Forum Post: to learn more about the financial mess - read this about former FDIC head - Sheila Bair

Learn more about how we got into this financial mess - read this article about former head of the FDIC - Sheila Bair - from the July 10, 2011 NY Times Magazine section

http://query.nytimes.com/gst/fullpage.html?res=9E0CE6D71F30F933A25754C0A9679D8B63&ref=joenocer

(excerpt) Arriving at the F.D.I.C. that summer, Bair found an agency that was floundering. ''There hadn't been any bank failures in a long time,'' she said. ''We were in this so-called golden age of banking, regulation had fallen out of favor and the F.D.I.C., which had a reputation as a tough regulator, had fallen on hard times.'' Its budget had been slashed, employees had been let go and morale was terrible. Except for a 10-second handshake, she never even spoke to Henry Paulson her first year or so in office.

Alone among the regulators, though, the F.D.I.C. began to home in on subprime lending. By 2006, the subprime industry was running amok, making loans -- many of them fraudulent, with hidden fees and abusive terms -- to just about anyone with a pulse. Most subprime loans had adjustable interest rates, which started low but then jumped significantly after a few years, making the monthly payments unaffordable for many homeowners. The lenders didn't care because they sold the loans to Wall Street, which bundled them into mortgage-backed bonds and resold them to investors.

Curbing subprime-lending abuses should have been the job of the Federal Reserve, which has a consumer division. But the Fed chairman, Alan Greenspan, with his profound distaste for regulation, could not have been less interested.

(snip)

''I think the president's heart is in the right place,'' Bair told me. ''I absolutely do. But the dichotomy between who he selected to run his economic team and what he personally would like them to be doing -- I think those are two very different things.'' What particularly galls her is that Treasury under both Paulson and Geithner has been willing to take all sorts of criticism to help the banks. But it has been utterly unwilling to take any political heat to help homeowners.

The second key issue for Bair has been dealing with the too-big-to-fail banks. Her distaste for the idea that the systemically important banks can never be allowed to fail is visceral. ''I don't think regulators can adequately regulate these big banks,'' she told me. ''We need market discipline. And if we don't have that, they're going to get us in trouble again.''

(before commenting a reminder - i didn't write this article - i only recommended it as worth reading!)