Opinion > Political Opinion

Posted on Sun, Nov. 08, 2009

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Reforms still needed

The following is an excerpt of remarks made by FDIC Chairwoman Sheila Bair at Kansas State University's Alfred M. Landon Lecture Series last week in Manhattan:

We're tackling the aftermath of a financial and economic crisis that has done as much, if not more, damage to our country than a Kansas tornado.

How will we weather the crisis?

How will we protect consumers from the abusive practices of the past few years?

How do we stop the excessive risk taking?

How do we keep people in their homes?

How do we prevent more of those massive bailouts of giant financial institutions?

As a lifelong Republican and market advocate, it's not been easy for me. The government has been going into places where we don't want to be. We've been doing things we'd rather not be doing but have had little choice.

I started becoming concerned about predatory lending and subprime mortgages in 2001 when I was assistant Treasury secretary for financial institutions. Some lenders, generally not banks, were offering mortgage loans that borrowers couldn't afford. These subprime loans were financed through Wall Street securitization vehicles and were replete with exotic features and complex fees.

While my concerns were clearly justified, my warnings did not resonate at that time, in part because rising home prices enabled weak borrowers to refinance and push their problems into the future. So even where federal powers existed to regulate nonbank mortgage lending, they were not used appropriately.

Inevitably, the housing bubble burst. The decline in home prices led to a large-scale downgrade in the credit ratings of a variety of complex financial instruments. Ultimately, the losses from the bursting bubble exposed how much risk had been created in the financial system.

In the fall of 2008, the U.S. authorities took a series of internationally coordinated actions to contain the damage from the collapsing financial system. These actions were an unprecedented broadening of the federal safety net. But, given the tools available, they were mostly necessary to prevent more failures of other large, complex financial institutions that would have caused severe damage for the global financial system and the real economy.

Credit markets are now slowly thawing, and liquidity has vastly improved with short-term credit spreads returning to normal levels. Equity markets have recovered somewhat, but are still well below their precrisis levels.

But reforms are still needed to create a more resilient, transparent and better-regulated financial system — one that combines stronger and more effective regulation with market discipline.

First, we must find ways to impose greater market discipline on systemically important institutions and ensure that no firm is too big or too interconnected to fail.

Second, we must close destabilizing regulatory gaps and have more checks and balances to make sure regulators do their jobs.

And third, we must do a much better job of protecting the American consumer when it comes to financial products.

Many in the industry are working constructively in Washington, D.C., for meaningful reform. Some, however, are working furiously against it. Fear is their tactic.

They say reform would stifle innovation. They say reform would impede the ability of our country to grow and compete in the global economy. But these are the very same arguments used to justify deregulation in the first place. Some want to keep the status quo. And, by implication, they want to keep the taxpayer on the hook.

That makes me angry.

My mentor and former boss, Bob Dole, has always lived his life by his father's view of the world as "stewers versus doers." The "stewers" would have us do nothing, even after millions in lost jobs and trillions in lost wealth.

My hope is that the intelligent people in Washington will be "doers" — willing to take on the special interests and willing to do what's right for America.