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the U.S. economy is in a deeper hole than it could have been.  July 8 was the last day of work for former FDIC chair Sheila Bair.  The NY Times Magazine has an extended profile and interview with her; she agreed to the interview under the condition it not be published until after she finished her 5 year term.

The big takeaway I got from reading the piece is that had other "supposed" regulators in both the Bush and Obama Administration listened to her and acted on her advice, well, we could be seeing some blue sky right now in terms of the housing crisis and economic recovery.  It's a shame, because millions of homeowners and borrowers continue to suffer at the hands of loan servicers who have zero incentive to work on anything other than the foreclosure process (if they can get proper paperwork together)...

full article is here:  http://www.nytimes.com/...

The exit interview leads with a bombshell:  Bair believes that Bear Stearns should not have been bailed out.

And so there we were, talking about Bear Stearns, the investment bank whose near failure marked the beginning of the crisis. Even knowing that her views of the financial crisis were at odds with many of the others who were involved, I was taken aback: I had never heard anyone involved in the crisis criticize the government’s decision to help Bear Stearns avoid certain bankruptcy....

“Do you really think they should have let Bear fail?” I asked.

When she put her drink down, her hesitation was gone. “Let’s face it,” she said. “Bear Stearns was a second-tier investment bank, with — what? — around $400 billion in assets? I’m a traditionalist. Banks and bank-holding companies are in the safety net. That’s why they have deposit insurance. Investment banks take higher risks, and they are supposed to be outside the safety net. If they make enough mistakes, they are supposed to fail. So, yes, I was amazed when they saved it. I couldn’t believe it. When they told me about it, I said: ‘Guess what: Investment banks fail.’ ”

Bair recognized early that the gathering clouds of subprime lending were going to
create a monster problem...

Alone among the regulators, though, the F.D.I.C. began to home in on subprime lending. By 2006, the subprime industry was running amok, making loans — many of them fraudulent, with hidden fees and abusive terms — to just about anyone with a pulse. Most subprime loans had adjustable interest rates, which started low but then jumped significantly after a few years, making the monthly payments unaffordable for many homeowners. The lenders didn’t care because they sold the loans to Wall Street, which bundled them into mortgage-backed bonds and resold them to investors.

Curbing subprime-lending abuses should have been the job of the Federal Reserve, which has a consumer division. But the Fed chairman, Alan Greenspan, with his profound distaste for regulation, could not have been less interested. The other bank regulators, the Office of the Comptroller of the Currency, which oversees national banks, and the Office of Thrift Supervision, which regulates the savings-and-loan industry, should have cared, too. But their responses to the growing problem were at best tepid and at worst hostile. (The O.C.C. actually used its federal powers to block efforts by states to curb subprime abuses.) By the time Bair got to Washington, the O.C.C. had spent a year devising “voluntary subprime guidance” for the banks it regulated, but it had not yet gotten around to issuing that guidance.

The F.D.I.C. jumped into the breach. Bair knew the issue well, because during her time at Treasury, when the industry was much smaller, she tried, unsuccessfully, to get the subprime lenders to agree to halt their worst practices. Now she was hearing that things had become much worse. Bair instructed the F.D.I.C. to buy an expensive database that listed all the subprime loans in the mortgage-backed bonds that Wall Street was selling to investors. She was shocked by what she saw. “All the practices that we looked at back in 2001 and 2002, which we thought were predatory — things like steep payment resets and abusive prepayment penalties — had gone mainstream,” she said.

By the spring of 2007, she was holding meetings with industry executives, pushing them to raise their lending standards and to restructure — that is, modify — abusive mortgages so homeowners wouldn’t lose their homes when the housing bubble burst and large numbers of loans were bound to default. “There is nothing unusual about this,” she told me. “Restructuring is one of the tools the banking industry has at its disposal.”

I realize I'm dancing around the edges of fair-use here but it is a long article and the next portion I've highlighted sharply focuses the crux of the problem that the Obama Administration has failed so incredibly on.  President Obama in fact mentioned his disappointment during his Twitter session last week in the inability to get ahead of the housing and foreclosure problem...perhaps if their focus had been where Ms. Bair's had been, we'd be out of the weeds.  Most economists agree that there can be no jobs recovery until the housing crisis is dealt with and the situation for millions of American homeowners is improved. Period.  The re-election of our President is also at stake here.

What has been discouraging is that the Obama administration hasn’t done much better on the loan-modification front than the Bush administration did. Early on, the president told his staff to talk to the F.D.I.C. about how to set up a loan-modification plan. The F.D.I.C. had a wealth of experience, in part because it operated IndyMac for nine months until a buyer was found. It used that time to work on mortgage modifications with IndyMac borrowers and came up with a template for a program it felt could work nationwide. “They did talk to us,” Bair said of Obama’s staff, “but I always had the sense they were talking to us because the president wanted them to.”

Getting the banks to make large-scale mortgage modifications is no different today than it was in 2007 — next to impossible. The servicers still lack the economic incentives to modify mortgages; it’s easier in most cases for them to foreclose, which also generates fees, while modifications don’t. As Bair herself discovered during the IndyMac experience, changing that attitude requires dogged effort. “I ended up having calls with our servicers every Friday, to get a status report on what they’d done that week on loan modifications, just to keep the pressure on,” Bair said.

Without question, it is difficult to get mortgage modifications right. But many Democrats originally voted for TARP because it contained a provision mandating that $50 billion of the $700 billion in bailout money go to mortgage modification. The Paulson Treasury ignored that part of the law — and the Geithner Treasury has barely touched that $50 billion.

Still, a Democratic administration had to do something. Bair offered up the F.D.I.C.’s ideas, which involved, among other things, some government insurance protection for redefaults that took place after three months. She was sure her plan had better economic incentives for servicers than anything else under consideration. But the Obama administration went with a plan that didn’t fundamentally change the incentives, and that was not much different from what the Treasury under Bush did after the financial crisis.

When Bair was shown the plan, literally hours before it was announced by the president, she told them, “That’s fine; I’m not going to speak out against this, but don’t expect me to marry up to it either, because I don’t think it will work.” She told me: “They wanted my name and reputation on it.”

This is truly a must-read, including the crediting of Ms. Bair's efforts to forestall adoption of Basel II which may prove to be the main reason American banks have not suffered as badly as their European based counterparts who were able to operate with lower reserves to cover the risky behaviors that have brought down Ireland, Iceland, Portugal and more.

Funny thing is, Sheila Bair is a Republican.  Go figure.

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