Book Review

Bull by the Horns: Fighting to Save Main Street From Wall Street and Wall Street From Itself, the new book by former Federal Deposit Insurance Corporation Chairman Sheila Bair, is an indispensable source for financial advisors.

Bair’s book is a comprehensive tutorial on how the American financial regulatory and banking systems function, and a sobering chronicle of how those systems were challenged to the maximum by the Great Recession of 2008.

Bair’s writing is crisp and colloquial, and she has a flair for the dramatic: Bair replays events from 2006 to 2009 and turns them into a cliffhanger. She served at the FDIC from 2006 to 2011.

The big story is spiced with her insights into her working relationships with the major policy makers at the center of the financial meltdown: Henry Paulson, then Treasury secretary; Ben Bernanke, chairman of the Federal Reserve; Tim Geithner, as both chairman of the New York Federal Reserve Bank and Treasury secretary; and Chris Dodd (D-Conn.) and Barney Frank (D-Mass.), the legislators who crafted the Dodd-Frank act, which bans future government bailouts of failing bank behemoths and beefs up financial regulators’ power to curb the excesses that led to the 2008 meltdown.

Bair sets the stage on page 1; the date is Oct. 12, 2008, the epicenter of the crisis: “I took a deep breath and walked into the large conference room at the Treasury Department. I was apprehensive and exhausted, having spent the entire weekend in marathon meetings with Treasury and the Fed. I felt myself start to tremble. Nine men stood milling around in the room, peremptorily summoned there by Treasury Secretary Henry Paulson. Collectively, they headed financial institutions representing about $9 trillion in assets, or 70 percent of the U.S. financial system. I would be damned if I would let them see me shaking.’’

By Bair’s account, she doesn’t. Bair, as the lone woman official in a doggedly male-dominated culture of high-stakes money making, candidly describes how she chaired the FDIC during the crisis: by championing the taxpayer and responsible banks; and pushing for tighter mortgage-lending standards, stronger capital requirements for financial institutions and restructuring of unaffordable mortgages. Often, the FDIC  battled with fellow regulators and industry lobbyists over these measures.

At the Oct. 12 meeting, Paulson imposed the Troubled Asset Relief Program on the biggest banks and investment houses, from Bank of America and JP Morgan Chase to the highly distressed Citigroup. Bair had earlier helped facilitate Wells Fargo’s acquisition of Wachovia Bank, thus embittering both Vikram Pandit,  former CEO of Citigroup, a suitor of Wachovia, and Pandit’s  primary regulator, Geithner, with whom Bair has a contentious relationship throughout the crisis. Both men were at the meeting; tension was palpable.

The FDIC, created in 1933 during the Great Depression to stabilize the banking system, ”preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $250,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails,’’ says the FDIC Web site.

The FDIC has prevented runs on the banking system since its inception, it insures about $9 trillion of deposits in U.S. banks and thrifts. Funding for the FDIC comes from premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities.

Subprime mortgage lending and its toxic effects fueled the meltdown. Bair sounded the alarm and pushed for anti-predatory lending regulations in 2007; delays led by industry lobbyists held up their taking effect until 2009. “By that time, though, the damage was done. Ben (Bernanke ) publicly acknowledged that their failure to act earlier had been a key shortcoming in the Fed’s handling of the crisis,’’ Bair writes.

A counsel to the Federal Reserve Bank explained the delay:  “The mind-set was that there should be no regulation; the market should take care of policing, unless there is already an identified problem.’’

Bair argues throughout her bracing account of the crisis that there were many who identified the problem, early, but for various motives, regulation was prevented.

In a closing chapter, “How Main Street Can Tame Wall Street,’’ Bair offers 15 ways to avoid another crisis. Among her suggestions are: raise capital requirements; maintain the ban on bailouts; break up the megainstitutions; impose an assessment or tax on large financial institutions; abolish government-sponsored enterprises (Fannie Mae, Freddie Mac); reduce the national debt; and tax earned income and investment income at the same rate, a hot topic during the recent presidential campaign.

“We need to reclaim our government and demand that public officials act in the public interest, even if reforms mean lost profits for financial players who write big campaign checks,’’ Bair says.

“Bull by the Horns: Fighting to Save Main Street From Wall Street and Wall Street From Itself,’’ by Sheila Bair. Free Press. 417 pages.  $26.99.