Bull by the Horns
How the crisis was seen coming
Description
In 2006, a woman most Americans had never heard of took over one of the least glamorous agencies in Washington. The Federal Deposit Insurance Corporation guarantees the money in ordinary checking accounts — the deposit insurance that means a bank failure doesn't wipe out a family's savings. It is not the Treasury, not the Federal Reserve, not the institutions that make headlines. Sheila Bair, a Kansas Republican who had worked at the Treasury and taught finance, arrived as chairwoman and started reading the fine print on the mortgages banks were writing. What she found unsettled her early, at a moment when nearly everyone with more power kept insisting the housing market was fine.
Two years later the fine print became the largest financial catastrophe since 1929. Lehman Brothers collapsed, credit froze, and the men running the response — Treasury Secretary Henry Paulson, Fed Chairman Ben Bernanke, New York Fed president Timothy Geithner — improvised rescues worth hundreds of billions of dollars in the space of weeks. Bair was in every room where those decisions were made, and she agreed with almost none of the instincts driving them. Her memoir, published in 2012, is the account of someone who saw the danger coming, said so, and spent the crisis fighting the people supposedly on her side.
What makes her telling unusual is that she was not an outsider throwing stones. She was a regulator with real authority, a Republican who believed in markets, sitting at the table as the rescue was assembled. Her disagreements were not ideological posturing. They were about who would pay, who would be protected, and whether the cure would quietly reward the behavior that caused the disease.
The question we’re asking : How did one regulator see the crisis coming when the most powerful people in finance did not — and what did she learn from being ignored?What we’ll see : A firsthand account of the subprime warnings, the panicked rescues, the fight over who got saved, and what a regulator's authority is actually worth.
Table of contents
01Chapter 1 — The regulator nobody wanted to listen to
Bair's alarm started with the loans themselves. Subprime mortgages — home loans made to borrowers with weak credit — had exploded in the mid-2000s, and the terms were engineered to obscure the risk. A borrower would get a low teaser rate for two years, after which the payment would jump to something they could never afford. The whole model assumed home prices would keep rising, so the borrower could refinance before the reset hit. Bair looked at the volume of these loans and saw a slow-motion default machine. When prices stopped rising, millions of people would face payments they were never able to meet.
Her instinct was practical rather than punitive. As early as 2007 she was pushing lenders to modify these loans — to freeze the teaser rates and keep families in their homes — arguing that mass foreclosure would be worse for everyone, banks included, than orderly restructuring. The idea met a wall. The mortgages had been sliced up, packaged into securities, and sold to investors around the world, so no single party had both the authority and the incentive to rewrite the terms. The servicers who collected payments made more money processing foreclosures than negotiating modifications.
02Chapter 2 — Too big to fail, too connected to touch
When the structure finally gave way in 2008, the phrase that came to define the response was already familiar to regulators: too big to fail. The largest banks and investment houses had grown so entangled with each other and with the wider economy that letting one collapse threatened to bring down the rest. Bear Stearns was rescued in March. Lehman Brothers was allowed to fail in September, and the resulting panic was so severe that the failure became, in hindsight, the mistake nobody wanted to repeat.
Bair's problem with the concept was that it created a trap. If a firm was too big to fail, then its creditors and counterparties knew they would be rescued, which meant they had no reason to police its risk-taking. The bigness that made a firm dangerous was the same bigness that guaranteed its protection. She watched the rescues extend that guarantee ever wider, and worried that each intervention taught the market a lesson: take enormous risks, and if they blow up, the government will absorb the loss.
03Chapter 3 — The bailout that saved the wrong people
The centerpiece of the government's response was the Troubled Asset Relief Program, the $700 billion fund Congress authorized in October 2008. In its final form, the money went largely to injecting capital directly into banks. Paulson gathered the heads of the nine largest institutions and told them, in effect, that they would all take the money whether they needed it or not, so that the weak ones would not be singled out. Bair went along with the capital injections as a necessary emergency measure, but she fought hard over the terms.
Her objection was about fairness and incentives at once. The rescues, as designed, protected the bondholders and often the executives of failing firms — the very people whose judgment had produced the disaster. Bair pushed for haircuts on creditors, for tighter limits on executive pay at rescued firms, for terms that made the bailout sting rather than reward. She frequently lost these fights. The prevailing view among Paulson, Bernanke, and Geithner was that anything punitive might spook the markets further, so the safest path was to be generous.
04Chapter 4 — What a regulator's chair can and cannot do
Step back from the sequence of rescues, and Bair's account becomes a study in the limits of a regulator's power. She held one of the significant financial jobs in the country, was often right, and was frequently overruled. Being correct, it turns out, is not the same as being decisive. The real leverage in the crisis sat with the Treasury and the Fed, and those institutions carried a set of instincts — deference to the largest firms, fear of market reactions, a professional intimacy with Wall Street — that a single dissenting chairwoman could slow but rarely reverse.
Part of what she describes is capture in the soft sense: not bribery, but a shared worldview. The people making the decisions had spent their careers close to the big banks, understood the world through the banks' eyes, and instinctively reached for solutions that kept those institutions whole. Bair, coming from deposit insurance and the discipline of orderly failure, simply saw the problem differently, and her difference read as obstruction to people who were certain they were saving the system.
05Conclusion
Bair left the FDIC in 2011, her term expired, having presided over the failure and orderly resolution of hundreds of ordinary banks while the giants she distrusted were nursed back to health on generous terms. The Dodd-Frank reforms passed in 2010 carried some of what she had fought for — a mechanism to wind down large firms, stronger consumer protection — though whether those tools would ever be used against a truly systemic institution remained, in her telling, an open question. The woman who read the fine print in 2006 spent five years watching her early judgment vindicated by events and ignored by the people with the power to act on it.