09/20/2012 01:28 pm ET Updated Nov 20, 2012

Sheila Bair Book Excerpt: Bank Bailout 'Plagues Me To This Day'

Sheila Bair thinks maybe the bank bailout was a bad idea.

The former chair of the Federal Deposit Insurance Corporation, in a new book about the financial crisis, says she worries that forcing the biggest U.S. banks to take $125 billion in government money in October 2008 caused more problems than it solved.

"The system did not fall apart, so at least we were successful in that, but at what cost?" she writes in her book, "Bull By The Horns," excerpted on Fortune magazine's web site today. "We used up resources and political capital that could have been spent on other programs to help more Main Street Americans.

"And then there was the horrible reputational damage to the financial industry itself," she adds. "It worked, but could it have been handled differently? That is the question that plagues me to this day."

This isn't the first time she has criticized the bailouts, telling PBS in 2009 they weren't "a good idea."

A long-time thorn in the side of Wall Street and Geithner's Treasury Department, Bair argues in the excerpt for tougher regulation and rules preventing future bailouts. In the excerpt, she suggests that, of the nine banks that took government money that day, only one of them, Citigroup, actually needed it. Goldman Sachs and Morgan Stanley, she thought, could have raised capital from private investors. Merrill Lynch had managed to get itself sold to Bank of America. The other banks were probably OK, she thought.

This is a controversial idea. It is entirely possible that, without an injection of government money, the crisis might not have stopped long enough to let struggling banks raise private capital. Banks with adequate capital at the time might have eventually found themselves gasping for air. Banks need confidence to survive, and confidence in the financial system was non-existent at the time.

But it is certainly true that the government did not have to lend the banks money at ridiculously low rates -- "This is cheap capital," Goldman CEO Lloyd Blankfein declared in the October 13, 2008, meeting where then-Treasury Secretary Hank Paulson twisted their arms into taking it. And it is also true that the government attached no conditions to the money they gave them -- no requirement to curb their behavior or their executive compensation or lend to Main Street or anything like that.

Together, this certainly raised a real moral-hazard problem for future regulators. As much as any other act during the crisis, this bailout created the impression that there were some institutions simply too big to fail, meaning they could just do whatever they felt like, with the expectation the government would clean up the mess.

Aside from questioning the value of the bailout, the excerpt is also interesting in how it describes that Oct. 13 meeting and its players.

Here's a shocker: Treasury Secretary Tim Geithner comes across as a bit of a tool.

Geithner, then the head of the New York Fed, disagreed with Bair's decision to let Wells Fargo, and not Citigroup, buy Wachovia. Paulson and Federal Reserve Chairman Ben Bernanke agreed with her that Citi was a hot mess and that it made no sense to let "two mismanaged banks," Citi and Wachovia, join forces.

Understandably, this made Citi CEO Vikram Pandit angry -- he tried to murder Bair with his eyes at that meeting. It's not exactly clear why Geithner didn't like the decision, but he sort of made a habit of disagreeing with Bair.

"Geithner just couldn't see things from my point of view," Bair writes. "He never could."

Bair is not the first person to accuse Geithner of having a soft spot for mismanaged banks during and after the crisis. Neil Barofsky, former special inspector general for the Troubled Asset Relief Program, in his own tell-all book, accused Geithner of constantly thwarting his efforts to hold Treasury and the banking sector accountable and of getting quite potty mouthed when things didn't go his way.

But Geithner is not the only figure of the crisis that Bair judges and finds lacking.

Of Pandit, she says she "doubted he was up to the job" of rescuing Citi, then the most troubled bank of the troubled lot.

Of former Bank of America CEO Ken Lewis, she says he was "viewed somewhat as a country bumpkin by the CEOs of the big New York banks, and not completely without justification." She says his "ill-timed, overly generous acquisitions" of Countrywide Financial and Merrill Lynch would ultimately turn a relatively healthy bank into a basket case. The bank is still trying to clean up the mess, hiving off as many businesses and branches as it can and laying off thousands of workers.

Of former Merrill Lynch CEO John Thain, she couldn't believe he'd even been invited into the room, seeing as his sole accomplishment in life was tricking Ken Lewis into buying his firm. His top concern, according to Bair, was making that TARP recipients not have their compensation affected in any way.

She is much kinder to Blankfein and to JPMorgan Chase CEO Jamie Dimon, saying the first had a "puckish charm and quick wit" and the second was a "towering figure in height as well as leadership ability."

Of course, that "towering figure" has spent the years since the crisis complaining as hard as he can about post-crisis regulation and agreeing loudly with Bair that his bank didn't need any stinking government bailout. His unrepentant attitude is an example of the very sort of moral hazard that keeps Bair awake at night.