Sunday, October 10, 2010

Steve Rattner on Sheila Bair

As I noted in my review of Overhaul, Steve Rattner absolutely savages Sheila Bair. I think Rattner treats Bair a little too harshly, but I agree that in this case, Bair was extremely unprofessional, and almost comically petty to boot. But I'm posting the full excerpt of Rattner's experience with Bair below the fold (it's long), so that you can make up your own mind.

The reason I think Rattner is a little too harsh on Bair is that, as head of the FDIC, she had the right to be concerned about the capital buffer at GMAC's bank (Ally), and to require higher capital levels. After all, it's the FDIC that would be on the hook if GMAC/Ally ever failed.

On the other hand, it's not at all clear that GMAC's capital level was her real concern (in fact, it's pretty clear that it wasn't her primary concern). Moreover, her stated cause for concern about GMAC — dealer floorplan loans — strongly suggests that her concern was less than genuine. Rattner is right that dealer floorplan loans are among the safest type of loans out there. Dealer floorplan ABS, which have a revolving structure similar to credit-card ABS, have miniscule historical loss rates (i.e., less than 1%), and have held up extremely well throughout the crisis. The fact that Bair cited dealer floorplan loans as her reason for requiring unusually high capital levels suggests that she either (a) didn't understand dealer floorplan loans (which would be bad in its own right), or (b) was being disingenuous.

I've always been surprised that Bair managed to become something of a hero among progressives. When Bair was the head of the CFTC in the 1990s, she fended off attempts to regulate OTC derivatives. And immediately after leaving the CFTC, she became a lobbyist for the New York Stock Exchange. Not exactly the profile of a progressive hero.

Anyway, here is Rattner's account of his experience with Bair:

From Overhaul: An Insider's Account of the Obama Administration's Emergency Rescue of the Auto Industry, by Steve Rattner (pp. 168–172, 236–237).

The new headache was Sheila Bair, the powerful chairwoman of the FDIC, which we needed to complete the GMAC and Chrysler Financial deal. Everything else in our charter depended on that. Without GMAC’s help, Chrysler would have no way to finance ongoing sales and the restructuring would fall through. General Motors’s survival would also be jeopardized.

I’d become aware of Bair’s central role gradually, while arranging for GMAC to take over Chrysler Financial’s lending activities. I had expected that obtaining the regulatory approvals would be easy. After all, didn’t we work for the same government? Didn’t we all want to save the economy from further shocks? That naiveté fell away quickly.

GMAC had three regulators: the Fed, the FDIC, and the state of Utah, where its Internet bank, Ally, was chartered. Since the Federal Reserve and the FDIC were independent agencies, for the first time in our “caper,” we could not use executive authority to direct the bureaucracy. No one—not the secretary of the Treasury, not even the President—could tell Ben Bernanke or Sheila Bair what to do. So the potential impediment at this point was not the recalcitrance of outside stakeholders but that of government colleagues.

We didn’t need much from the Fed, primarily just relief from something called Rule 23A, a Depression-era regulation prohibiting banks from lending money to “affiliated companies.” GM still had a significant stake in GMAC, but from our first meeting with Fed general counsel Scott Alvarez, we sensed a desire to help. Scott and his colleagues were diligent and careful—they made clear that they wouldn’t support a full merger of Chrysler Financial and GMAC. Yet they also signaled that they shared our desire to solve the auto crisis.

The FDIC, more directly and intimately involved with the bank subsidiary, had the authority to lift limits on deposits that GMAC had agreed to at the end of 2008 and controlled access to the TGLP. Its cooperation on both fronts was essential to GMAC’s plan for providing financing to GM and Chrysler customers. Our initial encounters were worrisome. Two Team Auto members, Brian Stern and Rob Fraser, had a Sunday session with the Fed also in attendance, where the FDIC was unyielding. A few days later, Deese and I accompanied Brian and Rob to FDIC headquarters to try to make some progress. But Bair’s lieutenant Chris Spoth and her deputy general counsel Roberta McInerney listened, gave away little, and promised no cooperation beyond checking with their boss.

The only specific objection raised by Spoth was GMAC’s financing of dealer inventories, which he viewed as excessively risky. The irony was that of all the possible reasons to worry about GMAC, “floor plan” was the least of them. In theory, GMAC can lose money on floor plan if a dealer won’t or can’t pay, but the deck is stacked in favor of GMAC. If a dealer defaults, GMAC has the right to seize the unsold cars and return them to GM for full value. What’s more, most dealers are personally liable for floor-plan loans, a tremendous incentive to make good on the debts. The historical loss rates on floor plan had been close to zero. The new risk, or course, was that GM itself might no longer be around to honor its repurchase agreement. But the President of the United States had just stood up to tell the world that a GM liquidation was unthinkable. What was the FDIC so worried about? We couldn’t figure it out.

It took me a while to understand that we were caught in the web of Sheila Bair’s own agenda. She was a lawyer from Kansas who, like Ben Bernanke, was a Bush administration appointee. Like Bernanke, she had also been an academic, though of lesser distinction. Unlike Bernanke, she was a politician too—in the 1990s she’d lost a Republican congressional primary in her home state.

Bair made her mark at the FDIC as an articulate early advocate of forceful action in the subprime mortgage crisis. At a time when the Bush administration was still wedded to its free-market, noninterventionist stance, she stood her ground. In 2008 Forbes named her the second most powerful woman in the world after Germany Chancellor Angela Merkel. A few pundits even touted her as a possible Treasury secretary for President Obama. But inside the bureaucracy she had a reputation for being a sharp-elbowed, sometimes disingenuous self-promoter. My colleagues who dealt with Bair during the banking crisis found the experience frustrating.

Bair’s concern was the safety and soundness of GMAC. We had told the regulators that we intended to recapitalize the company based on the results of the stress tests then under way. The goal of the stress testing, orchestrated by Tim for the nation’s nineteen largest bank holding companies, including GMAC, was the restoration of confidence in the banking system. If a company’s capitalization was found wanting, it would be required to raise enough additional money to weather a full range of economic storms. Ideally, investors would put up the funds, but implicit was the assurance that Washington would provide capital if the private market wouldn’t. GMAC was in such weak shape that its only possible source of capital would be TARP.

Based on the stress test results—not yet public but available to us—we had budgeted $13.1 billion of new capital for GMAC. Of that, $4 billion was to support the lending it would take over from Chrysler Financial. Bair didn’t believe those sums were enough. She suspected GMAC to be weaker than the stress test revealed, and didn’t trust de Molina’s ability to deliver what he promised. She also shared the FDIC members’ antipathy toward GMAC for its aggressiveness in Internet banking.

So the FDIC withheld its approvals, muttering about more capital. Making things worse, Spoth hinted at but would not spell out his boss’s demands. We made so little progress with him that I finally asked Tim to intercede. A summit meeting was booked for April 28, just two days before the President was to speak on television. It was in Tim’s small conference room, in the early evening of another unseasonably warm day, that I first came face-to-face with Sheila Bair—a small, trim woman about my age with brown hair, brown eyes, and an unsmiling, sour demeanor. According to Washington protocol, this was a “principals plus one” meeting. Sheila brought Spoth. Tim and I represented Treasury, leaving me without my finco experts Brian and Rob. Bernanke and Alvarez participated by phone.

One could hear bemusement in Bernanke’s soft voice coming through the speaker. His tone suggested that he was wondering, “Why are we even here?” The Fed was already prepared to meet a key demand by Bair, that GMAC be able to use dealer loans as collateral to borrow at the Fed’s “discount window.” But this meeting was about Bair’s needs. An effort was under way in Congress to increase from $30 billion to $100 billion the credit line at Treasury used by the FDIC to backstop its deposit-insurance fund. Bair made it clear that in exchange for helping GMAC, she expected Treasury’s support for the legislation. Such horse-trading is routine, and I didn’t question it. I just wished that she or Spoth had been more straightforward and had brought it up weeks earlier. But Tim readily acquiesced.

Next came a recital of grievances about GMAC. Weirdly, Bair attacked dealer financing anew, making it sound as if floor-plan lending were the reincarnation of subprime. It was as though we had not, just days before, explained to Spoth why floor-plan financing is about the least risky activity an auto finance company undertakes. He remained silent, and though I was incensed, so did I. As a “plus one,” I didn’t think it was my place to take on Bair in the presence of Bernanke and Geithner. The moment the meeting ended, I rushed down to see Brian Stern and Rob Fraser, wondering if I had somehow misunderstood everything I had heard about floor plan. They assured me that I hadn’t.

Clearly, the issue of the auto finance companies—which two months earlier we had viewed as the rail of the dog—was now a Great Dane of a problem. Soon to come was the news that Bair did not merely want Tim’s support for expanding her credit line; she wanted the legislation passed by Congress before she would agree to help GMAC. That wasn’t going to happen in the next forty-eight hours.

We agonized. It seemed insane to let Chrysler go down over her agenda. But Chrysler could not stay in business unless its dealers and customers got financing, and without FDIC approval, there was no way to provide it. We had fallen short on a key condition for not pulling the plug.

In close consultation with Larry and Tim, we decided the rescue was worth another gamble. We committed $7.5 billion of TARP funding to GMAC without waiting for the FDIC’s cooperation. In exchange, de Molina agreed to take on Chrysler Financial’s lending for two weeks so that the automaker could continue to sell cars. Two weeks would be long enough, we hoped, for the FDIC’s legislation to pass or for Bair to come around.

I reckoned the odds were on our side. For one thing, we’d held back $5.6 billion of the $13.1 billion earmarked for GMAC—additional capital that both de Molina and Bair wanted to see invested in the auto lender. Even if the GMAC arrangements fell through and we had to liquidate Chrysler in another two weeks, the consequences of having waited would not be severe. Keeping Chrysler on the dole for the extra days would cost taxpayers perhaps $500 million — a mere rounding error in the context of TARP’s $700 billion. And the people who bought Chryslers in the interim would be protected—we had a warranty guarantee program already in place.

Above all, I was banking on Bair’s self-interest. Being obstructionist had worked for her up to now. But as soon as she realized she was in danger of becoming the visible face of GMAC’s paralysis and Chrysler’s demise—as well as of the potential collapse of GM because it, too, depended on GMAC—I hoped that the hostages would be released. (pp. 168–172)


GMAC hung over me as a huge piece of unfinished business that could torpedo everything we were accomplishing. I spent days with Brian Stern and Rob Fraser figuring out how to structure and value the capital infusion that GMAC was going to need. Even more frustrating was continuing to do battle with the FDIC. As a way to keep the pressure on, we had proposed that GMAC take on the Chrysler financing business for only two weeks, seemingly plenty of time to tie up loose ends with the FDIC.

But the FDIC kept retrading and piling on new asks. Sheila Bair’s designated negotiator was Chris Spoth, the rather meek career FDIC official whom we had previously encountered. He seemed to have no authority whatsoever. More than once, we would come to an understanding on a point that we would confirm by e-mail, only to receive an e-mail back the next morning denying that an understanding had been reached. At another juncture, the FDIC asked for a letter saying that Treasury would stand behind GMAC no matter what, and then kept changing the language. Tim thought the new language would make the FDIC look weak and tried, unsuccessfully, to reach Bair. “I’ll write whatever you guys want, but I really think this is counter to your objective,” he told Spoth. Of course Spoth needed to check with Bair. “You’re right, let’s go back to the other language,” he responded a few minutes later. (Bair would duck even Tim when she wanted to; once her office said she was on a plane when in fact she wasn’t.) Bair also wanted a letter from Tim thanking her for assisting our effort; we took to calling this the “great American letter.”

Most frustrating was that after agreeing to provide the help we were seeking, the FDIC came back and increased the amount of capital that it wanted GMAC’s bank (Ally) to maintain to far beyond that required of any other bank. The excessive capital requirement would have many negative repercussions. It would reduce GMAC’s liquidity at the holding company and therefore its financial flexibility. Perhaps most importantly, it lowered the bank’s lending capacity, the opposite of what we were trying to achieve. And it reduced GMAC’s profitability and therefore the value of the $13.1 billion of new TARP money that we were preparing to invest. So the FDIC’s unreasonable requirement would cost U.S. taxpayers significant money. Whose side was the FDIC on, I wondered. We whittled back the duration of the higher capital requirement a bit but ultimately had to swallow and agree. We had no alternative. (pp. 236–237)


Blue said...

What did Blair (not Bair) want? I didn't see anything in the extract that claimed to know. Is Rattner really claiming that Blair was being difficult just to be difficult? The story doesn't hang together. Blair may not be the most pleasant person to deal with, but it doesn't make sense to describe her as uncooperative without at least hypothesizing why she was behaving that way.

Economics of Contempt said...


From the excerpt:

"An effort was under way in Congress to increase from $30 billion to $100 billion the credit line at Treasury used by the FDIC to backstop its deposit-insurance fund. Bair made it clear that in exchange for helping GMAC, she expected Treasury’s support for the legislation."


"At another juncture, the FDIC asked for a letter saying that Treasury would stand behind GMAC no matter what."


"Most frustrating was that after agreeing to provide the help we were seeking, the FDIC came back and increased the amount of capital that it wanted GMAC’s bank (Ally) to maintain to far beyond that required of any other bank."

Plus the "Great American letter" from Geithner.

Anonymous said...

haven't read the book, but looking forward to it. it will be interesting to hear what went on behind the scenes with wamu as well; i hope that story comes out before i die. imho that seizure made the crisis much worse, because it spooked private capital.

Blue said...
This comment has been removed by the author.
Blue said...

But Rattner's claim was that Blair's professed needs were cover for something else. What was that something else?

Calton said...

Where does Rattner say that, Blue? And why do you keep calling her "Blair"?

Anonymous said...

I'm somewhat perplexed that you didn't acknowledge that Rattner, a buddy of 'Tim' (i.e. Geithner), has some less than above-board reasons to lambaste Bair. Geithner HATES Bair, just as Geithner HATES Elizabeth Warren. That personal dynamic seems relevant here. Rattner makes clear that he's Geithner's agent; more disturbingly, he makes clear that he's Geithner's friend and considers 'Tim' a good-guy and a visionary.

Anonymous said...

As far as I can tell, Bair's motivation was to have a stable and sound financial industry which wouldn't wreck the country.

GMAC, with a history of making bad loans, got caught in that? Not sorry.

Anonymous said...

Now i'm considerably confused that you decided not to admit which Rattner,cheap diablo 3 Gold a friend regarding 'Tim' (my partner and i.elizabeth. Geithner), provides some below above-board top reasons to lambaste Bair. Geithner Cannot stand Bair, equally Geithner HATES Customer advocates. That will particular dynamic appears pertinent below. Rattner helps make obvious which he is Geithner's agent; much more disturbingly, he tends to make clear which he Billig Guild Wars 2 Goldis Geithner's pal and also considers 'Tim' a new good-guy and also a visionary.

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