Sheila Bair’s new book has been released. The former FDIC chair has a lot of interesting commentary:
Bair notes that some of the “early resistance” to FDIC loan modification initiatives came from fund managers who “had purchased CDS protection against losses on mortgage-backed securities they did not own.” The irony is that they were joined in this resistance by holders of senior tranches who were relying (overoptimistically, as it turned out) on the protective buffer provided by the holders of junior claims.
I’m glad that the government pretending to be concerned with helping homeowners save their homes, which we already know was not true (see Neil Barofsky’s account of his run-ins with Treasury and the hasty rolling-out of HAMP), when the true concern was to protect the fortunes of hedge fund managers who bought CDS as a hedge on securities they didn’t own. Much more important than middle-class families keeping a roof over their heads, or keeping their children in the same schools while their parents looked for work after being laid off by the financial sectors…
She also says this:
Participating in bailout measures was the most distasteful thing I have ever had to do, and those ex post facto rationalizations make my skin crawl… The bailouts, while stabilizing the financial system in the short term, have created a long-term drag on our economy. Because we propped up the mismanaged institutions, our financial sector remains bloated… We did not force financial institutions to shed their bad assets and recognize their losses… Economic growth is sluggish, unemployment remains high. The housing market still struggles. I hope that our economy continues to improve. But it will do so despite the bailouts, not because of them.
The ideal policy, according to Bair, would have been to put insolvent institutions into the “bankruptcy-like resolution process” used routinely by the FDIC, but she recognizes that the legal basis for doing so was not available at the time. She therefore signed on to measures that were instinctively repugnant to her, and tried to corral and contain them to the extent possible.
The argument that the bailouts “made money” is specious for two reasons. First, the funds provided were given well below market value, and the cost to taxpayers should be computed relative to the value of the service provided. If insurance is provided at a fraction of the actuarially fair price, and no claim is made over the period of insurance (so the insurer makes money), this does not mean that there was no subsidy in the first place. Steve Waldman has made this point very effectively in the past. Furthermore, the cost to taxpayers should take into account any loss of revenues from more sluggish growth. If Bair is right to argue that the bailouts were excessively generous, to the point that growth prospects were damaged for an extended period, the loss of tax revenue must be included in any assessment of the cost of the bailout.
Go to Naked Capitalism to read the full post, by Rajiv Sethi, about Bair’s book.