Q & A with Sheila Bair:
At the helm of the FDIC
FDIC Chairman Sheila Bair
AMHERST - Sheila Bair, who taught financial regulatory policy at the University of Massachusetts from 2002 to 2006, has been immersed in real-life economics ever since President Bush appointed her chairwoman of the Federal Deposit Insurance Corp.
Bair, who is on leave from the Isenberg School of Management at UMass, has been involved in everything from the subprime mortgage mess to the question of whether to allow banks in Wal-Marts.
The FDIC is a U.S. government corporation created in 1933 to guarantee checking and savings deposits in member banks up to $100,000 per depositer and up to $250,000 for individual retirement accounts at banks.
Bair, 54, is a native of Kansas and was a Washington insider for many years before moving to Amherst. She worked for Sen. Robert Dole, R-Kansas, in the 1980s and was a counsel to the Senate Judiciary Committee. She narrowly missed being elected to Congress from southeastern Kansas in 1990.
President George H.W. Bush appointed her acting chair of the Commodity Future Trading Commission and she served as senior vice president for governmental relations at the New York Stock Exchange. President George W. Bush appointed her assistant secretary of the treasury for financial institutions in 2001.
After Sept. 11, 2001, Bair spearheaded a drive for a bill to enable insurance companies to sell policies covering terrorism damage, with the government agreeing to take a share of the losses. She also worked on strengthening regulations on money laundering and, after the Enron scandal, on pension and accounting reforms.
Bair still owns a house on Main Street in Amherst near the Emily Dickinson Museum. While teaching at UMass, she lived there with her husband, Scott Cooper, who is now vice president for government relations and public policy at the American National Standards Institute in Washington.
In 2006, Bair made an unusual addition to her resume when an illustrated children's book she wrote to encourage financial literacy was published. Its title is "Rock, Brock and the Savings Shock."
What follows are her responses to emailed questions from the Gazette:
QUESTION: Are you concerned about the resets of adjustable rate mortgages in the coming months? What actions should the government take? Should it increase pressure on the lending industry to minimize foreclosures?
ANSWER: I do remain concerned about these loans. We estimate that almost 1.3 million hybrid loans are scheduled to undergo their first reset during 2008 and an additional 422,000 in 2009. None of these borrowers should lose their homes because of an unaffordable reset. If the borrower cannot refinance, the servicer should modify the loan with a minimum five-year extension of the starter rate. It should be emphasized that the starter rates on these loans are quite high - typically 7 to 9 percent.
At the FDIC, we've worked very hard with industry to find standard, systematic ways to help subprime borrowers and other homeowners who are in distress. Whether they have been tax or accounting issues, we've been able to address the most common barriers to modifying their loans and keeping their homes. It's clear that it is generally in the best economic interest of both borrowers and investors to avoid foreclosure, even when the borrower has become delinquent, but it's been a challenge to get industry moving.
Q: Do you think the economic stimulus package will avert or mitigate the impact of a recession?
A: In addition to our other regulatory responsibilities, I've generally focused my attention on what the FDIC and other federal financial regulators can do to address the current problems in the mortgage market as well as deal with the resulting credit issues. Congress and the President have worked closely to craft a bipartisan economic stimulus bill. It will continue to be important to supplement this effort with appropriate regulatory responses to ensure a return to responsible lending practices and a stable housing market.
Q: What are the potential ramifications of Americans' low savings rate?
A: American savings habits do not compare favorably to other developed nations. Many European industrialized countries are approaching 15-year savings highs. In France, Germany, and Italy, savings rates exceed 10 percent. In 2006, Americans saved just 0.4 percent of their income.
As chairman of the FDIC, along with other financial regulators and policy makers, I can exercise leadership in trying to make sure the nation's financial system works for all Americans, helping them build savings, not stripping away their wealth.
A financial system that expands consumer access to ownership fosters a culture of entrepreneurship and hope, strengthens families, and lifts the fortunes of our nation. A financial system which blocks that access, fosters a culture of despair and lethargy, stresses families and causes people to lose faith in the American dream. The stakes are clearly very high.
Q: The Los Angeles Times called you "the consumer champion within a very business-oriented administration." Is that a fair description?
A: It's a nice compliment. But, I don't think it's a fair assumption to make that "consumer oriented" and "business oriented" goals must be at odds. I've often said that safety and soundness regulation and consumer protection are two sides of the same coin. I believe that if you have sufficient rules in place that provide for clear disclosure and allow markets to operate in an efficient and sustainable manner, both business and consumers will prosper.
I'd also make the point that many in the Bush Administration care deeply about consumers. On mortgage issues, I'm impressed with the commitment of Treasury Secretary Paulson to identify and work through solutions for subprime borrowers facing foreclosure. I also believe that Federal Reserve Board Chairman Bernanke brings a balanced perspective to these issues.
Q: You worked on an initiative to get lenders to agree to best practices for subprime loans before you moved to Amherst in 2002. Were you aware during your time in Amherst that these mortgages were getting out of hand?
A: I've worked on these issues for some time, dating back to 2001 at the Treasury Department. As I became more familiar with these products, I immediately had a concern about their sustainability. In an environment where home prices appreciated rapidly, borrowers were able to refinance before their payment shock hit. As we have seen, however, when home prices are going down, there are severe consequences for borrowers, lenders, investors, servicers - virtually everyone down the line, including banks and the larger financial system.
Q: What is the current prospect for having banks at Wal-Mart and Home Depot?
A: Both of these companies have withdrawn their applications for an Industrial Loan Company charter. Congress is currently working on legislation in this area that may provide some clarity. In the meantime, the FDIC's moratorium on processing ILC applications has expired so we will begin evaluating and processing the applications that are pending.
Q: What is the FDIC doing to improve financial literacy and revenue generation in low-wealth communities?
A: I firmly believe that financial literacy has become essential for the economic well-being of every American. Even experienced financial consumers can be overwhelmed by the complexity of today's choices. Unfortunately, there is a growing population of less-experienced individuals who are exposed to possible fraud or financial abuse, or who are simply making ill-advised, uninformed choices. Many of these individuals are found in low-wealth communities. More than anything, these folks can be helped by clear and simple information about how various financial products work. One of the financial education programs that does this well is the FDIC's Money Smart program.
The FDIC started Money Smart in 2001. It's a free program that primarily focuses on helping low- and moderate-income adults develop money management skills. It's designed to introduce consumers to mainstream banking, including basic services such as checking and savings accounts, credit cards and other consumer loans, and home mortgage loans. We offer the program in six different languages through an extensive alliance of organizations, including financial institutions, non-profit organizations, and government agencies. Since its inception, almost a half million people have taken Money Smart classes and about 95,000 have established new banking relationships.
Q: You're said to be leading efforts to bring 73 million "underbanked and unbanked" Americans into the banking system. Who are these people and what are you doing to help them?
A: The Alliance for Economic Inclusion, or AEI, is our national initiative to create grass-roots coalitions across the country to get more people into the financial mainstream. The goal is to expand the availability of low-cost savings products, small loans with a savings feature, and other affordable services.
This year, the FDIC will be conducting a comprehensive survey of FDIC-insured institutions to collect data on their efforts to serve unbanked and underbanked consumers. This was mandated by the Federal Deposit Insurance Reform Act of 2005. This will give us more information about bank practices as well as a feel for the size of the unbanked and underbanked population. The number of unbanked and underbanked populations has never been accurately measured.
The FDIC also recently began a two-year pilot project to identify affordable alternatives to payday loans and other high-cost loans that are harmful to consumers and communities. Working with banks across the country, our goal is to promote programs that are affordable, responsible and profitable.
Q: What have you been doing to get the Pentagon to protect soldiers from predatory lending?
A: Our men and women in uniform, who sacrifice so much, deserve access to fair and affordable banking products. The FDIC has been in contact with the Association of Military Banks of America and more than 125 banks located near military bases. These banks have indicated a willingness to try and work with the FDIC on developing and providing an affordable, small denomination loan product, possibly with a savings component. The FDIC was also very supportive of legislation sponsored by Senator Talent of Missouri that caps interest rates on loans to military personnel.
Q: When you're working long hours in Washington, do you ever miss the more leisurely life of an academic in Amherst?
A: Sure, there are days when I miss it. I love Amherst. Who wouldn't? But I feel that I have a tremendous opportunity at the FDIC to truly make a difference and do something for others. It's something that I value highly and try to bring my best to every day. Of all the jobs I've had in public service this has been the most rewarding. And we are involved in so many issues that touch the daily lives of Americans - things like homeownership, economic empowerment, and the safety and security of the financial system. I hope that more of our young people, especially at UMass, think about the value of public service and find a way to incorporate it into their lives. I know they won't regret it.
Originally published in the Daily Hampsire Gazette on Monday, February 18, 2008. Article by Nick Grabbe, Staff Writer.
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