WASHINGTON -- Federal Reserve Vice Chair Janet Yellen's support for repealing the landmark Glass-Steagall banking law shouldn't disqualify her from the central bank's top post, according to Sheila Bair, former chair of the Federal Deposit Insurance Corp.
Bair was an outspoken critic of the financial status quo during her tenure at the FDIC from 2006 to 2011 -- a rarity among bank regulators -- and has remained a strong proponent of Wall Street reform since leaving office. In an interview with HuffPost, she said Yellen's support for deregulating Wall Street during Bill Clinton's presidency is common among potential candidates to replace retiring Fed Chairman Ben Bernanke.
"I saw your piece about how [Yellen] supported repealing Glass-Steagall," Bair said. "That really didn't surprise me. Everybody at the Fed did. But I think she's the best of the people out there."
Like Bair, Yellen warned about the developing housing bubble during the George W. Bush presidency, and criticized predatory lending in the market for subprime real estate mortgages. Most other financial policymakers either downplayed such problems or ignored them. In speeches throughout 2008, when Yellen served as president of the San Francisco Federal Reserve Bank, she called for restructuring the financial system, saying turmoil in financial markets had revealed fundamental problems in the banking industry.
But as an economic adviser to Clinton, Yellen supported doing away with Glass-Steagall's separation between traditional bank lending and risky securities trading. She also signaled an openness to allowing banks to team up with commercial and industrial firms.
Bair said she doesn't downplay the significance of the Glass-Steagall repeal, widely cited as a major cause of the 2008 bank crash and subsequent bailout. Former Obama economic adviser Larry Summers withdrew from consideration for Fed chairman, in part over concerns about his support for deregulation in the 1990s, including the repeal of Glass-Steagall and the push to exempt trading in opaque financial derivatives from regulatory oversight.
"There were two problems," Bair said. "One was the Citigroup problem. It created institutions that were too complex to manage. People at Citigroup just didn't know how to handle that behemoth. And some of those problems were in proprietary trading, but some of them weren't. It just created and reinforced companies that were beyond the capacity of any management team to control."
Bair emphasized that among the 2008 bailout recipients, Morgan Stanley had the most visible problems with proprietary trading. By 2008, every major financial firm had both commercial banking and securities trading operations. But Morgan Stanley was devoted to its securities business, making the effective government subsidy for proprietary trading relatively low. Today, Morgan Stanley is a formal bank holding company with access to cheap Federal Reserve loans, now as close to zero percent as the central bank can manage. The firm can plow this money into any enterprise it sees fit, including risky speculative trades for its own book. Bair said the Volcker Rule -- which would allow commercial lenders to trade securities on behalf of clients, but ban them from doing so for their own accounts -- is critical given the post-crisis financial landscape.
"The Volcker Rule would have helped [before the crisis], but it's especially important now because all these investment banks are now bank holding companies," Bair said. "We don't want them speculating with their government-supported money. What Volcker says to me is that if you're a safety-net institution, it's fine to make money. You're a for-profit firm. But you have to do it by providing credit that's directly useful to the economy."
In 2012, JPMorgan was burned by its proprietary London Whale trades, losing more than $6 billion. The company categorized the trades as a hedge against other risks, but that explanation is not generally accepted by financial experts, and Bair rejects it. While Congress required regulators to write a Volcker Rule in 2010, the version proposed by federal regulators includes hundreds of pages of loopholes and exemptions, and has not yet been implemented. JPMorgan has negotiated settlements with U.S. and international regulators over other legal infractions related to the London Whale trades, however, and individual traders face domestic criminal charges.
"A lot of that stuff goes on," Bair said. "We saw it with London Whale. They call it hedging, they call it market making, but it's really something else ... Volcker would give regulators examination and enforcement tools to enforce that culture change."
Bank lobbyists have aggressively lobbied regulators against implementing a straightforward Volcker Rule banning proprietary trading, arguing that would punish harmless trades made on behalf of clients -- so-called market making activities -- or efforts to hedge against risk. Under Bair's blueprint, megabanks would have to move all of their securities operations outside of subsidiaries that offer customers taxpayer-guaranteed deposits.
"I will grant the industry this," Bair said. "I think it's hard to distinguish market making from proprietary trading. There will be clear cases, but there will be a gray area, so we should at least force all market making out of the bank. Don't let it be financed by deposits. Wall off that funding, get it out of the depository institution."
Bair said she doesn't buy the bank lobby's hedging argument. "It's easy to see whether something is a hedge or not. I think regulators can easily distinguish that."
Bair also objected to Yellen's enthusiasm for the Fed purchasing Treasury bonds and mortgage bonds to further depress interest rates, arguing that the policy mostly fuels asset bubbles. But Bair emphasized that many top contenders for the central bank simply are not interested in using the Fed to lower unemployment.
"I don't agree with her monetary policy, but she really does care about unemployment, and that's not a given," Bair said. "So I respect her motivations, even if the policy we disagree on."
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Introduces Financial Product Safety Commission
Elizabeth Warren <a href="http://www.huffingtonpost.com/2009/03/10/financial-product-safety_n_173691.html" target="_hplink">announced</a> a bill creating a Financial Product Safety Commission with House and Senate Democrats in March 2009. The body was designed to have oversight over mortgages and other financial instruments to protect consumers against predatory practices. She said if the agency had existed before the subprime collapse then "there would have been millions of families who got tangled in predatory mortgages who never would have gotten them." HuffPost's Ryan Grim <a href="http://www.huffingtonpost.com/2009/03/10/financial-product-safety_n_173691.html" target="_hplink">reported</a>: <blockquote>Without all these toxic assets on banks' balance sheets, the institutions wouldn't be on the brink of collapse and the recession would be more manageable. "Consumer financial products were the front end of the destabilization of the American economic system." Sen. Charles Schumer's cosponsorship of the bill is notable because of his proximity to Wall Street. The bill's merit, the New York Democrat said, is that it regulates the actual financial product rather than the company producing it.</blockquote>
Geithner Opposes Her Heading CFPB
Tim Geithner expressed opposition to her nomination for the Consumer Financial Protection Bureau, <a href="http://www.huffingtonpost.com/2010/07/15/tim-geithner-opposes-nomi_n_647691.html" target="_hplink">reported</a> HuffPost's Shahien Nasiripour. Geithner thought Warren's views on the big banks and Wall St. were too tough. Warren's oversight of the Treasury department as a watchdog for TARP apparently irked Geithner, agressively <a href="http://www.youtube.com/watch?v=pz7ruJw6byQ" target="_hplink">questioning him</a> during Congressional hearings: <blockquote>While her grilling of Geithner in September, over what members of Congress have called the "backdoor bailout" of Wall Street through AIG, inspired the "squirm" video, just last month Warren pressed Geithner on the administration's lackluster foreclosure-prevention plan, Making Home Affordable. Criticizing him for Treasury's failure to keep families in their homes, she questioned Treasury's commitment to homeowners.</blockquote>
Ready For A Fight
Elizabeth Warren <a href="http://www.huffingtonpost.com/2010/03/03/fight-for-the-cfpa-is-a-d_n_483707.html" target="_hplink">reiterated her desire</a> for a strong Consumer Financial Protection Agency to HuffPost's Shahien Nasiripour: <blockquote>"My first choice is a strong consumer agency," the Harvard Law professor and federal bailout watchdog said in an interview with the Huffington Post. "My second choice is no agency at all and plenty of blood and teeth left on the floor."</blockquote>
Named Interim Chief Of CFPB
In September of 2010, HuffPost's Ryan Grim <a href="http://www.huffingtonpost.com/2010/09/13/elizabeth-warren-interim-cfpb-chief-consideration_n_715457.html" target="_hplink">reported</a> that Elizabeth Warren was being considered as a candidate for interim director of the Consumer Financial Protection Bureau. Days later the announcement was <a href="http://www.huffingtonpost.com/2010/09/15/white-house-taps-warren_n_715291.html" target="_hplink">official</a>. The move allowed Warren to set up the groundwork for the agency immediately without risking a GOP filibuster of her nomination, a response that seemed certain giving the <a href="http://www.boston.com/news/nation/washington/articles/2010/09/15/opposition_mounts_for_interim_appointment/" target="_hplink">public opposition expressed</a> by some Republican senators. When it came time to put forth an appointment for a longterm CFPB chief, Warren was overlooked, partially because she was seen as unfeasible, but also, HuffPost's Shahien Nasiripour <a href="http://www.huffingtonpost.com/2011/07/18/republican-opposition-to-elizabeth-warren_n_902165.html" target="_hplink">reported</a>, because she was a divisive figure within the Obama administration: <blockquote>Ultimately, Warren wanted the job, allies said. And near-united opposition from Senate Republicans -- 44 of them signed a letter saying they'd oppose any nominee -- should have made it easier for Obama to nominate her, since the Republicans publicly said they wouldn't support anyone for the role. Instead, the Republicans made it easy for the White House to deflect questions about the administration's lack of support for Warren. Asked how she squared the administration's public statements with its private ones, Warren declined. "I really have to say, I'm just not there. I'm not in the intricacies of the political part of this, and I can't comment," Warren said Monday. "The truth is I don't know anything about it."</blockquote>
Chats With HuffPost About Bureau
In October 2010, shortly after being tasked with building the groundwork for the CFPB, Warren stopped by HuffPost to chat with Ryan Grim and Shahien Nasiripour "This is the first real agency we've built in the 21st century -- well, there's Homeland Security, but one for the people. And it means we ought to think differently," said Warren. "The government can talk to people and people can talk to the government differently than when the Consumer Product Safety Commission was built, or when the FDA was built. And if we do this right, that should change the whole dynamic of who this agency really is." HuffPost's Ryan Grim <a href="http://www.huffingtonpost.com/2010/10/07/elizabeth-warren-consumer_1_n_754026.html" target="_hplink">reported</a>: <blockquote>By gathering information, contracts and documents from homeowners and consumers, and allowing watchdog groups and individual concerned citizens access to those documents, the agency can exponentially expand the manpower it has to review the operations of banks and lenders. The goal would be to become aware of a particularly fraudulent practice before it is rampant and insulates itself in the financial services industry.</blockquote> For full video of the interview, click <a href="http://www.huffingtonpost.com/2010/10/07/elizabeth-warren-consumer_1_n_754026.html" target="_hplink">here</a>.
GOP Calls Her A Liar
In May, Warren was called to testify before a House subcommittee and defend the merits of the CFPB. Some of the questions submitted by Republican representatives appeared confused and at times aggressive, leaving Warren to correct them on some basic facts about the actual purpose of the bureau. HuffPost's Mike McCauliff <a href="http://www.huffingtonpost.com/2011/05/24/elizabeth-warren-liar-gop-facts-cfpb_n_866505.html" target="_hplink">relays</a> one particularly contentious moment: <blockquote>The subcommittee chairman, Rep. Patrick McHenry (R-N.C.), began the proceedings by suggesting Warren had lied to the committee in a previous hearing that had questioned the CFPB's role in offering advice to state attorneys general negotiating a settlement with abusive mortgage servicers. At the time, Warren said she was proud her agency had been able to help, at the request of the treasury secretary. But McHenry brought up the memo again, suggesting it showed that she hid a larger role in the negotiations from Congress. "This is our job, and we're trying to do our job, to be helpful to other agencies, and to help those agencies to hold those who break the law accountable," Warren said, repeating that she was proud of the work.</blockquote>
Announces Senate Run
Elizabeth Warren <a href="http://www.huffingtonpost.com/2011/09/13/elizabeth-warren-senate-massachusetts_n_960510.html" target="_hplink">announced</a> on September 14, 2011 that she was running for the United States Senate seat currently held by Scott Brown (R-Mass.) "After listening to people all across our state who know that we can do better, folks who are frustrated like I am that Washington just doesn't get it, I'm running for the Senate so I can fight every day for Massachusetts families," Warren <a href="http://www.huffingtonpost.com/elizabeth-warren/senate-announcement_b_961624.html" target="_hplink">wrote on The Huffington Post</a>.
One month into her campaign to secure the U.S. Senate seat currently held by Scott Brown in Massachusetts, Elizabeth Warren raised $3.15 million, largely <a href="http://www.huffingtonpost.com/2011/10/10/elizabeth-warren-raises-3_n_1003836.html" target="_hplink">from small donations</a>. According to a campaign email, 96 percent of donations were under $100. "These are pretty amazing numbers for our first official finance report, raised in a very short period of time," she said in an email to supporters. Warren's campaign has also attracted <a href="http://www.huffingtonpost.com/2011/10/18/elizabeth-warren-builds-s_n_1018334.html" target="_hplink">large liberal donors</a>, including colleagues from Harvard and well-known liberal donors like George Soros, Barbra Streisand, and DreamWorks CEO Jeffrey Katzenberg. Warren <a href="http://www.huffingtonpost.com/2012/01/11/elizabeth-warren-scott-brown-fundraising_n_1199680.html " target="_hplink">raised</a> an impressive $5.7 million in the fourth quarter of 2011. In early January, the candidate's <a href="http://www.huffingtonpost.com/2012/01/16/elizabeth-warren-money-bomb-fundraising_n_1208511.html?ref=mostpopular" target="_hplink">money bomb</a> pulled in more than $100,000 in just one weekend.
Elizabeth Warren and Sen. Scott Brown (R-Mass.) <a href="http://www.huffingtonpost.com/2012/01/23/elizabeth-warren-scott-brown-attack-ads_n_1223574.html" target="_hplink">signed a pledge</a> to curb third-party attack ads. If either campaign breaks the agreement, they would donate half the cost of the outside ad to a charity of their opponent's choice. "This may not work," <a href="http://www.politico.com/blogs/david-catanese/2012/01/warren-this-may-not-work-112119.html" target="_hplink">Warren said in an email to supporters</a>. "But there's enough at stake to make it worthwhile to try to take back this election."