Book Review: "Bull by the Horns"
Board: Macro Economics
Bull by the Horns -- Sheila Bair, 365 pages (415 with notes and index)
Sheila Bair's book on her tenure as head of the FDIC before, during and after the financial meltdown of 2007 and 2008 will likely encounter immediate comparisons to other noted books published after the crisis as readers attempt to answer the questions: Haven't I already read enough? Is there anything new I'm likely to learn from another book? Are there any unique insights in Bair's book that haven't been covered ad nauseum in prior books? Is there anything new to learn that materially changes my beliefs in actions to take in the future to ensure our government and corporations do not repeat this fiasco?
The answers to these questions are:
Haven't I already read enough? Maybe more than you wanted but less than you need to read.
Is there anything new I'm likely to learn from another book? Yes.
Are there any unique insights in Bair's book not covered in other books? Absolutely.
Is there anything new to learn that materially changes my perception of desired policy or of investment risk? Yes.
To understand the answers to these questions, one first needs to review the perspective and content of some of the other "famous books" on the financial crisis, then review a summary of Bair's book.
A Recap of Reviews
Too Big To Fail, written by Andrew Ross Sorkin, spent most of its bulk conveying the sense of chaos between all of the participants during the financial crisis. If it had any particular perspective, it seemed to be that of the Treasury and the New York Fed, then led by Hank Paulson and Timothy Geithner. (see #1 for a review)
All the Devils are Here, written by Bethany McLean and Joe Nocera, examined much of the crisis from the perspective of the corporate participants, and is probably the single most effective book at dispelling any notion that the actions that produced the financial crisis were purely the result of a "free market" adopting new securitization strategies whose risks no one foresaw and could not be avoided. Instead, it makes the definitive case that all of the major players knew EXACTLY what they were doing, knew the risks, and couldn't stay away from the profits as long as their competitors were making money.
13 Bankers, written by Simon Johnson and James Kwak, is perhaps the most concise "famous" book written about the crisis so far and addresses it from an analytical perspective from the government and regulatory bodies looking out. (see #2 for a review)
So in reverse order, one has 13 Bankers available to understand the theory of what happened and why it wasn't inevitable, one has All The Devils are Here available to understand EXACTLY how banks and securities firms took the flawed or completely missing regulations and systemically abused them and the public for profit in ways the Mob could only dream of and one has Too Big To Fail to allow one to experience much of the smoke and dust blowing around during the actual meltdown.
So what's missing in the analysis?
How about a detailed understanding of the communication between the government agencies and regulatory bodies directly involved with trying to defuse the financial bombshell? How about a more concrete explanation of the policy battles between those agencies and regulators both before, during and after the implosion? How about a concrete summary of how those battles magnified the damages inflicted upon consumers and taxpayers and transferred the new risks generated away from the parties producing the damage?
Those are the areas of analysis covered in Sheila Bair's book, Bull By the Horns. Bair's role as head of the FDIC throughout the entire crisis and the policy and personality battles she encountered with her other government and regulatory peers provided her unique insights into decisions and their consequences. Those inside insights are explained primarily from a theoretical standpoint by 13 Bankers, weren't the focus of All the Devils Are Here and were completely lost in the poorly organized Too Big To Fail which relied upon selective insider quotes without real insider insight.
Geithner Versus the Taxpayer
Easily, one of the most influential players in the entire financial meltdown and its aftermath was Timothy Geithner. Geithner was President of the New York Federal Reserve Bank from 2003 until his appointment as Treasury Secretary in the Obama Administration in 2009 so he was not only directly involved with the regulation of many of the firms that got in trouble but directed many of the individual deals to stabilize failing institutions, either by tossing billions at them or arranging shot-gun weddings with other larger institutions to hide the stench a little while longer to avoid further spooking the market.
One thing becomes very clear very early in Bair's book. Bair and Geithner don't like each other and never got along well --- probably at a personal level but definitely in their professional capacities. Since Geithner still holds his cabinet position, it will likely be a while before he writes his book explaining his theories, strategies and motivations. However, after reading Bair's book, one is not struck by any sense Bair intended to single Geithner out for criticism or sole blame for some decision made during the crisis. What DOES emerge from Bair's narrative is a consistent pattern of behavior, supported by concrete details, in which Geithner ignored or excluded Bair and/or other regulatory bodies and in some cases ignored documented policy decisions set forth by President Obama and Rahm Emmanuel (his one-time chief of staff) in pursuit of his own strategies.
Bair's narrative also echoes a disturbing pattern of behavior that took place in the Clinton Administration in which the "Committee to Save the World" --- Alan Greenspan, Robert Rubin and Larry Summers -- consistently ignored crucial insight into fundamental problems in the derivatives markets as documented by Brooksley Born. Not only did they ignore her, they actively worked to isolate her from other policy makers in Congress and the Administration or withheld information from her until the very last minute, limiting her ability to formulate viable responses to refute a policy argument being made. In the case of the most recent meltdown, Hank Paulson (Treasury Secretary under Bush) and Geithner (then as NY Fed President) exhibited the same behavior towards Bair beginning as early as 2006. After the inauguration of Obama, new Treasury Secretary Geithner and new Economic Advisor Larry Summers continued the same modus operandi.
Here are some examples:
CitiGroup Versus Wells-Fargo -- In early October 2008, Wachovia became the next domino to near a very dangerous financial death. By the time Bair' FDIC was involved, the New York Fed and Treasury had already been working to arrange a deal by which CitiGroup would take over Wachovia. In exchange, the FDIC (not involved to that point...) would publicly guarantee a "ring fence" (Bair's term) around the more toxic assets on Wachovia's books. At the time Paulson and Geithner began meddling, Wells-Fargo had already been in direct discussions with Wachovia for a direct purchase that would NOT involve the FDIC or any additional "ring fence" of loss protections for Wachovia shareholders. Instead, the meddling of the New York Fed and Treasury telegraphed to Wachovia that it was in competition with another bank who was asking for extra FDIC help in acquiring the firm, immediately lowering Wells' "willingness to pay." Meddling from Paulson and Geithner continued and resulted in CitiGroup submitting a low-ball bid involving up to $42 billion dollars of FDIC protection against a pool of $362 billion dollars in suspect mortgages. Even at that point, CitiGroup futzed around for multiple DAYS and was never able to convince its board to approve the purchase. In the mean time, Wells-Fargo was getting cold feed and feeling like it wasn't involved in a fair fight (it wasn't). Bair notes that despite the fact that dropping the ball on Wachovia very well COULD have been the trigger for a larger meltdown, communication from the Treasury and Fed to the FDIC whose guarantees were crucial under any scenario was astonishingly poor or missing entirely. The reader gets a mental picture from the narrative of the Treasury and Fed batting a $42 billion dollar armed nuclear weapon back and forth like a tennis ball while refusing to tell anyone else with an interest where the tennis ball was. (A short review cannot do the synopsis in the book justice. You have to read the chapter entitled The Wachovia Blindside to get the full picture.)
The Rules Behind TARP -- At the time TARP was being concocted by Treasury and the Fed, the original language limited FDIC protection of customer accounts to those in the regulated affiliates of bank holding companies. For an entity operating both retail bank operations and more speculative insurance and investing affiliates, losses associated with those speculative affiliates would not be explicitly or implicitly backed by taxpayers' explicit backing of the FDIC's deposit insurance. Geithner lobbied FOR covering losses associated with those speculative / unregulated affiliates which did not pay insurance fees to the FDIC.
Getting Out from Under TARP -- Under the stress test scheme concocted by Geithner's Treasury in the spring of 2009, Bank of America's "score" indicated it needed a $22.5 billion dollar capital infusion to reach a point of health that would allow it to return the $45 billion it had been given under TARP. Under the original rules of TARP, each firm would have to raise a matching amount in common equity via stock sales. The premise behind this was to ensure the general market had regained enough confidence in each firm's management before allowing the "safety blanket" of TARP dollars to leave the firm and reduce its liquidity. By late summer 2009, Bank of America was one of the biggest banks that had not been allowed to pay back its TARP funds and the Fed under Bernanke recommended relaxing the 1:1 capital raising rule to a 2:1 rule. For BoA, its $45 billion TARP infusion meant it would need to raise $22.5 billion from new shareholders. BoA was desperate to exit TARP, not because of the stigma of having needed the money but because as long as those TARP dollars were outstanding, BoA's executive compensation was severely limited. BoA submitted a series of plans that each fell short of the simple $22.5 billion dollar requirement yet each new proposal was backed by the Fed. Bair then discovered the Fed had been consulting as well with Lee Sachs, a trusted advisor under Geithner in the Treasury department. The final deal for BoA allowed it to only raise about $18.8 billion and, as Bair predicted in writing in an email to the vice chairman of the Fed and another senior Fed official, other TARP recipients including Wells-Fargo, PNC and Citigroup all attempted to negotiate lower equity sales for their TARP exits. Wells-Fargo and PNC wound up losing their efforts and raised the equity required under the standard terms. Citigroup, however, not only lobbied for only raising $15 billion instead of $20 billion as required but also asked that it be released from a secondary restriction involving $300 billion dollars of suspect mortgages backed by an implicit FDIC guarantee of about $42 billion (the "ring fence"). They got their requested "ring fence" restrictions removed but the FDIC succeeded in increasing their required equity sale from $15 billion to $17 billion dollars.
Common to all of these scenarios (and more covered in the book) are the following patterns of behavior on the part of Timothy Geithner:
* shifting risk AWAY from the biggest risk takers (and confirmed losers) TO the public
* adding insurance exposure risk TO the FDIC in particular while retaining authority within the Fed and Treasury that allowed for the declaration of additional bailouts
* a particular focus on shifting risks and costs AWAY from the worst "poster children of failure" including CitiGroup who were regulated by the Federal Reserve when he was in charge of the New York Fed
When one remembers that Geithner worked under Robert Rubin and Larry Summers as Under-Secretary and that Robert Rubin then went on to lead the board of CitiGroup while apparently doing nothing during his tenure there, it doesn't require much imagination to see GIGANTIC blind spots in Geithner's strategic view if not outright conflicts of interest between his professional duties and his personal allegiances.
One final shot over the bow of Tim Giethner. On page 364 in the Epilogue, Bair writes:
The president needs to appoint -- and the Senate needs to confirm -- strong, independent people to regulate financial institutions and markets, people who understand that their regulatory obligation is to protect the public, not the large financial institutions. When Tim Geithner testified before Congress shortly after becoming treasury secretary, a congressman asked him about the effectiveness of regulation and he proudly responded, "I have never been a regulator, for better or worse." He did not even understand that part of his job as president of the NY Fed was to regulate some of the nation's largest financial institutions. Indeed, he seem offended that the congressman asking the question thought he was a regulator.
Milky Ways Versus Granola Bars
The other major conclusion one reaches from reading Bair's book has less to do with economic details and more to do with the financial media, with Aaron Ross Sorkin as the poster child. In my original review of Too Big to Fail, I cited the following complaints about Sorkin's writing style:
* page after page of "details" which lacked specific dates and times
* lots of content derived from anonymous quotes spoon-fed to you by players with axes to grind
* lots of made-up, "you're in their head" narrative about what people were thinking (or even sweating) at the time
I've started referring to this pattern as the Milky Way approach to writing. Identify a few key ingredients that people like (chocolate, caramel) then add a bunch of "nougat" made up of fluffed up hydrogenated fat and other mystery ingredients and sell it as a product. Using this approach doesn't mean people won't like the product and that you won't sell a lot of candy bars, but the nutritional value of the product is suspect and definitely not good for you in high doses. Andrew Ross Sorkin's Too Big To Fail is a good example of the Milky Way approach to "investigative journalism" (as is virtually any book written by Bob Woodward in the past 20 years).
The practical implications of this style are vitally important to people hoping to actually LEARN something from the material. These style patterns virtually assure the reader that the writer has done little synthesis of the raw information they were provided. If the author couldn't be bothered to document specific dates and times, did they actually HAVE specific dates and times for their inputs? Did they actually lay out the chronology of their "facts" to confirm those "facts" could have occurred as their sources who wished to remain anonymous claimed?
In contrast, Bair's book is more like a Granola bar. It has a lot fewer "filler ingredients" and no matter where you bite into the bar, lots of individual, discrete pieces of information are provided with names, dates and times to clarify the sources of the point being made at that time. You may not agree with all of Bair's analysis and you may suspect she is reflecting her own biases, but at least you can check her work for yourself.
Bull by the Horns is highly recommended reading, for its political, policy and investing insights.