We are observing the five-year anniversary of one of the most tumultuous months in American economic history, September, 2008, when Lehman Brothers went bankrupt, and in which the entire developed world narrowly avoided a financial meltdown. Coincidentally, I recently met Sheila Bair, the former leader of the Federal Deposit Insurance Corporation, which, according to its web site, www.fdic.gov, “is an independent agency created by the Congress to maintain stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions for safety and soundness and consumer protection, and managing receiverships.”
Ms. Bair led the agency during one of the most challenging times in our nation’s history for financial institutions, the crisis that developed throughout the last decade, and exploded into the Great Recession five years ago this month. Few people outside the government and the financial community realized how much at risk our financial system was in September, 2008. But for the acquisitions of Merrill Lynch and the availability of private financing at Morgan Stanley and Goldman Sachs (which secured a critical investment from Warren Buffett,) our major investment banks were all at risk. AIG needed a federal bailout, and even GE was at risk because of its inability to secure short term credit.
Ms. Bair wrote a book in 2012, called Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street From Itself, which recounts her experience during this crisis, what led up to it, and what followed it. She is an exceptionally rare public official, someone with the brainpower, experience, values, and courage to understand at both a detail and a strategic conceptual level what needed to be done to protect the public interest. Although other public officials were well-intentioned, they appeared not to have the vision to understand how short term actions, particularly the bailouts they were advocating, were likely to compromise the long term health and stability of the financial system.
Public anger about bailouts is remarkably astute, even if it often got expressed in a largely inarticulate, incoherent fashion. Ms. Bair did a remarkable job understanding what should be done, and what would create bigger downstream issues.
She was single-minded in focusing on a handful of key objectives:
By her own admission, she was only partially successful, which I particularly respect. Few leaders are as humble and honest in admitting when they have failed.
Several points she made frankly scared me:
The Dodd-Frank legislation helped to address the worst excesses and abuses that triggered the Great Recession, but it did not go far enough. Moreover, many implementing regulations have yet to be written.
Unfortunately, one of its unintended consequences is that smaller community banks with lower asset levels probably will not survive. One banker told me that, whereas a bank could be profitable at $1 billion of assets before the financial crisis and Dodd-Frank, the minimum profitable size for a bank today is $3 billion of assets. There will be fewer banks, particularly fewer small banks that are better able to meet a community’s unique needs.
On this last point, communities around the country will lose not only the benefit of a bank to make loans to deserving individuals and small businesses, but they will also lose the contributions to not-for-profit organizations and local trade associations and Chambers of Commerce. There are fewer of great community bankers left in Connecticut because the large banks have acquired the smaller banks that were critical to many community-based initiatives.
The financial crisis left many longer-lasting scars in our economic system and our psyches. We are blessed that leaders like Sheila Bair were there to protect the public interest, and as we reflect on the crisis that hit its high point five years ago this week, we should realize that getting the right people to make the important decisions in regulating our financial system is more important than ever.