Former FDIC Chair Shelia Bair Comments On Bank Bailouts, Peer-To-Peer Lending, And Tax Reform

On Tues, 04/08/14, former FDIC Chairperson Shelia Bair visited Minneapolis and offered commentary on the financial services industry, peer-to-peer lending, systemic risk, and the recent recession.  Bair is educated as an attorney and was Assistant Secretary for Financial Institutions at the Treasury Dept. and a professor at the University of Massachusetts Amherst before she moved over to Chair the FDIC from 2006 to 2011.  At the FDIC Bair helped the nation’s financial system out of an exacerbated recession and unprecedented bank run from 2007 to 2010 but not without ruffling a few feathers.

Addressing a sold out crowd including former Congressman Tim Penny and other elected officials, business people, students, and ethically minded community members, Bair had the honor of being the keynote speaker at Saint Mary’s University of MN’s publically broadcasted Hendrickson Forum on Ethical Leadership.  Bair opened her keynote by describing how unimpressed she was that when she arrived at the FDIC in 2006 the organization had little to no info on sub-prime lending and had to buy a database to conduct research on it.  This was in part due to the fact that sub-prime lenders were private and not a part of deposit institutions and thus slightly out of scope for the FDIC at that time.  Bair did not inherit a perfect FDIC, and it can be inferred that the FDIC should have been paying attention to sub-prime lending far sooner as it was directly related to many elements that affect deposit institutions including real estate, entrepreneurship, income and tax, and community redevelopment.


Bair now free from the constraints of holding a Washington office spoke openly about how she felt hindered to speak to the human element of the financial crisis while at the FDIC.  She indicated that although she was a part of the team that brokered the historic bank bailouts (2008-2009), that she has some serious reservations about that, because it was “too generous and uneven” and “helped the banks far more than it helped homeowners and families”.  She also described regular disagreement with then Treasury Secretary Timothy Geithner and suggested he was too close to many of the bank executives who benefited from the bank bailouts.

She further described miscommunication and lack of collaboration as Geithner worked around her efforts at the FDIC, and the undertone of this was political disagreement over which agency should lead the recession resolution in terms of the banking industry.

At present, Bair supports the Dodd-Frank Act because it favors bankruptcy and a three-year claw back for executives over a bailout in the event of a bank failure.  Although Bair in the past has said she disagreed with Janet Yellen’s support to repeal the Glass-Steagall Act, she presently indicated she still supports the new Fed Chair and viewed her as a reliable Washington outsider.


When I directly questioned Bair on the growth of peer-to-peer lending she seemed cautious about its long-term viability citing an unknown regulatory landscape and even recounted that peer-to-peer lender Prosper lost many investors during the worst months of the recession.  In discussion with Bair I observed that she, like many banks, is in a wait and see mode with peer-to peer-lending, but she did indicate that for customers consolidating higher interest rate debt it can be a good thing and that could in turn force banks to be more customer centric with better terms.

Yet I am more optimistic on peer-to-peer lending than Bair in partnership with many respected peer-to-peer investors including Google who invested $125 million in Lending Club and the former CEO of Citi Group, Vikram Pandit.  It is really telling when the former Citigroup CEO goes against his own industry in favor of a tech-heavy new lending model, but he is right because most customers no longer need the big bank branches and elaborate services that are fee heavy.  Moreover, peer-to-peer lenders offer attractive rates, diverse portfolio options, and low operational costs and that keeps investors and borrowers happy.  Just like online news slaughtered traditional print media, as soon as peer-to-peer lending gets more regulatory backing it will slaughter traditional fee-heavy banks if they don’t adapt to this new environment.

When commenting on federal sequestration Bair showed frustration and disagreement over the automatic spending cut approach and instead suggested that tax rates be reduced and restructured in a number of areas to encourage more employment, keep businesses in the U.S., and encourage business innovation which would in turn provide more income and employment thus bringing in a greater amount of taxable income to offset her proposed tax reduction.  This truly can be a helpful aspect of the budget deficit issue in that taxes in the U.S. are far too high and there are some needless loopholes that harm many and help few.  The 2.3% Medical Device Tax is an example of this as it encourages the many medical device companies in MN to move their operations outside the U.S. due to the high tax cost, and it adds to their cost of doing business thus reducing their ability to get favorable loans.

Lastly, as an advocate for consumer protection and creative thinking I asked Bair if she had any insight on what the massive Target data breach might mean for the banking and related industries — where an estimated 10-15% of the 40 million affected cards have encountered some type of fraud — and she reminded me that the banks are taking the losses before the retailer does.  Although she offered no specifics other than suggesting that debit cards are more relevant, she shared my concern that data security is a growing factor in financial regulation yet I was then reminded that Bair is more of a politician and economist than a technologist.  Yet from an economic policy standpoint if the nation encounters more data breaches like this it could drive the cost of goods up thus forcing more costly and secure card payment products perhaps with biometrics on them.

Photos by Rick Busch.

Written by Jeremy Swenson (c)

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