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Sheila Bair on the state of Dodd-Frank and financial reform

Jeff Horwich Jul 18, 2012

Sheila Bair on the state of Dodd-Frank and financial reform

Jeff Horwich Jul 18, 2012

Jeff Horwich: Happy (almost) Anniversary, everybody. Two years ago this Saturday, President Obama signed the Dodd-Frank financial reform law. Dodd-Frank followed the hurried bailout of American financial firms. Many say the bailout pulled the economy back from the brink. But the ad-hoc nature of the bailout made clear we needed better ways of responding to — and ideally preventing — financial crises.

Sheila Bair was chair of the FDIC during the bailout and the crafting of Dodd-Frank. She later founded the Systemic Risk Council to pressure the government and the financial industry to live up to the goals of financial reform. As the anniversary approaches, we invited her to Marketplace for a check-in. Welcome.

Sheila Bair: I’m happy to be here.

Jeff Horwich: As I recall, you were quite adamant while Dodd-Frank was being crafted that it should pave the way for essentially a bailout free future. Do you think we got there?

Bair: Well, I think we’re getting there. You know, we don’t really end “too big to fail” until we convince the market that they are going to take losses if these big banks get into trouble. There has been some progress on that score, the ratings agencies have started downgrading the banks based on the reduced likelihood that they will be bailed out in the future. So, I think that there is more work to be done but yes, we are making progress.

Horwich: As you continue to work and advocate to weed out various problems in the system, do you think we are stuck with anything truly problematic either in the law itself or that has come about during the implementation of Dodd-Frank?

Bair: Well, yes. I mean, I think Dodd-Frank is something I support but it is a very long and complex law and unfortunately, the regulations we are getting now are also quite lengthy and complex. The CFTC moved forward last week with its definition of swaps — which I’m glad they’re moving forward but the definition was 600 pages long and it’s basically because of all these things in there for lobbyists saying who is not subject to these new rules.

Horwich: So systemic risk, this term that you are so closely attached to — if I might paraphrase — is “a risk to a financial institution that could have major spillover effects beyond that institution.”

Bair: It’s a risk to the public-at-large. A practice or an institution that if it gets into trouble, if things go wrong could hurt innocent bystanders.

Horwich: So going after systemic risk suggests safety, it suggests caution. Then we have this other important aspect of our economy where we say financial institutions are supposed to be taking risks on deserving people and businesses. How do you reconcile what seems like a real contradiction there?

Bair: Well, I think we do want banks to take risks but we want them to take risks on economic activities that have some real economic benefit. I mean, trading CDS indexes with a bunch of hedge funds — I don’t know what kind of positive economic benefit we would get from that. It’s the kind of risk you take and whether you’re taking a well-measured, well-understood, well-evaluated risk, that’s really the question.

Horwich: There are many people out there who would have liked to have seen and might still like to see banks fail — especially big banks fail — that they think have been misbehaving. What do you say to them?

Bair: Well, I say that we should have a let a couple fail. It makes me angry that we didn’t and I think there were tools there that could have been used that were not. You know, there were a couple of institutions that were clear outliers in the terms of their mismanagement — the risks that they took — and they should have been put into a bankruptcy-like process and they weren’t. I think if we had done that; that would have been more powerful than all the rules that we’re writing now to try to correct these misbehaviors. Be that as it may it’s a legacy of the bailouts and it’s something we have to deal with now.

Horwich: Sheila Bair is the former chair of the FDIC and current chair of the Systemic Risk Council, thanks very much.

Bair: You’re very welcome, thank you.

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