Of course, no one has any idea who Obama will choose for his cabinet but Robert Kuttner makes an interesting suggestion, FDIC chair Sheila Bair. She has the required experience and the proper philosophy. She has dealt strongly with failing banks and field tested the strategy of solving the financial crisis by renegotiating mortgages. I like this suggestion and will probably send the suggestion on to Obama.
Sheila Bair for Treasury Secretary As Obama puts together his shortlist for treasury secretary, he should stay away from ex-Wall Streeters and former Clinton administration officials. Current FDIC chair Sheila Bair looks better by the day.http://www.prospect.org/cs/articles?article=sheila_bair_for_treasury_secretaryShe has long waged a battle within the administration for direct assistance to homeowners, rather than having stressed mortgage holders be the incidental beneficiaries of bailouts to bondholders and banks. Last week, she went public with her dissenting views, giving an interview to the Wall Street Journal. "
e're attacking it at the institution level as opposed to the borrower level, and it's the borrowers defaulting. That is what's causing the distress at the institution level," she said. "So why not tackle the borrower problem?"
The FDIC, not the Treasury, is the one agency with the institutional competence to run a direct mortgage refinancing program. When an insured bank fails, the FDIC often takes it over for a time. It doesn't subcontract the job to Wall Street investment houses, as Treasury Secretary Hank Paulson is doing. FDIC uses competent public servants who look to the public interest first.
Nor does the FDIC just pump in capital and keep the inept executives who drove the bank into the ground, as Paulson is hoping to do. It gets rid of toxic management along with toxic assets. This is the exercise, writ large, that the federal government will need to perform in the next administration, as it partly nationalizes banks.
Bair has used FDIC's temporary ownership of a large failed bank, Indy Mac, to demonstrate how a mortgage refinancing program can be done right. The FDIC has contacted all of Indy Mac's mortgage holders who are in financial straits, and is working out easier mortgage terms. In some cases, bondholders are made to eat part of the loss. This is the right approach to repairing the entire subprime mess. So Bair has both the background and the commitment to do the recapitalizing and regulating of American banks correctly.
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Subsequently, she held a number of regulatory posts, including the important position of acting chair of the Commodity Futures Trading Commission. This is another crucial credential, since most of the financially-engineered derivative products, such as bonds back by subprime mortgages and credit default swaps should have been subject to CFTC regulation, and probably will be under reform legislation. Her close understanding of derivatives is essential to remaking our banking and credit system.
(more at link)
Meet the Next Treasury Secretaryhttp://www.prospect.org/cs/articles?article=meet_the_next_treasury_secretary#epilogue(snip)
Bair is in this tradition. If anything, she would likely be an even tougher regulator than Geithner. Like him, she knows Wall Street but is not of it, having served as assistant secretary of the treasury for financial institutions early in the Bush administration, and as acting head of the Commodity Futures Trading Corporation under Bill Clinton. She also did a stint at the New York Stock Exchange.
When a Democratic president takes office, the tradition is to reassure Wall Street by appointing as treasury secretary either a Republican or a Wall Street Democrat. Clinton initially named Lloyd Bentsen, then the financially conservative chair of the Senate Finance Committee. Bentsen was succeeded by Robert Rubin, co-chair of Goldman Sachs--perhaps the ultimate Wall Street Democrat. John F. Kennedy went for the full monty; his treasury secretary was a leading Wall Street Republican, Douglas Dillon of the financial house Dillon Read.
With Bair, Barack Obama would get a fully credentialed and expert Republican--but one who is more progressive on financial regulatory issues than most Democrats. That might appeal nicely to Obama's wish to be simultaneously bipartisan and progressive.
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As Geithner, Bair, and Obama have each suggested, all financial institutions with the potential to infect the system and trigger government bailouts need far more extensive supervision and examination, as well as capital, leverage, and liquidity requirements. This would be a first for investment banks, hedge funds, and private equity firms. But these enterprises now engage in the same business activities as regulated banks, and they all infect each other. Last year, according to Frank, 60 percent of all credit in the United States was created by financial institutions other than banks, many of them almost entirely unregulated and unexamined. If an institution quacks like a bank, incurs risk like a bank, and gets bailed out like a bank, then it needs to be regulated like a bank.
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Bair, meanwhile, was operating Indy Mac, the failed bank seized by the FDIC, in a manner opposite from that of the Paulson plan. Instead of buying bad paper from the bank and letting incumbent management, she seized the bank, tossed out the culprits, and ran the institution in the public interest, offering refinancing to tens of thousands of holders of extortionate mortgages.
(more at link)
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