Sheila Bair’s Turn

Keith Epstein and David Heath of The Huffington Post have an in-depth article about how Sheila Bair got two mortgages on two different properties from Bank of America while she was discussing with them whether the bank could repay its TARP money to the government.
Let me start off by saying that I strongly, strongly doubt that Bair sought out a better deal on her mortgage because she is head of the FDIC or discussed her mortgage with any of the Bank of America bigwigs that she met with. That would be stupid, and it doesn’t fit with anything I know about her. (Granted, I know very little about her.)
That said, WHAT WAS SHE THINKING? To begin with, Bair is on the record (July 2009 congressional testimony) opposing institutions that are too big to fail, saying “We need an end to too big to fail.” She might argue that her solution is enhanced resolution authority, but she also said, “A strong case can be made for creating incentives that reduce the size and complexity of financial institutions.” She has taken pains to differentiate herself publicly from Geithner, Bernanke, and other officials and regulators as a critic of big banks and of generous bailouts.
So how does she not understand that when you borrow money from Bank of America, it gets bigger?*
In addition, how could she not realize that it looks terrible to be negotiating with Bank of America over its TARP repayment while she has a mortgage with them waiting to close?
Then of course there is the Watergate principle: the cover-up is worse than the initial wrongdoing. There are a few  aspects to this cover-up.
Not surprisingly, the FDIC has a rule to cover exactly this type of situation. It reads: “No FDIC employee may participate in an examination, audit, visitation, review, or investigation, or any other particular matter involving an FDIC-insured institution, subsidiary or other person with whom the employee has an outstanding extension of credit.” Bair should have simply gotten a waiver. Hank Paulson got a waiver to deal with Goldman Sachs on September 17, 2008, because he needed to save the financial system from collapse and Goldman was a crucial part of the system; Sheila Bair couldn’t get a waiver before she took out a mortgage to buy a house and refinance her old one?
But here’s the cover-up. Instead of admitting that they screwed up, the FDIC is claiming that she never needed the waiver in the first place. The FDIC’s ethics officer says “We have discerned that she has not participated in a particular matter involving Bank of America at the time that she was negotiating a loan.” This is a distortion of language (it was a matter, just not a “particular” matter) worthy of Bill Clinton (“It depends on what the meaning of ‘is’ is.”) or George W. Bush (“The British Government has learned that Saddam Hussein recently sought significant quantities of uranium from Africa.”). The FDIC is insisting that because Bair did not participate in an official FDIC action involving Bank of America, she wasn’t violating any rule–even though she was meeting with senior Bank of America officials to discuss their relationship with the United States government.
But listen to this: “In response to a public records request, the FDIC redacted a reference to the meeting [with Greg Curl of Bank of America] from Bair’s calendar, saying that matters involving examination, operating or condition reports on a bank are exempt by law from public disclosure.” So which one is it? If it involved “examination, operating or condition reports on a bank” doesn’t that mean it falls under the FDIC’s ethics rule?
The other issue, which Epstein and Heath go into in depth, is that Bair got a loan on her old house that apparently she was not eligible to get according to bank policy, because she rents out part of it. I don’t think this means there was a quid pro quo or Bair did anything wrong; I think the most likely explanation is that the loan officer thought “Wow, this is Sheila Bair, I’m not going to say ‘no’ to her,” so she got special treatment without asking for it. But again, instead of admitting that Bair got a good deal, the FDIC said, “Our legal counsel does not believe [the mortgage] prohibits the rental arrangement in place and which was disclosed to Bank of America.” Only when it was completely busted by the Huffington Post (which sent people into bank offices to try to get the same deal Bair got, unsuccessfully) did the general counsel switch the story to, “It may be a simple mistake by a local representative of Bank of America.”
Does Sheila Bair not know what the rules are? Does she not think they apply to her? Does she not realize that basic common sense dictates that you don’t engage in a new, large financial transaction with a bank that you are directly involved in regulating, without being extremely careful? Simon and I wrote a book trying to show people the close relationships between the megabanks and the Washington political establishment. Bair is making our job that much easier.
* When a bank makes a loan, it creates a new asset. It does not draw down another asset, unless it gives you the loan in cash. If it writes you a check or credits your bank account or credits someone else’s bank account, it is creating a matching liability–not reducing assets by an equivalent amount.
By James Kwak