan Chase and Wells Fargo, you’re in fine shape.” Jamie Dimon got out in 2006; he saw it coming. You can see his shareholder letter. And Wells never really got into it to begin with, so we could have differentiated. We could have celebrated those banks that were not in bad shape and said, “OK, here are the two or three that are, and this is what we’re going to do with them. We’re going to put capital in them.” They didn’t have to close them, but they could have at least said—There were so many tools they could have used. Look what they did with AIG. They basically said, “OK, we’re going to lend you a lot of money, but you’ve got to basically cede control of your company to us.” They could have done that with Citi. It didn’t seem to disrupt the markets when they did it with AIG—They never explained that—or Fannie and Freddie, for that matter.

Even within the construct that they wanted to do—forget haircutting senior bondholders—I don’t think sub [subordinated] debt holders have any expectation that they have anything other than a very risky investment, all right? I just don’t buy that. There were steps along the way they could have done to impose some accountability—which, I think, longer term, would have had a more stabilizing impact on the system, as opposed to the one now, that’s created an expectation of bailouts—which they’re reinforcing with all this advocacy now. There are things they could have done, and they just decided not to do them. I think at the end of the day [sighs] they just didn’t want to impose pain on these institutions. They just didn’t want to do it, for whatever reason—whether they really felt in their mind that was going to disrupt the system—I didn’t see it, and I don’t think the public buys it. I think the public still doesn’t buy it.

Thank you.

So, again, out of order, but—conservatorship for Fannie and Freddie—August, September 2008—yet another of the litany of 90- or 180-degree pivots. Were you party to all of those—to that decision? What was your take on it? What impact did it have?

Yes. That one I’m a little more sympathetic. You really could see the systemic impact if Fannie and Freddie had been allowed to fail. I think they had too much leverage. They had invested in all these risky subprime mortgages; they had done it with the government’s encouragement, giving them affordable housing credit. But I think that one, they had to do it. Banks had tremendous exposure to Fannie Mae and Freddie Mac securities. If they started taking haircuts on them, we would have had some significant—and throughout the banking system. International investors—I think there again, when you look at Treasury’s actions, remember that Treasury has to fund the government and the bond investors, right? And a lot of that’s—You need to look at underlying incentive. A lot of international investors were heavily invested in Fannie and Freddie debt, so to haircut that, I think you would have—They were huge. They never should have gotten that big.

So was I part of that decision making? Hank consulted me. I think he pretty much—It was one of those things, “This is what I want to do. Sheila, do you agree?” kind of a thing. But I think it was a sincere call, and we talked it through a bit. And I told him I agreed with him and I would support him, and I did. Anyway, I do.

But there again, they were taken into conservatorship, they were nationalized by the government, they did impose accountability—unlike these private banks that were just bailed out and then as soon as things got stabilized and the government withdrew their money, they were paying their big bonuses again, and they were happy, but not many other people were.

Why don’t we take a break now, because we’re due one.

Yes, we are. It’s time.

[BREAK]

Anything occur to you during the break?

No, I don’t think so. No.

Bob, I cut you off.

Well, first of all, how are you holding up?

I’m fine. I’m a little bit tired, just because I didn’t sleep very well last night—for reasons unrelated to this.

Well, I’m astonished at your stamina.

Well, good.

And recall—seemingly total recall of events, which is great.

Yes, well—

I actually have a question, Bob—or do you want to—

Well, go ahead. I’m—

All right, here’s a question related to that: So if you read Hank’s book, as we have, there are several episodes where he disappears behind a pillar and gets the dry heaves. [laughter] This is very stressful on human beings.

Yes, yes.

How did you sustain this? What are your sources of personal reserve that sustained you at a time when not only are you trying to fight the battle to save Western economic civilization, but you’re doing so in an inhospitable environment, with people who aren’t very appreciative of what you’re doing?

Right, right. Well, first of all, I was surprised that—Hank hid that very well. I never knew he was having that kind of physical stress. I think a lot of exercise—walking, mainly. My husband and I, we’d have to do it late at night, because I wouldn’t get home until late, but we’d get our flashlights and take the dogs out and go for a three-, four-mile walk in the evenings, and it was a great way to clear the head. As I said, I had a very supportive husband, which made a huge—He also helped me keep my sanity and gave me some strokes when I was [laughs] feeling unloved and unwanted, which was quite a bit. So yes, but I think—

Dogs do that, too.

—exercise—Yes, dogs do that. And then on weekends, we’d make ourselves go out. We used to bike ride a lot, not so much anymore. I wish we’d get back into that, but we’d go for long bike rides. I remember being out on the towpath along the Potomac and just getting into a rip-roaring fight with Tim—I think it was on the Wachovia thing. And Scott [P. Cooper] was just sitting at a picnic table watching me. I was pacing back and forth along the side path to the canal. He was just looking at me, with his expression like I can’t believe you’re having to do this—because—

So you were on the phone with Tim Geithner?

I was on the phone with Tim, yes. Yes. Yes, exercise, that really—exercise and a supportive family—that’s how I kept my sanity. And my health stayed pretty good. With me, it’s sleep. I’m a person who needs sleep, so when I don’t get a good night’s sleep—and worry can sometimes keep me awake, so the walking helped with that, too—kind of clearing the brain and helping you get sorted the things in your mind and how you’re going to tackle them the next day. That was helpful, too.

Did you ever turn back to—I guess you would consider him your mentor—Bob Dole? Did you ever talk to him?

No, I never did. No, I didn’t. He never was a financial markets person, so I was afraid—

I really meant more personally—and professionally, generally.

Yes, yes. Well, no. But I think for him to really empathize and relate to what I was going through—I just—I was afraid we wouldn’t have this common understanding to have that conversation. And—I’ll just leave him out of it anyway. Warren Buffett was actually helpful to me. I think Tim really worked overtime to ingratiate himself, so Warren’s kind of supportive of the three amigos now, which is fine, but at least early on, we were getting some support from Warren.

How so?

Well, for the public-private partnerships—because we really wanted banks to have to sell these assets, clean out their balance sheets, and get the loans restructured. He was publicly supportive of that. He was initially quite critical of the stress tests, because let’s face it, the stress tests basically were a signal to the markets that anybody over $100 billion was going to get bailed out. That’s basically what the stress tests did. He didn’t think that was necessary, and he was right. That wasn’t necessary. But that’s pretty much what the implication was of the stress tests, and he was publicly critical of that at the time. But later, I think Tim and all his Wall Street contacts did a lot to work with him. I did talk to him a few times, and he was helpful.

Had you known him before you went to the FDIC?

A little bit. We had a mutual friend, a woman named Carol [J.] Loomis. She was a reporter—a journalist—for Fortune magazine for many years, wrote his shareholder letter for many years. They were just good friends. They played bridge online together. And she was a friend of mine. She and I were on a nonpublic board together. It was kind of a difficult board, and we bonded on that. So he knew about me through her and reached out to me early on. And it was funny, I remember, he asked me to breakfast and we had breakfast, and when we were done—We just had breakfast at whatever hotel he was staying at—and I reached for the check. He was quite offended. I said, “No, I can’t let you pay for this.” It was $20 or something. [laughter] Yes, so he was a good sounding board for a time.

There were a couple of other people who I reached out to for policy advice and was kind of disappointed in them. I’m not going to mention any names, but these were people—See, part of my disillusionment with all of this was—and I think that’s why people in the industry were surprised when I reacted in some of the ways I did—I worked for the New York Stock Exchange. I wasn’t anti–big bank. I wasn’t anti–financial markets. I wasn’t anti–big financial institutions. I thought they needed to be regulated, but it’s Wall Street. There was nothing offensive to me about the Wall Street ecosystem, because I assumed that was capitalism, that was free markets. And when I saw these people with their hands out, coming to taxpayers, eagerly wanting this support, it disillusioned me terribly.

And when we kept doing these serial bailouts with Citi, I remember calling a couple of my more Libertarian friends—without mentioning names—This was by 2009—and I said, “The system is kind of stable; why do we still need to be doing bailouts?” They said, “Oh, yes, keep doing bailouts, keep doing bailouts!” That’s when I realized, OK, well, these guys get all their funding from Wall Street. [laughs] And they were free market when it was convenient to be free market and they’re bashing Fannie and Freddie or doing other things, but once it’s not in their interest to be free market, they’re not free market anymore. “Yes, do the bailouts!”

That was kind of disillusioning. It was some lonely territory there. The regional community banks were supportive. They, for the most part, didn’t do any of this crap. But the whole industry was getting tainted. And, of course, they’re right—They got trapped in a lot of the regulatory backlash that occurred afterward. So I got some support there, but it was pretty lonely there for a while.

Russell, correct me if I’m wrong on this—and you may not have anything to offer on it, but—We talked a little bit about President Bush 43 and President Obama just very briefly, and about if politics of the 2008 campaign had any impact, but we haven’t really mentioned the transition itself, did we? Did we talk about the transition?

No, but we haven’t—I’m not sure that we’ve covered—

Are we there yet, I guess?

I don’t think we’re quite—

Yes, we haven’t talked much about Obama, have we?

No, no.

I have one more question on the crisis itself.

I’ll just keep it written here.

OK. So one of the big overarching questions about the policy choices, the execution of the crisis response, et cetera, has to do with the trade-off between intervention versus not—that to intervene creates moral hazard is the fear, that it then sets a precedent that convinces players in the market that there will always be a safety net and therefore we don’t need to worry, long-term creditors of financial institutions will always get their capital back, blah, blah, blah. How do we reconcile—How do we hold people accountable? I’m inviting a commentary on philosophy, as well as any observations on specific execution—maybe conversations you had had with the three amigos or any others that might have engendered this tense trade-off between intervention and the creation of moral hazard.

So, look, nobody says we shouldn’t have intervened. I’ve never said we shouldn’t have intervened. Clearly, we had to take measures. We had to take measures in addition to the supports we had through deposit insurance and traditional Fed lending, which, since discount lending is only for banks, they had to use [Section] 13(3) [of the Federal Reserve Act], which had never really been used before, either. Nobody said that we shouldn’t have done anything, but I just suggest that what we did went far beyond what needed to be done to stabilize the system—in a way that continued credit flows to the real economy.

Where was your focus? Did you want to take it on faith that by bailing out the banks, it was going to flow through to the economy? Well, that didn’t happen, which, again, is why I don’t understand why Hank, et alia, keep espousing, Let’s do this again, because it didn’t happen. Or do you do a combination of things to impose a little pain and accountability? For example, lend, but at a penalty rate—That’s kind of the classic, [Walter] Bagehot sage wisdom—and I never know if I pronounce his name correctly—that we didn’t follow, right? This was not penalty rates; they were very generous rates.

Again, there were steps along the way we could have taken, I think, to thoughtfully impose some accountability without creating systemic impact. And some of this stuff was just laughable, like, they couldn’t fire those traders in London who worked for AIG? They had to pay them bonuses? Because it would have a systemic impact? How does anybody believe that? But when you have really credible people saying it, then you wonder, OK, well, maybe so. I just don’t buy that.

I think there were opportunities that we did not take. I think we were purposely not looking for opportunities. When we were able to have an impact, we were able to dial back, right? So for the liability guarantee, the initial ask was, “Sheila, get up and have a press conference saying you’ll guarantee everybody, and we’re doing it for free.” We didn’t do that. Money market funds—We got a cap there. Even on the TARP investments, we did get them to have some minimal requirements on loan modifications. Tt wasn’t as much as we should have, but we got something there. Generally, when we were pushing, it was to ask for something from them in return or impose some accountability on them.

There were opportunities. This was not a binary choice. And I think the people who advocate for what we did say it was either this or Armageddon—that we were going into the Great Depression. I just don’t think that’s right. There were plenty of steps along the way. Why couldn’t Citigroup’s sub debt holders convert to equity? Probably by now they would have made some money off of it. There’s no reason why they couldn’t do it then. “Oh, no, that’s going to disrupt the system.” It bothers me that people—smart people—just still take that at face value. “Oh, we had to do that. Right. Had to save the system.” And there’s really no analysis.

That’s why Adam Tooze’s book is important, and I hope there’s more academic work about that, really drilling down into this. Just don’t take this at face value. And you can do that—and I don’t mean you personally, but academics [laughter] can do that—

Who, us?

Yes, us?

Well, you can do that. [laughter]

The weight on my shoulders is immense. [laughter]

But the choices that were not taken—Really challenge the idea: “Well, why would that have created a systemic problem?” Because I don’t think it would have. And certainly in 2009, we had opportunities, once the system—It was really the short-term funding markets that had to be stabilized; those were stable by 2009. That was when—I submit that probably it would have done some meaningful restructuring of Citigroup. You would have had a sick bank you would have wound down over time; you would have spun out a healthier bank that would have gotten back to profitability a lot faster and would have had a lot more contributions to the real economy than what—They had to nurse all these toxic assets they had over a period of years and turn to the derivatives market to make money. And that worries me, because I don’t know if they know how to manage those risks. Their derivatives book is almost as big as JPMorgan Chase’s now. So anyway—whatever. I digress.

There was some talk at one point that Larry Summers or somebody in the Obama administration had proposed nationalizing Citibank. Do you know about that?

Yes, see, I didn’t know any of that was going on. Again, it was just so frustrating—I write about this, and this is common for women—just getting into the conversation is a huge challenge. These things are going on in sidebars—“Oh, yes, well, we’d better tell Sheila”—after they’ve had their conversations. I wish I had known about that. I didn’t. I remember Larry Summers calling me—It was kind of vague, very high-level questions about Citigroup, without—portraying it as just that he was information gathering, not that there was any serious consideration of that. I wish they had told us that. Our guys had been doing a lot of work on Citigroup; we would have some thoughts about maybe how you could do that—or at least nationalize part of it. Apparently, they were pushing Tim that way, but again, I didn’t know. Larry was apparently doing that.

Then I had this very curious meeting with Tim, which I recount in my book, where he asks me to come over—This is when he was Treasury Secretary—and said, “Well, what if we break up Citi, and we’ll put the bad assets over here, and you guys take the losses.” I said, “What? And why would I do that?” [laughter] Again, Citigroup had $250 billion in insured deposits; it was a very small part of their liability base. There was this myth that somehow the FDIC was going to go bankrupt, and that was just not the case. That was Citi’s problem—They didn’t have a stable insured deposit base; they were relying on hot money to fund themselves, so I said no. And I think what happened was, he took that back and said, “Sheila Bair’s opposed to this,” when I wasn’t opposed to breaking up Citi; I was opposed to the FDIC taking the losses. I wanted the private sector, their own stakeholders, to take the losses.

With more meaningful engagement and trust, we could have done some things to impose some accountability, at least on that one institution, and in a way that longer term would have been, I think, healthier for their stakeholders and the economy. But we didn’t have meaningful engagement with them. We didn’t know that these were things that were being discussed at the White House.

Let’s talk transition.

Oh, Russell?

I have sort of two residual questions to ask. One was—and you may have already dealt with this—but was there a critical missed opportunity in the sequence of events in 2008?

Well, look, I think the Bear Stearns bailout deal—government-supported deal—I hate to second-guess, because I wasn’t on the front lines of that; they had data and information I didn’t have. But looking at it and knowing something about Bear Stearns—It was a smaller, second-tier investment bank—It wasn’t even one of the big ones—and it sounded like the value of its real estate itself gave them some level of solvency. [laughs] So why they’re forcing this sale with JPMorgan Chase—? Well, if they’re going to go down, let them go down. My guess is they wouldn’t have. My guess is that Chase wanted them, and probably would have come up—just as Wells did later on. If they think government money is there, they’re going to ask for it, and if they don’t have that expectation, then they won’t. So I think the Bear Stearns bailout was a mistake, based on everything I know. And I’ve challenged people to show me differently, and nobody ever has.

It did set up an expectation—OK, the government’s going to take care of it—and that created confusion with the market, especially with Lehman Brothers. I think Dick Fuld [Jr.] rightfully assumed, If they didn’t let Bear Stearns go down, how in the world could they get Lehman Brothers go down, which was bigger and more influential? And there’s some revisionist history in their most recent book, because Lehman had opportunities to sell themselves. They absolutely did. This new book that the three amigos have written, it pretends like they didn’t have any opportunities. I don’t buy that. They didn’t have opportunities at the price Dick Fuld wanted, but they had opportunities.

Gotcha.

Was the decision to let Lehman fail the right one?

Well, in retrospect, it wasn’t. I understood why Hank did it at the time. I think he was getting the crap beat out of him—bailout here, bailout there. So to your question, he was feeling a lot of political heat, so that probably influenced his decision. This new book they have, there’s some suggestion that it was calculated to get the TARP bill passed. That wasn’t my impression. Again, I was not on the front lines of that at all—Lehman had a teeny, tiny thrift. We just really didn’t have a stake or reason to be involved, and they didn’t ask us to be involved. But in retrospect, surely it was a mistake.

Here again, agencies that are equipped to do this kind of work would think of things that Treasury didn’t think of, that—So Hank thought he had a deal to sell Lehman to Barclays. OK. He writes about that, and he was surprised, because the regulator got in the way. We had a couple of international failures—Granted, they were smaller banks, but this has happened in previous situations—crises—that the FDIC has handled. The first thing to do when you’ve got a foreign bank is to check with the regulator. What’s the approval process? That’s just in our playbook; they didn’t even think about it. And then he’s still taking Callum McCarthy to task, who was the head of the FSA [Financial Services Authority] at the time, for nixing it, but you know what? I don’t blame him. He has 24 hours to approve one of his biggest regulated institutions buying a bank that everybody knows is in serious trouble.

But that’s why it’s not a bad thing—It’s a good thing—to have a playbook now. It’s a good thing Congress has set up some rules of engagement. This is how you do it. And it’s good that they put the FDIC in charge of the Title II process, because the FDIC thinks about those kinds of things. The Treasury Department doesn’t; that’s not their job. That’s not what they’ve been equipped or designed to do.

Paulson has been singularly remote on discussing where he was getting the heat from.

Oh, the political heat? Yes.

Can you give us any insight into that?

I think he was getting it from the Hill. I do think he was getting it from the Hill. Also the media, a lot of the social media—I don’t know to what extent the mainstream media was beating up on him, but there were a few, probably. I think that was real. As I recall, there was a lot of adverse publicity and some heat from Congress. I couldn’t name names for you, but my recollection is that that was real, yes.

Were there any of the crisis meetings that you didn’t deal with in the book that we should talk about? Was there anything that was just too hot to include in the published account at that point?

No. I think I was pretty candid about it. There again, I think people thought I was too candid. But look, I’ve been in government service for a long time, and I’ve always respected confidentiality and what the public should know and what needs to remain confidential. But this situation was so extraordinary and so harmful to so many people, and so much government money put at risk, I thought the public needed an unvarnished accounting, so I pretty much gave it in the book. I really didn’t hold back much.

Thanks.

Yes, yes.

All right, Barbara. Transition?

Oh, transition. Any impact on you directly? Or what are you seeing? And were many of the teams carrying over for it?

It was an amicable—initially, at least—Sylvia Mathews [Burwell], whom I like and still stay in touch with—She’s the president of AU [American University] now, as you know—she was the head of our transition. And then Dan Tarullo was also involved; he came over very early. Because Dan had been a big opponent of Basel II—thank you, Dan—and had given us some good academic support on this when pretty much everybody else was singing with the groupthink, so I thought that went well.

They did not try to influence politically or change our decision making; I think it was strictly fact-finding and understanding what we did and how we did it. They understood we were independent; we had fixed terms. I didn’t sense any attempt to move anybody in or out or whatever. I was a little worried, because sometimes, even if you’re an independent agency, they want to put their own Schedule Cs in—we didn’t get any of that. So yes, they were actually pretty hands-off. I thought that initial process was a good one. Definitely.

But you were surprised that Geithner was—

I was. I talk about it as a punch in the gut in my book, and it was. There again, people assign personal animosity to that. This was about policy differences, and I had beat my head against a wall with this guy, because he just was so focused on Wall Street, and I was really hoping for a fresh look from the Obama administration. Then I realized it was going to be worse, actually, because he had a lot more power as Secretary of Treasury than he did as the president of the New York Fed. At least I had Hank and Ben containing him a little bit here and there, but then it was—It was a punch in the gut, because I just knew—I knew what was going to happen would happen, and it did.

Let me ask you this—because your account of President Obama and the incoming economic team is not—It’s not your own; there are other people who are suggesting similar things, that—

Yes, there were. Yes.

—that there was an opportunity for President Obama to come in with a team of Obama people—

Yes.

—and he came in with a team of Clinton people.

He did. He absolutely did.

I’ve been reading Reed Hundt’s book [A Crisis Wasted: Barack Obama’s Defining Decisions].

Yes, that’s a good book.

And he’s making exactly the same argument as somebody who evidently gave money to Obama early and felt that there was an opportunity for fresh ideas, and then he looks up and is sort of gobsmacked by the—

It’s the crew. [laughs]

—by the crew.

Yes, it’s the Clinton Treasury Department.

Let me stop fumbling with my question and let you just sort of run with that for a little while.

Well, I agree with that. The only thing I can think of is that I think Obama—He was a one-term Senator; I don’t think he had his own people. Between that and hearing all this, “Got to save the system, got to save system! Don’t do anything to disrupt the system!” So “We’ve got to keep Tim in there; we’ve got to keep doing what we’re doing”—I think that was the pitch that was being made to him. And I think he was afraid that if he brought in—This is kind of back to your earlier question—If he brought in any new people with a fresh look, he was going to get people all unsettled again, which is a sad statement—that Wall Street would have so much power over even our President that, no, sorry, you’ve got to keep doing everything and helping us the way they have been doing; you can’t take a new look at this, or we’re going to bring the system down if you don’t. Let’s face it—at the end of the day, that’s probably what he was hearing.

If he had had his own people to give him some confidence that there were alternatives that would not disrupt the system, we would have seen a different choice. It was basically me. He did reach out to me, and we had a couple of nice private conversations, and he told me I had direct access to him, I could call him anytime, but at the end of the day, that just wasn’t realistic. It was going to be me, this time, against Tim and Larry—that whole crew. They had daily access to him. I’m going to call him and change things?

I give him credit that he—I think he sensed that he needed different perspectives, and maybe I let him down a little bit. But I just felt I was outgunned and outmaneuvered, and I was afraid that if I tried to use that access and get him to do different things, that they were still just going to beat me down and that what relationship I had with him was going to be compromised, because then I would really incentivize them to try to exclude me as much as they could. But they did anyway.

I wrote about the loan stuff in my book—and Reed did, too—that on this, he clearly was looking to me for leadership on the loan stuff. And they gave him a plan that did not work—This was basically to subsidize the interest reductions that bondholders—or the mortgage-backed securities [MBS] holders—were going to have to take on their MBS investments. And they weren’t spending much money. They gave him some number—three or four million homes saved—which everybody knew was not going to work. And I just cringed. He asked me to go to Phoenix for his announcement, and I did, and I just cringed when I heard him say it.

They did not tell him that I did not think this plan would work. They did not tell him that. They portrayed the plan I was pushing in a very—frankly—dishonest way, that this won’t work for XYZ reasons. They referred to the high default rates that we had on IndyMac, which were skewed, because by the time we took IndyMac over—First of all, IndyMac was one of the most toxic lenders around, and second of all, these loans—a lot of them, most of them—had been delinquent for over a year; it’s very hard to rehabilitate. They were using those higher redefault rates with the IndyMac experience, which was not what would be typical, to discredit our plan.

So I never really got a chance to present my side of it to him—on either our plan or why I thought their plan wouldn’t work. And I think he was ill served by that. He should have had us all in the room with a robust discussion and made a decision. But they weren’t going to allow that.

It’s really hard to do an end run around a Treasury Secretary this deeply embedded.

Well, yes—or the head of the NEC.

I’m trying to remember—Oh, Larry.

Larry, yes. [laughter] Larry. Yes, so—

It took a minute. Sorry.

Right. And I think Rahm wanted to help, too. Rahm was friendly. As I said, when Obama was elected, Rahm called me and said, “I’ve got your back, too.” All these people—I should have known they had their knives out for me. [laughter] If I had thought about it, I should have known that anyway. So I think Rahm was sympathetic, but he was—I was just the Chair of the FDIC—I think about that a lot: Could I have done more? Because he did reach out to me and he did give me access, but I didn’t know how to use it. I didn’t know how to get around them.

Again, I’m not sure it’s possible when the other gatekeepers on economic policy are intent on monopolizing things. Were there names of people that were being bandied about that you thought, Oh, this is—

Well, I suggested Paul Volcker. I thought he was—You needed somebody with stature who could speak with authority and be calming, but would not be so naïve and accepting at face value of everything these guys were telling Tim—because he just did. Other people—I think it was naïveté or just—I don’t know. He did not push back on the kind of stuff they would tell him and the feedback he was getting from Wall Street. Yes, I had suggested Paul Volcker, and that was public. We had, like, a million different investigations after it was all over, and my emails were being subpoenaed left and right. I had sent an email to John [D.] Podesta, actually—because he was head of the transition team—That’s right, this was not to Rahm, this was to John Podesta—suggesting Volcker. And shortly thereafter, I read in the paper—

WikiLeaks.

—that Tim was trying to force me out. [laughs] Yes, maybe it was WikiLeaks. There was some other stuff in WikiLeaks. I can’t remember.

That would have been much—

Yes, all of those emails are out everywhere.

—much later, I think.

Nothing was private.

You’ve probably said everything there is to say—I’m just mulling over the meaning and the implications of a President coming in with—short-timer in the Senate, no Washington experience, smart as a whip, law degree, but no real economic experience—even reaching out to you, not attempting to cut you out, but you just feel like you can’t get around, as Russell said, the other gatekeepers—that he’s not the only gatekeeper?

No. And to his credit, when he first became President, he was meeting regularly with the bank regulators, and by the summer, that stopped—Larry and Tim had—They took their time, they circled their wagons, so he really wasn’t pretty much hearing from anybody directly, except from them. But he did ask me—When that AIG bonus thing broke, he asked me over to the Oval Office, and I remember Larry and Tim were sitting there, and I thought, OK, well, he knows they don’t like me, and this is their punishment. [laughter] No, that was a terrible—That really—And it was unnecessary.

But there again, they never thought I was a team player—but I was a team player. He asked me over there; I sized up the situation; I thought, Well, I’m going to take an opportunity. I kind of bailed them out—I said, “Well, look, there’s no playbook for this. We really don’t know how to deal with this. But if we had an FDIC-like process for these banks, then for systemic institutions like AIG, we would have a process for changing management and bringing other people in and not have to rely on current management so much.” That was actually when I got the administration on board for doing what became Title II. Of course Tim tried to undo that later and basically turned it into a bailout kind of a thing, so Congress balked on that, and they really worked with us on Title II.

Again, I think Tim’s trying to relitigate a lot of that with some of the things he keeps saying about bailouts. But that’s one of the few times—In fact, he had to specifically summon us, because we didn’t have our regular meetings with him anymore. Those were stopped.

And what did the President say to those comments?

Oh, he liked that idea. I could have sat there and tried to embarrass them and say, “Well, why the hell did you do this?” That’s what I was thinking.

Since you’re not a team player.

Yes. [laughter] I’m not a team player. But I thought, Well, that’s just going to make them hate me even more than they do. [laughter] Because I wanted what became Title II—and I thought, Well, I’ve got a good audience with the President to point out to him exactly why he needs a process to deal with these troubled institutions that will maintain funding flows—so again, whatever benefits they’re doing for the real economy, you can continue funding them to keep that going.

But there was no reason why you couldn’t put the liability—at least the equity and sub debt, and I would argue senior debt, too—into the resolution and have them be there to absorb the losses. There was no reason in the world why you couldn’t do that. That’s what we’ve done in the past, and I assume that’s what would happen if they use Title II. That’s what should happen. Whether they have the courage to do it or not, I don’t know. But anyway, yes, he was very receptive. He was very receptive.

I loved Barney Frank’s account of your—

Yes, Barney was a friend.

—of your role, and I wondered if you had any—I laughed out loud when I was reading this last night, where the question during the transition was about whether they would pull the second tranche of TARP down, and President Obama says, “One President at a time,” and I think Barney said something to the effect of, “I think you’ve overestimated who’s staffing the executive branch right now.” [laughter] It was much pithier than that, but I had occasion to laugh.

Yes. That’s right. I forgot about that. That was funny.

Did you have any piece of that? Did anybody come and ask you about it?

That was so maddening. We thought we had a deal. We did have a deal with Treasury to use that TARP money—what they had left—for mortgage loan modifications. We had our proposal, and again, it was all about economic incentives, which were not strong enough under what Mr. Obama had announced, that his White House team had given them—but that happened later. But we had a deal, we thought, with the Treasury to use that unexpended TARP money for loan mods, and then Hank all of a sudden said, “No, the new administration has to decide,” so they didn’t do anything. They used that—Whether it was an excuse or not, they didn’t do it. They waited for Obama to come in, and then Obama came up with this tepid plan he had that didn’t work.

Right. And you didn’t have any input in that?

No. No. And there again, I think there was some suggestion—They had to do something on loan mods to get that second tranche, so whether they really even had their heart into saving these homes or just had the optics that they were doing something so they could say that—

Larry had sort of embraced that—

Yes, exactly. Yes. It was politics. They were doing it because they thought it was politically necessary to do it, not because they believed in it. And of course, it wouldn’t work if you go into it with that mindset. It’s just—[sighs]—I don’t know. They didn’t see what I saw. They were seeing the borrowers that—What’s the movie you were just talking about earlier?

The Big Short.

The Big Short. They were seeing borrowers that way, that they were people gaming the system, I guess. They didn’t go out there and see the people I saw. I visited some of these servicing fairs. I went out to California. The main reason we got Hank to move on loan modifications was because Arnold Schwarzenegger basically adopted our plan in California, and then Hank realized and the industry realized, Oh, shit, it could go—I’m sorry [laughs]—I’ve been trying not to cuss here—

No, please, it’s better that way.

It makes it more colorful. [laughs]

Finally! It’s taken us about seven or eight hours to get you relaxed enough to do this. [laughter] We’re going to have to run the interview—

That’s right.

—another ten hours now.

But I think they decided, Well, the state’s going to be doing this, so if we don’t have a national system—Then they realized they needed to co-opt any individualistic state efforts. But Schwarzenegger asked me to go out to California and attend—He had gotten all these servicers there to have a big—I can’t remember—an expo—a mortgage modification expo or something. It was so funny, the American Banker did a story about how they called him “The Modifier.” [laughter]

So I go out there—I tear up thinking about it now; I write about it in my book. It was just blistering hot, it was in Southern California, and it was just people lined up for blocks and blocks and blocks—lots of people of color, working families—people in waitress uniforms and construction worker dungarees—These were working people who had left work to come apply for loan modifications. There were probably thousands of people there—so we all spoke to them—and then you had all the servicers there with booths where you could come in one by one and apply for a mod. That was a laborious way to do it, but it was something. I remember speaking to them, and I just looked out at the sea of faces, and there was just—I’m going to tear up thinking about it again, because they were just [chokes up]—I’m sorry.

It’s OK.

I still—OK, I didn’t get through this without cussing or tearing up. [laughter] They were just scared. And I was so mad, because we had seen this coming for so long. And I was so tired of Tea Party types saying these are all deadbeat flippers and just everybody thinking about the banks, not about these homeowners. It was really quite emotional—as you can tell, I’m still emotional about it.

So after I gave my remarks and they kind of herded everybody into this huge area where the servicers had their booths set up, and I’m standing aside—I think it was Clayton Servicing—and I was overhearing—They didn’t see me. A nurse was there with her father. She was in her RN [registered nurse] uniform. She had her lapel pin, I remember. She had a subprime hybrid mortgage that the payment was resetting to a higher rate. She had been perfectly on time with her payments during the teaser rate—Well, they called them a teaser rate, but the rates were actually high—the two- or three-year introductory period. And she wanted a loan modification.

This was exactly the type of borrower we wanted to help: somebody who had been making the payments, couldn’t afford the reset, so they gave her one for two years. We’d had an agreement—I’d wanted it a permanent one, and I think we had finally agreed with the HAMP protocol to get a five-year extension, and they only gave her two years. I was so mad.

So I called the head of Clayton Servicing afterward and complained to him. And he said—Even when we thought we had agreements, people were not being forthcoming, because they said, “Oh, no, we can only do two years, because we can only get our investors to agree to two years.” I’m sorry—I do fault Hank for that a bit—because if we had all gotten on the phone and just told them this was the way it was going to be, I don’t think you would have gotten that. But they were still telling them—“OK, this is what the government wants you to do, but you can really do what you’re going to do.” At least she got two years. She didn’t get five years, but—Just to add insult to injury to it—It just shows what a slog, a necessary slog, it was, to help these homeowners, and it was so counterproductive.

I’m so glad House of Debt came out. I wish they’d written House of Debt during the crisis, because far better than I, they made the economic arguments I was trying to make then—that this is what’s dragging on the economy, guys. It’s not your precious banks; it’s the mortgages. Fix the mortgages, and everything else will get—Don’t fix the banks, fix the mortgages. I never could get through.

I thought they made such a persuasive case as to why that’s really what brought the economy and the Great Recession to us, which continued. You look at these aggregate numbers and it’s like we were—What’s the official number?—We were out of the recession in 18 months or whatever it was, but you’ve got to look at how that wealth and income was distributed. Most people were in a recession for ten years, right? I don’t want to go through that again. And if we follow the same playbook that we followed then, if we have another financial crisis and do the same thing, we’re going to get that again. And I just don’t think we can survive it.

Here’s what I’m puzzled by: That very moving account, you would think, would be precisely the kind of thing that Barack Obama would find—

Compelling.

—convincing.

[sighs] Yes.

Am I mistaking the person who’s the President, or is there—

No, he absolutely wanted to do it.

—or does he not get that information? Or does he get it, and he’s just not persuaded by the visceral emotions that are evoked by that?

I think he absolutely wanted to help them. I think that’s absolutely where his first priority was. But the team he brought in did not have that agenda, and they just stonewalled him: “It’s too hard.” It’s in their new book, all of the legal restrictions. We could get so aggressive, as I said, with finding bailout authority, but had to cross every T and dot every I for anything we wanted to do for homeowners.

I’m not staying this stuff would have been easy, but I think if there had been a full commitment to getting it done from people who were knowledgeable about it, which is what—The FDIC staff knew this better than anybody. That was the other thing that just drove me crazy. The Treasury people didn’t know anything about mortgage servicing or reworking troubled mortgages. That was the FDIC’s bread and butter. But they really wouldn’t let us get near to it. If they had let us in and let us be in charge and given us—Yes, I would have spent money. That was the other thing—that Hank and Tim always wanted to show a return on their investment; they didn’t want to—

[laughs]

So we’re happy to suffer all these indirect costs—the job losses, the reduced tax revenues, and all of that—but we’ve got to show a profit on our direct investments—a cash flow, a positive cash flow, from all of our TARP investments. So that was the other thing, and they kind of set that up as the rule, and that was very difficult, as well, to do, because that wasn’t going to happen. It just wasn’t going to happen.

Where does your empathy come from—to feel that so close to your heart—and that’s not having an impact on these others?

I’m sorry, I probably made too many gender differentiations during this, but it’s partly—There is research that shows that women are a little more risk-averse and tend a little more to see issues on a human level. So on that one, I do think gender played a role. And I think it’s part of our maternal instincts, too—We’re a little more hard-wired that way. We’re protective, I think, because of our maternal makeup; it makes us see things a little more in personal terms and wanting to be a little more protective.

And I was more distant from the big banks than they were. The big banks were not the FDIC’s bread and butter. We had a few larger regionals, but most of our banks were community banks that, for the most part, had nothing to do with any of this, so I wasn’t getting that daily—I wasn’t in that daily atmosphere of Wall Street. They weren’t part of who we regulated and who we dealt with on a regular basis, so I think that gave me more capability to see what was going on beyond Wall Street that they just didn’t have.

But it’s sad. And Congress was willing to spend money. This idea that they had to prove a profit—Yes, I can see why they’d want to prove a profit for the bank bailouts, because nobody wanted to do that, but I don’t think there was an expectation of a profit for helping homeowners. I think Congress absolutely understood they were going to be spending money on that—and were willing to do it.

So what do you regard as your greatest accomplishment as Chairman of the FDIC?

Oh. I think public confidence. There are a lot of things that I’m proud of, and I think restoring employee morale is also something I’m very proud of. But the two go hand in hand, because I had to energize the agency to perform as well as we performed, and we got public confidence because we were handling the bank failures very well and were giving people that seamless, uninterrupted access to their insured deposits. So I think everything we did funneled into public confidence in the FDIC, and that, in turn, stabilized the system and helped Wall Street, whether they want to admit it or not. My obsession with our little Deposit Insurance Fund. [laughs]

There’s major legislation that comes under Obama, though, to try to deal with some of this, right?

Yes, that’s true. Yes.

And Dodd-Frank.

Well, we won that. Dodd-Frank definitely went our way. I didn’t win everything. The expanded bailout authority for the clearinghouses was a really—They’re the new GSEs [government-sponsored enterprises] now—another good paper for some academic who wants to take a look at financial market utilities and what’s going on there. There you go; you’re the go-to guy on this. [laughs]

For the most part, we got what we wanted in Dodd-Frank. I wanted to charge an assessment on large nonbank institutions above $50 billion to provide working capital for a Title II. I didn’t want to have to have Treasury be the financing mechanism for Title II resolutions. We got that in the House. Tim opposed it in the Senate—and vocally so. And that was public—Mitch McConnell said it—that he was coming around, and he was trying to do it surreptitiously, because I don’t think Obama knew, [laughs] because Rahm called me. I asked Rahm, and Rahm said, well, they would just stand down and not do anything, and so I thought I had it. And then it turns out Tim was actually in offices lobbying against it. Mitch McConnell and Susan Collins both publicly called him out on it. But we lost it. We did lose that. So that was a disappointment. But I think the Title II structure, which is modeled off of the FDIC process, which has imposed some accountability, we got that.

And a framework for more robust regulation—Title I designations, the ability to regulate systemic activities as well as systemic institutions. Title I, systemic institutions, is by the boards of this administration, but activities regulation is—They had the power to do that. They haven’t used it, which is too bad, but at least the authorities were there, which we fought for.

FSOC [Financial Stability Oversight Council] was something we had wanted. I wanted them to have more authority to write rules if the regulators couldn’t agree. We didn’t get that, but we did, at least, get an interagency coordinating group that would force people to share information that they weren’t sharing before. I hope that’s what’s going on.

Did the team get any better later—the economic team? My familiarity, because we’re at the early stages of this—

Yes. [pauses] So I think Jason Furman was good. Austan Goolsbee, I think, was sensible. Oh, golly—I’m sorry—the head of the CEA [Council of Economic Advisers]—California academic—you know who I’m talking about?

Oh, Christina Romer?

Yes, Christy Romer. I think she was sensible. I heard she had her own internal battles with Larry. I think she’s too polite to say much publicly about it. And I think Reed’s book goes into—that she wanted a much bigger stimulus, which they needed—and even more focused on the mortgage problem and housing.

So, yes, I think there were some good people there, but they were just kind of overwhelmed by Larry and Tim. And Tim—the President liked Tim, no doubt about it. They had a good chemistry and rapport. He had outsized influence. But it upsets me—And we’ll see how history treats his administration—and your oral history and the wide variety of people that you’re talking to will help with that—but Tim kind of used him to validate what he did.

After his book, Stress Test, came out, he was on one of those late-night shows—I can’t remember which one it was—I don’t watch—but I saw it later on YouTube, because somebody had sent it to me. This guy was really hammering him—I can’t remember who it was. It’s too late in the day. But Tim got flummoxed, and then all of a sudden he said, “Well, President Obama supported it. Why would President Obama support it if these things you’re saying were true?” He was using the President as cover—again, and not responding on substance or policy or being able to defend; just, “Well, President Obama—”

I like Obama, and I respected him. He brought a dignity to the office, and he had a wonderful family. And I think he was used. He was used in a way that did not necessarily serve his legacy well. We’ll see. But I thought that was unfortunate.

He certainly didn’t bring—He would not have brought to the office much familiarity with this area.

No, he didn’t. He had to let somebody in.

And coming in at that time, when—Again, all of us, even if we’re not feeling the pressures you are, the rest of us are waking up in the morning and it’s like the ceiling’s falling in on you. So the people who are helping you get out from under that, you’re going to feel grateful for, even if the nuances are off.

No, that’s true. That’s true. And I think that’s probably—That is what happened. And I think people will take that into account. Again, I would be troubled by it less if there was more reflective self-reassessment now, but just to say we should do it all over again the same way—That, I can’t forgive. What a blind spot. I don’t get that. I really don’t.

Bob, this is actually a question to relate to that very point, because you are our expert on historical collapses—Is that typical, after these historic financial collapses, that people say, “Oh, however we came out of that, let’s just do the same”?

So there is a great deal of improvisation that takes place in histories. The absence of a playbook is exactly right. And it’s justified by saying, “Well, every crisis is different.” You make it up as you go along, because you have to—and/or the trope that the regulations that exist, the playbooks that exist, are those meant to resolve a crisis just like the last one, but you get shadow banks, you get CDSes, you get other stuff—It’s all different the next time, et cetera, et cetera. And I think Sheila is spot on—when you say that the absence of a playbook convinces people that it’s all negotiable—that it’s all a matter of what kind of support you line up and who lobbies for you and what pressure you can bring.

Yes, which is not good government. Not good government at all.

You’re also giving us a lot of helpful information, because now we have so many outsider Presidents who, because of this populism and this—I think it’s not too strong to say—hatred of Washington, a visceral hatred of Washington—so we get these outsider Presidents who don’t know the system and may not know the topic that’s in crisis. But you’re also helping us with one of our projects called First Year, about what it is like for a President to walk in the door in the midst of a nationwide—and in this case, almost a worldwide—crisis.

So that takes me to a question that I have about leadership that I had added to the questions here in your briefing book. We’re always interested in Presidential leadership, but also your own leadership of the FDIC. What lessons about leadership—Presidential, administration leadership—did you take away—? Even reflecting backward now with some benefit of years? What makes a good leader?

I think knowing what your purpose is, having a guidepost—and one that you truly believe in. With me it was public protection. It was depositor protection. It was helping Main Street. I viewed that as my public mandate. And maybe that goes back to where we started the conversation—that is, my kind of prairie populism—and government steps in to help people who can’t help themselves, not people who should have known better. I still remain offended by everything that we had to do.

But I think just having a moral compass and a clear understanding of what your objective is. That helps you clear out all the white noise you’re getting on either side, because different people will come in—lobbyists will come in, relationships will come in, somebody you know will come in, Bob Dole will come in—and lobby. No, he wouldn’t do that, but I’m just saying, people you know, people who think they might have influence with you, people who’ve got an agenda they don’t tell you about. You’ve just got to put everything through that screen of what your public policy objective is—at least for government leadership. And if you do that, you’ll succeed. You will be good on media—you’ll be popular with the public—because you’ll be sincere; you’ll have a good reason to explain and defend what you’re doing. But you won’t if your compass is off, right?

So that’s what I tell all government—I still speak a lot to government employees—I’m going to go over to GAO [Government Accountability Office] next week to talk with them. If you just understand what your public purpose is and stick to it—If you do that, you’ll be a good leader—you’ll stay out of trouble, number one, and number two, you’ll be a good leader. I really think it’s as simple as that.

Applied to Presidents?

Yes, I think so. Well, you need a dose of pragmatism, too. So I’m saying that—I’m extolling my high ideals as supporting my leadership style, but I made compromises. I wheeled-and-dealed with the guys, whether I wanted to or not, because I thought I could make it better, I could make it closer to my viewpoint, even if it was something overall, if I was left to my own devices, I would not have done. And Presidents have to do that on a higher level. Again, always keep that public purpose focus, but you have to compromise; you have to make decisions.

You have to not only have good policy ideas, but ideas that you can execute on, which is like [Thomas] Edison said, “Inspiration without execution is hallucination.” I think I’m probably butchering that quote, but you get the idea. [laughter] It’s true. Good ideas in Washington are a dime a dozen; you’ve got to figure out something you can actually get done, and so I think leadership is also understanding the art of the doable, and that’s even doubly important for the President.

This guy [Donald Trump] just throws—Whatever moves him, he throws ideas out and keeps people off balance all the time. And 99.9 percent of his ideas are never going to happen—and shouldn’t happen. He doesn’t seem to care. He doesn’t seem to feel like he has that responsibility to articulate visions and policies that can actually be consistent and be implemented. But he’s not a good leader. But that is what a good leader does, I think.

So for someone who’s reading this—back to Bob’s initial point of 50 years later—we’re referring to the incumbent President.

Sorry. OK. The incumbent.

You said, “this guy.” [laughs]

Yes, that’s “this guy.”

We knew.

The incumbent President, yes.

But we want to make sure others know—for the long term.

So you’ve seen Presidents come and go in your time in D.C. Who stands out toward the top? I won’t invite you to list them—[laughter]—but—

But feel free to—

Well, Ronald Reagan, of course. I got to wear his wife’s coat. [laughter] No, I did like Reagan. I did. I liked all the Presidents in different ways—except for the current one, who I’ve never worked with. I shouldn’t say this, but I will, since it’s late in the day—Somebody remotely related to his administration called me to feel me out if I’d be interested in working for them, and I told the guy—“Well, I think I’d have to lose 20 pounds and dye my hair blond to get a job.” [laughter] I should not have said that. [laughter] But anyway, I digress. What was the question again?

Which Presidents did you like the most, and why?

Which Presidents do I like? Look, I liked Reagan. And that’s when I worked for Dole. Reagan would come over to Dole’s—Reagan came up to the Hill; Reagan worked the crowd—He was so good on a personal level. He was such a charming—He was smarter than people gave him credit for. He, like George W. Bush, had an instinct for what the core problem was and finding the right solutions and staying focused on it. He was a big-picture guy—but I mean that in a positive and not a negative sense. And he hired smart people, too—I mean, Jim Baker was a brilliant choice for Chief of Staff—and could fill in the details that Reagan didn’t fill in or didn’t need to fill in.

And he worked so well on a bipartisan basis. The guy did not have a bone of pettiness or personal animosity. I think that’s why he worked so well—because he engaged with people on a personal level, did not hold grudges, did not make things personal, did not have agendas. And even though I really disagreed with him on social issues, looking back on that, I think a lot of the social issues he campaigned on—and maybe this says something bad about him, I don’t know—but I think he did that kind of to maintain the base. But I never saw him seriously try to do anything on abortion or anything else. I never saw it. If there were things going on, I never saw it. He was a good politician in that way, too, in terms of putting together a coalition and knowing who to say good things to but maybe not do anything about.

And his economic policies—the supply-side economics was not a good thing—but he had the good sense to support Dole in trying to close some of those loopholes and raise revenue. If you look back, the ’86 tax reform bill [Tax Reform Act of 1986] was done on a revenue-neutral basis; they fixed the ’83 Social Security compromise. So even though we slashed taxes in 1981, there was a lot of legislation after that to close some of the funding—the deficit gaps that it created. And he let that happen. Again, he was a smart politician. He kind of knew instinctively he needed to—He was happy to let Dole go out there and take the hits for it, but he let it happen. Yes, he let it happen—and sometimes helped it happen.

As I said, I like them all in different ways. [George] H. W. Bush was a real gentleman—and very public service–oriented. His son was also ill served with some bad advice on Iraq, but was basically a good person and had good instincts.

On Enron, when I was still at Treasury, I kind of had gotten into a fight with Glenn Hubbard. If you recall, when Enron failed, there was this issue—The Enron executives had sold—They had their employees’ 401(k) plans locked up, so you couldn’t sell Enron stock—The employees couldn’t sell, but they were dumping their stock left and right. It was a huge scandal, as it should have been.

So we were doing some pension reform legislation as part of that—401(k)/pension reform legislation. I had the lead on that, and I was pushing a provision that—a simple rule that said, if employees are locked up, management’s locked up, too—everybody’s locked up. You can’t lock up some people and not lock up other people. Glenn was really fighting me on that. I don’t know if he was opposed to the principle, or he just didn’t like regulation and changing things, so we had this big conference call with the President. I’ll never forget—he sided with me and he said, “What’s good for the guy with the mop is good for the guy at the top.” [laughter] It was a great quote. But he had that streak in him that impressed me. I think he did have a touch for Main Street, as they say.

And we’ve talked about Obama already.

But of all of them, Reagan was special. He just had that ability to inspire people and make them feel good about the country and a sense of optimism, which we kind of needed in the early ’80s. I didn’t agree with a lot of his policies, but I respected his intellectual integrity about it. He wasn’t captive to any lobbyists or industry interests. There are not many Presidents you can say that about. But he was a self-made man; he was financially secure. He didn’t have any moneyed interests that had engineered his Presidency—that I could tell—that had any influence whatsoever on him. I think he had good instincts. I didn’t agree with everything he did, but a lot of the areas where I didn’t agree with him, he talked a good game and actually never did anything, so—

I have one more question: Can you help us in terms of thinking about puzzles about President Obama in particular? Are there things that we should be spending our time thinking about and digging into, from the close periphery, you saw?

Well, I don’t think Congress was fair to Obama. I think he had a war from Day One. He had no honeymoon period whatsoever. And I do think some of that was race. I do. Not only did he inherit a very distressed economic situation, but politically, from Day One, they weren’t going to cooperate. And I was disappointed in my own party for that. Everything had to be partisan. The Democrats were to blame for some of that, but—like, on Dodd-Frank, I was so mad at the Republicans. Chris Dodd did everything he could to get Republican votes for that bill; they just didn’t want to play. From Day One, they were going to say this was a bailout bill. No matter what was in it, they were going to say it was a bailout bill; they were going to oppose it. A few brave souls, like Susan Collins, voted for it, but mostly they didn’t. And I just—I was disappointed in my own party. However history judges Obama, I think they should understand that he had a really bad hand dealt to him, both economically and politically, as well.

So a lot of this stuff had to be partisan, and because it was partisan, it was imperfect. I mean, a bipartisan process produces much better legislation than just having to ram something through with your raw political power. Some of the staying power of Dodd-Frank or—I guess it’s OK to call it Obamacare; I’m not a health person—I don’t view that as a pejorative, by the way; I’ll use it in a positive way—it’s hard to sustain it, because it was so partisan. You didn’t have Republicans—and that’s what we saw in the ’80s. When things finally got to the floor, they were passed by 75, 80 votes. You didn’t see this 51-to-49 stuff. They didn’t bother with it. Because it just—it wouldn’t last, and they knew that. Anyway. But things were different then. They were better. [laughs] I don’t think I’m just being nostalgic. I think they were better.

Richard Lugar, who just passed away—in his obituary in the New York Times—the very end admits that even his almost hagiographic biographer says he was a wooden speaker. [laughs]

He was. It’s true. He was.

You’re here to say that’s true?

Yes.

But there was a great quotation at the end that just summarized what you’re saying about the need for bipartisanship: that partisanship does not last; anything that’s done in its name probably will not last very long, or the quality of it isn’t very good; and then if there’s no bipartisanship, there’s nothing to fall back on. Because that can engender good will, and when the country is truly in crisis, we need that good will.

Yes, yes.

So Obama needed the bipartisanship after the 2010 midterm election.

Right. Well, that’s true, yes.

He had control of both Houses—

Yes, when he first was elected. Yes. But not—

And I recall, it seemed from the press coverage—New York Times on the left, Wall Street Journal on the right—that there was kind of an air of triumphalism in the White House staff. Rahm Emanuel at the top, who was a very tough cookie from what I understand—and I’ve never met the guy, but based on what I’ve read. Did Emanuel and that sense of triumphalism create an atmosphere of triumph?

No, that’s fair. There was some fault on both sides. That is very fair. Dodd-Frank was the main Obama initiative that I was involved in, and I do fault the Republicans on that—and I’m a Republican. But you’re right, maybe the earlier battles on health care and Rahm’s pugilistic approach may have poisoned the environment so much—So that is fair. There is blame on both sides.

But I’ve been around long enough to see a lot of Presidencies come in, and usually you get a little bit of a honeymoon, and I didn’t see any of that for Obama. I really—I did not. And they were the loyal opposition, so maybe because they were the opposition in the minority, maybe they felt like they didn’t need to do that. But I think they did.

The smarter play would have been to work on a bipartisan basis to get some constructive things done—again, and bring the legislation more their way. Because now we have these laws, and they’re in turmoil. They’re constantly being subject to revision. That’s not good for the country, either. For a developed economy, one of our strengths is that continuity, that legal certainty, right? If you’re changing things every two or four years, it’s just—It’s not good, not good.

Toward the end of Bernanke’s memoir, he acknowledges that he had been a registered Republican, and appointed to the Fed by a Republican President, and during the crisis, grew estranged from the party. I think his memoir says he’s now an Independent, although I’ve heard more recently that he’s registered as a Democrat. I don’t know whether the latter—

That’s interesting. [laughs]

—is a fact. But have you been tempted to leave the party?

I have thought about it from time to time. The Democrats kind of scare me too, though, to be honest with you. They just do. They seem so fractured and unfocused. And the identity politics really scares me. I grew up as a civil rights lawyer. Martin Luther King was my inspiration, and colorblindness was my paradigm, and you don’t look at gender or race or ethnicity or sexual preference—you just—you don’t look at that. You don’t treat people in groups. You celebrate our diversity, but all these different factions—and white privilege and everybody’s evil—I just—

I saw it once—I went to a diversity training thing—I won’t mention the school. It was at a university, and this woman, this facilitator, came in, and she was doing this diversity training. This was for rank-and-file college employees, so we had maintenance people there and the landscapers and whatever, and most of them were white males—probably make $45,000 a year or whatever—They’re trying to support a family—and she just goes off on white male privilege. And she actually has a little chart—a hierarchy of—and the white males were down here, [laughs] because you need to feel guilty because you were born with this white male privilege. And I’m thinking, Oh my God! I’m sitting here—I’m higher up on the chart, thank goodness, because I’m a woman, but I was—My dad was a doctor; we were financially secure—and you’re telling these guys—so I see stuff like that, and it scares the hell out of me.

This is a long answer to your question, but I guess I need more reassurance from the Democratic side that they’re going to be unifying, not divisive—and a better economic plan for working families. Other than Elizabeth Warren, that’s not coming across clearly to me, so I’ve thought about just becoming an Independent, but being an Independent is kind of a cop-out, too. I shouldn’t say that. Maybe that’s more principle. But I’d like to try to change my party or bring it back if I have an opportunity, which I think I’m going to at least wait and see if there’s a primary challenge to Trump. And I will jump in with both feet. If I can help, I will. Because this guy is an embarrassment. [sighs] I’ve got a 19-year-old daughter. How do you explain somebody like that to her?

Well, that’s going to make a very interesting next project. [laughs]

No kidding. Well, you won’t have me back—I would not be any kind of an unbiased source for that. [laughter] I don’t work for him, anyway, and would not. So—yes. That will be a good challenge for you all. Hopefully you’ll be doing it in a couple of years and not six years or five years or whatever time we have left.

Agreed.

You did refer to someone calling you about that—with a comedic response to us, which was great. You talked about the human guardrails in this administration. Were you tempted at all to say, Well, maybe my country does need me? Even the Mueller Report [Report on the Investigation into Russian Interference in the 2016 Presidential Election] shows that there have been some people who have served as human guardrails—for good or ill. If they hadn’t, there would have been ways to, perhaps, undo this Presidency that may not be available now. But I’m fascinated by people who have chosen to go to work in his administration—for whatever reasons. Did that tempt you at all, to say, I’ve got all this experience and background and I really could help?

Not really. Because, as much as I had to disagree with my colleagues in the Bush and Obama administrations—First of all, I don’t think they would appoint somebody like me. They want deregulators, really. And he’s made some good financial appointments—I don’t want to suggest that—but they don’t have my view on financial regulation and financial stability and the need to keep a closer eye on these banks, which I think still poses a risk to us. I think I just would have been miserable, again. And I don’t think somebody like him would listen to somebody like me, anyway. It’s kind of a hypothetical question, because I just don’t think I’m the kind of person they’re looking for, and would not want to do it anyway.

I get what you’re saying, and I’m glad he’s got some rational people in there fighting the good fight. On the other hand, I can only assume they’re compromising themselves every day. And at this stage in my life, I just—If I was 30 years younger, maybe, but at this stage in my life, no. It’s just—It’s not worth it. It’s not worth it.

All right.

Thank you so very much.

Sure. Yes, my pleasure. It was fun.

This has been extremely illuminating.

Oh my goodness, so helpful.

Oh, good. I’m glad you found it helpful.

When these are going well, there’s no place we’d rather be, and today’s gone terrific. So we’re grateful for that.

Thank you.

OK, good. Well, you certainly took me on a walk down memory lane. [laughs]

Well, I hope it wasn’t too painful.

I can’t believe I’m still tearing up about that foreclosure thing. Oh, God. I do. I probably will just never get beyond that. It was a very emotional experience.

[END OF INTERVIEW]