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FDIC head Sheila Bair: We need financial reform

KANSAS CITY, Mo. —Forbes magazine has named Sheila Bair, a Kansas native and chairman of the Federal Deposit Insurance Corp., the second-most powerful woman in the world for two years in a row.

Bair recently was in town to address the Kansas City Economic Club and deliver the 2010 Dole Lecture at the Dole Institute of Politics at the University of Kansas, her alma mater.

Answers have been edited for clarity.

Forbes magazine says you are the second-most powerful woman in the world. What does that feel like?

(Laughs.) "Well, this is the second year in a row. The first year, it felt like a real surprise. We knew they were working on a top 50 or a top 100 list because they had asked for my bio. When our public affairs director called me and said, 'You're No. 2,' I thought he was kidding.

"I think it's more about the agency. The FDIC has been in such a central role throughout this whole crisis, stabilizing the system and keeping our insurance rock solid. But it was very flattering."

How did that designation play out in your family life?

"Yeah, well, my daughter still bosses me around when I get home from work at night."

German Chancellor Angela Merkel is No. 1 on the Forbes list. Does that make you want to be president? That would surely push you ahead of Angela.

"I would think so, yes. But that's not where my aspirations lie. I'm committed to serving out my term at this job. It expires at the end of June next year."

What would you like to do after that?

"Go back to academia or maybe run a nonprofit. I would like to continue to be involved in policy work on financial services reform because I think we'll be working through this for years, unfortunately."

You are from Independence. How did your upbringing shape the powerful person you've become?

"Independence is kind of a scrappy town. It had very good economic times in the last century based on oil and natural gas. After that was over, the area fell on harder times and had to reinvent itself. So that probably affected me.

"And I think being from Kansas generally is important. The work ethic is very strong in Kansas and honesty is strongly valued. I worked for Bob Dole for many years, and he has that great Midwestern perspective. I think one of my strengths is I'm very direct and straightforward — that can be a weakness, too."

When you were appointed by President George W. Bush, things were humming along pretty well, and then a few months into your term, the economy collapses and banks begin to fail — something no one had heard of since the Great Depression. What was that like?

"Well, it was amazing. I joked that I should stay out of government service because when President Bush first appointed me assistant secretary for financial institutions in 2001, I was reluctant to take the job because we had just adopted our daughter, and I had a son in grade school. But the Bush people assured me it would be a 9-to-5 job, and then shortly after I started, (the Sept. 11, 2001, attacks) hit, which was an assault on the financial sector. And then Enron hit.

"When I took this job, after five lovely years in academia at Amherst, it was the same thing — they said it would be 9 to 5. When I started, the biggest issue was whether to let Walmart have a bank."

That must seem like a million years ago.

"It absolutely does. But I think I was aware of the dangers earlier because when I was at Treasury I had worked on predatory lending issues, and players in the mortgage markets were doing these kinds of nontraditional loans back in 2001.

"When I came back in 2006, I'd been out of the mortgage stuff for several years, and the staff started telling me that they were really worried. So we bought a database of loans that had been securitized — most of the high-risk, nontraditional loans were securitized through private-label securitizations, so if they weren't on banks' balance sheets, we couldn't see what was there. When we looked at the database, we couldn't believe it."

What did you discover?

"No documentation, really high loan-to-value ratios, high debt-to-income ratios, steep payment shocks. It was just amazing. We started speaking out toward the end of 2006 and pushing for stronger guidance at least for the banks on their origination standards. But so much of this was occurring outside of the banking sector. These third-party mortgage brokers had pipelines to Wall Street securitization firms, so banks only owned a minority piece of it.

"It was a case of a noble cause — promoting homeownership — being totally twisted and turned on its head."

What is your No. 1 challenge right now?

"We're experiencing more bank failures this year. It's smaller banks now. So working through those is a daily endeavor."

What is your biggest long-range priority?

"Making sure the party doesn't start again. We need financial regulatory reform. We need stronger controls on who can be in the mortgage origination business."

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