of the 57 presidential inauguration at c-span.org. you can >> this week on "q&a," sheila bair discusses her book, titled, "bull by the horns: fighting to save main street from wall street and wall street from itself." [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2013] >> sheila bair, former federal deposit insurance corporation chairman, why did you write a book? >> it is an important time in history. there had been others who had not been completely accurate,

especially in terms of what we and i did. i thought i would give them our perspective. currently, for people to understand there were different policies, a different policy options, disagreements. if we want to prevent this crisis from happening again, i felt the public itself needed to engage more on financial reform to take an interest in it, educate themselves better for it i try hard to make the book the festival. i have policy recommendations. >> where did it all start for you? where is your birth town? >> kansas. there is a symmetry with my personality. >> when did you know you would be an independent person? >> i think i have always been. i grew up in southeast kansas. independence is a small town. people always had to be a bit scrappy. the roads have improved a little

bit since i have moved away. it is somewhat reflective of where i grew up. my parents were depression-era kids. they were very poor. they had a lot of strength. it is probably a personality trait i have had throughout my life. >> where did you go to college? >> cambridge university. a product of public schools all the way through. a public-school education served me well. it saddens me because i think it is basic to what america is about to give everybody a basic shot and have an opportunity. it starts with public education. >> how many total years have you

worked in government? >> a lot. since 1981, really. i was a civil rights attorney. i dealt with gender discrimination. a disability rights law had just come into law not long before i had joined. that was very good experience that led to my next government job with bob dole, 1981. the senate turned republican. at the top of the list was the voters' rights. he wanted to make sure he was a player. it was a good fit. >> did you agree with him in

most things? >> i did. people tend to identify me with the progressive camp. i hate labels. i have taken strong stances. i am a conservative in one sense. i believe in capitalism but believe that system has to be policed and regulated. it is popular. i think it is one that was reflective of both politics. the tax reform act. i enabled it to be lower for everyone. the compromise that fixed social security for years. a benefit to cut and tax increases. that was bipartisan leadership that we needed and had. his service to our country and the terrible wounds he suffered gave him a tremendous strength.

he understood what it meant to put country first. the world war ii people knew that. we do not have that so much now. >> how did you become head of the corporation? >> i had served in the bush administration. i had a son and we adopted a daughter from china. i wanted more time with my family. i got a call from the bush

administration. the new york state banking supervisor -- >> the girlfriend of the mayor. >> i never got the details. i think it is terrible to try to penalize somebody because their companion is on gun control. that did not go through. they called me and asked if i were interested. i had served on the fdic. with my dole connections, they were eager to get someone in place. the predecessor had already stepped down to take another job.

i talked to my family about it. we decided it was a great opportunity. we have made a very nice life. a great town with great public schools. we decided this was a unique opportunity appeared with my family's support, i took the job. >> what does your husband do? >> he is the vice president's of government policy, and he has been in public policy of his

life. he is a democrat. it is a bipartisan marriage. he has been in washington most of his career. it was a struggle for all of us. >> where was your office? >> we were very close to the white house. i could see the helipad from my office. i could see the washington monument. it was a lovely office. very special. it reminded you, i asked them to move my desk so i could see the washington monument. it is a nice reminder of the importance of my job. >> how long? >> five years. >> when you were there, who did you work for? >> the public. it is an independent agency. it is important for people to understand. most of these financial

regulators are independent agencies. that meant i was ahead of the agency. it was our statutory mandate, to protect depositors. i tried to stay focused on that. >> did the president have anything to say? >> no. even though you do not work for the president, he appoints you. once you are there, you are the head of an independent agency. having the support of the president is important. people would try to defy the president. >> when barack obama came, did you stay there? >> i did.

i had to go through this in my book. the chief of staff, i said, there is a lot of work left, and you need to know what the president wants. if he had anybody else in mind, or was uncomfortable with me, i did not want to stay. he is the new president. an important job. he was very reassuring. he said, i am sure it is fine. so i was very reassured by that conversation. several days later, a big bloomberg story was that tim geithner was trying to force me out. all this stuff about how i was not a team player, even if i stayed, i would not be part of the important policy decisions, it was a petty story. >> where did it come from? >> i do not know.

there was a backlash. the chairman of the senate banking committee wrote a letter to the president asking him to keep me. he said, he liked me and what i was saying and i had a sense of urgency that he liked. that was it. i stayed. i tried to find out. we had disagreements. i did not think it was a bad thing to voice different views.

i was surprised. we did not have a very productive conversation. we got through it still. we did what we needed to do. i always tried to participate. i always came to the table. we tampered the bailouts. a lot of the policy choices that were made were not once i would make if i were running things. >> a long paragraph. i want to put it on the screen so people can follow it. what would all this say about our financial system and our regulators? --

>> the specific reference was to the trading operations. it was a big cultural problem in the trading operations. i think they are all about, you should not categorize everybody, but there is too much focus on profits and profit at any cost. people to take advantage of as opposed to people to serve. trying to rethink the culture of the trading operations. the role is to have a pet dissipation on institutions and bank holding companies so you have access to the discount window.

that their business model should be about customer service and not making speculative trades for their own profit. >> holding company means what? >> most of the big banks are banking organizations. it is important for people to understand that. city group, j.p. morgan chase, bank of america all of these are thousands of legal entities. some of those, there will usually be a large, insured bank inside that. there would be other affiliate's that do different types. we injured them. we were not the primary regulator of any of them. it allowed us, if we thought

there was a problem, it allowed us to go to the institution ourselves and take a look. that had not been used as much as it should have been. i tried to enhance that. >> let me read a little more. --

>> they decided they would sue the government. how much was involved? >> i hardly know where to start. that was a reference to the libor scandal. a key interest rate used to determine the interest rate on a lot of consumer products. also, to determine the prices of over-the-counter derivatives market. it is priced based on what the libor interest-rate is. it is a manipulation of the interest rate. a survey of the bank's through a british trade association.

he came to light recently people on the trading desk of these institutions, many of them, were trying to manipulate the process to affect libor to benefit their trading. they were hurting counterparties. it is a number of banks doing this. the london whale was the same problem. it was a trader at j.p. morgan chase taking huge derivatives. a volatile complex, he built up a dominant position. the hedge fund figured out he had become dominant in that position. they started trading against him. racked up trading losses. it was undetected. they said it was a hedge.

i do not believe that. he was just trying to make money. it hurt the bank. it caused a lot of losses. >> if you look back on the crisis, what year would you say? >> it came to a head in late 2008. >> who got hurt? did anybody lose? >> shareholders took losses. they did take dilution of their share. laymen, obviously, they were allowed to go to bankruptcy. that was a failure. smaller banks, the largest banks in our traditional process, their manager lost their jobs, their bondholders took losses.

that is the way it is supposed to work. it is a government run bankruptcy. that is supposed happen. when you get in trouble, you and your stakeholders are the ones who are supposed to take the losses, not the government. that is one of the problems of the bailout. those who invest in large institutions, you have to put on the government. if they can take risks, when the risks go up, we will put it back on the taxpayers. that in itself makes the system unstable. people at the bank's were not a healthy account of the way it should have been. that is a source of system instability. a lot of the dodd-frank financial reform law is designed not for the problems that led to the prices. a lot is trying to fix the bailout to make sure to get rid of this moral hazard created by this very generous the bailout. >> let me go back.

how many people work there? >> when we started, 4500. >> why so many additional? >> it had been cut to the bone. there was a brutal downsizing. >> by who? >> predecessors. in fairness, the agency had gotten very big as a result of the crisis. there was need for downsizing. they cut too far.

that was symptomatic of a self regulatory mantra that had taken over washington. when the golden age of banking, banks were very profitable forever. we do not need regulators, we do not need the fdic. we have the ability to borrow. there is always the option to borrow from taxpayers. >> the costs are paid for by the banks? >> yes.

the premium, the returns, pay the operating costs. >> as you sit there, what do you not regulate? >> we do not insure securities. you have to be a regulated bank. we do not insure holding companies. we did for a limited time. that is a good thing. there was no loss. there was a gain on that. there was no loss. we only insure insured banks. if you structure your counts right so you can add $250,000, you and your wife can have a joint account for $250,000. there is information.

>> early in the book, you talk about hank paulsen. you tried to get an appointment with him. they would not give you the time of day. >> i got put off. i finally got an appointment. i went over there. i went to the lobby. they read directed me to bob's office. he and i had a very nice meeting. we had a good working relationship. we did not agree on everything.

hank came by for five seconds and set high. that was my meeting. >> why would he be so busy? >> people say, why were you left out of meetings? why were people trying to roll you in things? one reason was there was a view that we were there for the little people. it was a hundred thousand dollar deposit. if you are a wall street titan, somebody with that in the bank is not somebody you think about. that is reality. we are the little people. there was a sense we were not players with the large institutions. we injured them. the fed and the occ, they were the important people to deal with. >> tim geithner is not one of your favorite people. >> on a personal level, i think he always did what he thought was right. we have profound philosophical disagreements. >> can you remember the moment you disagreed the most? >> it escalated during the crisis. there was an international

agreement that deals with how much leverage a bank can have. >> what does that mean? >> leverage means you borrow. how much shareholder equity. you find your operations with some amount of money you raise. the capital ratio deals with the relationship between how much money you borrow and how much money you get from shareholders. >> a bank has $1 billion, not my money, but a whole bunch of money. how much cash money do they have to have available if we all walked in and said we want our money back now?

>> that is an issue. those are reserve requirements. banking regulations are complicated and that is a frustration for me. reserve requirements relate to how much cash you have to have on hand to make good on your deposit withdrawals. those requirements are set by the federal reserve. capital is something else. that is how much shareholder equity you have to use to fund your operation. you can put it into loans, a lot of different places. they are really two different concepts. >> how much cash? >> 10%. they are governed by the federal reserve. that sets the policies. it used to be 15%. i think it went down to 10%. i could double check. banks typically, at least right now, because of the monetary policies, they punched so much liquidity into the system, it really relates to how much cash they have. not the capital.

>> the 8000 people that work for the federal deposit insurance corp., how many people were on your board of directors? >> 5. we had two internal directors. a democrat, an independent. my two republican directors. they regulate. the banking system is too complicated. this has been simplified somewhat. there used to be a national bank charter from the occ, your national bank, and you are regulated by the occ, and you could have a primary markets loner regulated, you can have a state charter. states can chartered banks. if you are a state-chartered bank and not a member of the federal reserve system, you are regulated by the fda.

that is the majority of banks. the fdic has well over 5000 small banks. we also have insurance functions. it is a bigger operation. the occ just regulates national banks. bank of america probably had the largest deposit. j.p. morgan chase is larger by assets. >> we have a photograph that you have in your book. a lot of the people you were involved with, you are the only woman photographed. who is in that group? hank paulsen, ben bernanke, chris, is john? >> yes. tim geithner, john, and chris.

>> you talk about being the only woman in that group? what was your reaction? how did they treat you? >> it was, [laughter] it was difficult. it was. i always felt like when i get into a meeting, another meeting occurred. the decision was made. i was brought into a meeting to be told what they decided to do.

that was hard. i felt there were a lot of bilateral relationships. one on one conversations i was not privy to. it was challenging to have a seat at the table and make our way through it and get our views taken seriously. >> go get a job and find the cure to cancer, we tax you at 45%. manage a hedge fund and you will pay 15%." >> a hedge fund is a fund that makes money by arbitrage. they try to exploit inefficiences in the system and for instance they may have arbitrage with interest rates or inefficiencies in currencies and they will take opposite positions. it is difficult to explain what hedge funds do. they are trading oprations. they have the long-term capital gains and pay theselves with carried interest. the fiction is they are paid to manage the money and generate profits. they have a percentage of the returns -- we tax them at the marginal rates.

and the fiscal cliff legislation. >> the new secretary of the treasury is jack -- the chief of staff to the president. let me read something i picked up on wikipedia. he was named the chief operating officer of the investment unit and then they say -- the group he oversaw invested in a hedge fund that bet on the housing market to collapse. how can we expect a government with hank paulson out of goldman sachs -- how can we get the average person a fair shake? >> that is an example -- a lot of them took short positions and derivatives with speculative debt on how mortgages perform. they would make a profit -- and other hedge funds opposed the market and they wanted the housing market to go bad. they would make money if it happened.

in one, the volker rule will prevent that kind of activity. >> why has it taken two years? >> i don't know. the pace of regulatory reform is not that good. >> why do you think that happened? >> it is -- dodd frank led it to authorities to get it done and they are responsible for some of the problems. the lobbying against the

regulatory process has been severe and intense. it is not getting better. >> how can they stand up to the lobbyists? >> there is what some people call cognitive capture -- to look at the world through the industry they regulate and they are too worried about those -- you should always listen about what the impact of your rule will be. but when you approach the issue the way the bank does -- a lot of this is political pressure and as opposed to -- get these rules done. they have to go to congress to get the funds appropriated.

and they try to get this rolled back and the end of the day they have been too slow, too. they have a fixed term and we have to say -- you've had your say. with the definition of the rules being very complicated. this will help you take less risks with less leverage. >> we have carl levin and john rich, the former ots, the office of thrift supervision -- >> chairman bair writes, she informed of the -- what is audacious about fdic telling about a potential downgrade? why is that so audacious, that you can't believe the audacity? >> ots was a primary federal regulator and i thought ots should relay the downgrade to the new ceo who just took over.

>> turf? >> i have the highest regard for sheila bair but these were tense times and -- um, people's blood pressure increases under situations like this and sometimes we say things we wish would not appear in print.

>> people say they have the highest respect -- sure they do. >> he tried to make things not be personal. washington mutual, a big seattle-based thrift institution. this was a prized institution. with little income documentation that this losses caught up with them.

they had many opportunities to collect themselves. they didn't do it and they were realistic about what these were and they kept digging deeper -- >> here is another board member. going back to 2008 -- sen. richard shelby is questioning. >> are you confident banks have not outsourced their due dilligence? and is that a problem? it seems to be a concern to a lot of people.

>> it didn't take long for you to get right to the heart of the matter. i have spoken on this -- i wouldn't go so far to say banks outsourced it lock, stock, and barrell. but the high credit ratings and the debt obligations on the asset-backed securities were considered senior to aaa securities. there was a reliance on that rating. there was an undue reliance on the credit ratings. >> credit was a problem in the crisis -- they were paid by the issuers to sell the securities.

they had high ratings -- >> ratings agencies? >> moody's -- they are -- corporations whose business it is to evaluate the credit quality and there are some problems there. the ratings organizations backed by mortgages and instruments derivative of the first line securitizations which john dugan was referring to. they didn't do their homework and never looked at the lones to see -- loans to see if they were underwritten. the issue was either, the bond- holders -- the people who bought them didn't, either.

a security in this case is a bond. there is a legal operation -- for the bond. and they rated the mortgage- backed securities market. and they went into a securitization and the interest in the revenue streams on that securitization -- and that is dividing securitization up into risk factors. if there started being losses on the mortgages, you would take those losses first. this is part of the securitization, to take a simplified example. to the revenue streams off the mortgages. and the intermediate -- would have a second claim to the income streams and the third would have the most subordinate claims. >> this comes from a generalist, and you talk about all the people involved, is there no wonder the banks and wall-street crowd can run circles around --

>> i go through this in my book those were the securitizations and they take the bottom and put all those into a pool and -- that is what you probably heard about. investors didn't know what they were buying. the ratings agencies handed out aaa credit ratings to make investors think they were safe, but they weren't.

making the judgement about the securities -- investors were buying the stuff at prices that understated the true risk and the loss -- everyone was

surprised they didn't have the cap -- >> when were you the maddest? >> i wrote the book and got mad all over again. i thought i'd mellowed out a bit and i didn't. the citigroup bailout made me the angriest. it was nonstop and there was the attempt at a backdoor bailout with wachovia, a failing national bank with fdic support and three bailouts of citi. there was never that much accountability. we did replace the board but not as much as we should have. at the end of 2009, they wanted to pay themselves big bonuses again. >> did anything ever happen because they got those bonuses? >> no. they got them. it was just over the top.

the country was still suffering so badly in 2009 and my own agency had taken a risk in the debt and here they are, wanting to repay the tarp so they can pay big bonuses again. >> let me throw politics into it. obama authored a campaign positioning himself as anti-wall street. in reality -- >> i think -- i met with him several times. he was accessible and then that faded away and larry and tim -- his heart was in the right place but he picked people who were part of this. >> you talk about tim geithner

and hank paulson and all the people who come and go from wall street. what is going on here? >> it is perspective. narrow focus on wall-street and viewing the needs of the country through wall street. it is just not so. their interests are different from ours. big bonuses are not in the interest of the country. >> and they put a restriction on the outfits that were bailed out. they had to have multiple bailouts at citi and they had restrictions on them but -- the treasury repaid the tarp and bailout money to pay bonuses again.

to some extent -- the healthy ones -- they have the desire to camoflage those with problems like citi group but you go to wells fargo or jp morgan chase they weren't in any kind of -- they had access to liquidity and we say, we want you to have the tarp money, they won't take it. >> another sentence, 'i have seen many instances where staff were too differential to -- how many want to work in these institutions? >> it is an accepted practice of working for a regulatory agency for several years than an organization you regulated. and the political pressure can be profound. we had much work with that. they were beaten down. on the back of the authority -- when our staff in the path --

the board had slapped them down. they had also not gotten what they needed from the political agency -- and this happened -- they have to support the staff. they want them to be independent and take actions that need to be done. and -- they don't always know they have it.

>> we go through the innaguration and the president's group called for the group and you are having meetings and the comptroller of the currency, and you knew the owner had given a million dollars, how big an impact would it have? >> it wouldn't have an impact. of course they have the bank.

you know -- it is good to be independent so they don't work for the president, and marty -- the new chairman, you will know that doesn't matter. >> this is neil boraski who has a book talking about what it was like working inside the treasury department. and the inspector general for tarp. >> and as i laid that case out to him and explained he was not being transparent, the meeting was contentious. he used a lot of obscenities in expressing his view that he'd been one of the most -- and he'd forced them to express things they otherwise wouldn't and he had expletive-laced -- i am not complaining about that. i am a line prosecutor and have

one of the most powerful officials in the world dropping f-bombs at me. we looked at each other -- here we are advocating common sense changes and this deep level of animosity was remarkable. >> he is talking about tim geithner, who is leaving, but you write a lot about tim geithner. was he successful or -- was all this contention? >> the lack of tolerance for different views was not helpful.

the fdic had a lot to add. we had the chance to help with these banks and -- we returned them to the private sector. i think that hurt the process. defining success -- we didn't go over the cliff. and that is a good thing. it is still a drag and not a source of strength for the economy and they do a better job of lending. there could be things they have done differently and it would have been nice if there was openness. >> let me back into this.

>> how big a company is this? >> $1.2 trillion. they have -- >> and the former treasury secretary under clinton. you say he brought tim geithner to the treasury, out of the new york fed. you write, 'tim played a staff role, and had been the mechanic of the bailout programs. hank and ben treated him like staff. he had been elevated for all the wrong reasons and had every expectation tim would continue

his citigroup friendly policy." did he continue the citigroup friendly policy and did they make out better with him as secretary? >> there is no question. the government was quite generous. just about every mistake in the book -- >> bob rubin was worth millions and never punished in any way. >> i don't get it. he shows up in conferences and in -- i can tell he never really accepted responsibility for any of this.

he helped create the beast and he was secretary of the treasury and to go become the chairman or executive chairman -- a beneficiary of this major change, it was terrible. >> another piece you were involved in, suzie ormann and sheila bair. >> ever lose one of these? everyone has except those whose money is in the fdic. good to know in times like these. here's the question. do you know if your money is safe and sound? go to fdic -- and the more you know, the safer your money.

>> first question. did you pay her to do that? >> she makes out like a bandit with the fdic. >> i started engaging her -- she'd criticized about the complexity of our deposit insurance rules. we simplified it and -- we set this up to better define our deposit insurance and our limits. as we got into the crisis more and more, people were raising questions about the safety of insured deposits and i was the head of the agency. and i thought it would be good to have a third person. to vouch for us, basically, and she was willing to do this. on doing those ads -- >> they run free of charge and

for her, it gives her -- >> she has writtne several best- selling books and i think her name recognition was much higher than the fdic. i think we benefitted for her credibility. >> what did you decide to do once you left this job? these people are in the revolving door business.

>> i was a senior advisor there. i joined a couple of boards. this is a nice combination of things. i am enjoying my life now. i wanted to practice what i preached and didn't think it would be appropriate to work for a bank we regulated and won't take speaking fees either. it is what i am comfortable with. other people did not follow the same path. it is good to show by example. and we did a lot of things that have the debt guarantee programs. i didn't want anyone to say there was anything on my mind other than protecting the public. i don't judge people who use a different option but i wish they'd think hard about that.

it undermines public confidence in the regulatory process when they see these regulators who have helped the industry -- >> that is sheila bair, the former fdic chairman and author of "bull by the horns." we thank you. >> for a dvd copy of this program, call 1-877-662-7726. to give us your comments, visit us at q & a.org. also available as c-span podcasts. >>