Sheila Bair: Main Street’s Protector?
On April 8, Sheila Bair, former chairman of the FDIC from 2006 to 2011, spoke at the inaugural Fred Dunbar Memorial Lecture on Law and Economics on the topic of “Ending Too Big to Fail” and her recent book “Bull by the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself.” The talk was informative and Bair spoke with clarity on the Dodd-Frank legislation and recent regulatory efforts to prevent future bailouts and end the Too-Big-to-Fail mentality. Indeed, she spoke forcefully about making sure that Wall Street CEOs were held accountable under Dodd-Frank; however, her own track record as chairman of the FDIC paints a different picture.
From 2007 to 2011, the FDIC, under Bair’s direction, instituted a policy against disclosing settlements that the FDIC reached with big banks and their executives over negligent, reckless, and fraudulent conduct that forced hundreds of institutions into receivership. From the LA Times article that broke the story:
Three years ago, the Federal Deposit Insurance Corp. collected $54 million from Deutsche Bank in a settlement over unsound loans that contributed to a spectacular California bank failure.
The deal might have made big headlines, given that the bad loans contributed to the largest payout in FDIC history, $13 billion. But the government cut a deal with the bank’s lawyers to keep it quiet: a ‘no press release’ clause that required the FDIC never to mention the deal ‘except in response to a specific inquiry.’
The FDIC has handled scores of settlements the same way since the mortgage meltdown, a major policy shift from previous crises.
The FDIC also did not require institutions and allegedly culpable individuals from admitting to negligent, reckless, or fraudulent conduct.
The practice of publicizing settlements promotes transparency and creates a deterrent effect in the banking industry against committing similar conduct in the future. More importantly, the lack of admissions in these settlements and the lack of publication inhibits shareholders and others from filing and successfully litigating derivative lawsuits seeking to hold executives and others accountable. Far from fighting to save Main Street from Wall Street, Bair’s policy effectively shielded Wall Street from meaningful accountability.
Bair’s policy also stands in stark contrast to others in Government such as U.S. Attorney Preet Bharara of the Southern District of New York who has instituted a requirement in his Office that settling defendants admit to liability and that all settlements be filed publicly with the court. Bharara will speak at this year’s graduation.
What may be most troubling of all is that the FDIC policy also prevented the sharing of information with other agencies, such as the Department of Justice, tasked with prosecuting fraud as an outgrowth of the mortgage crisis. Indeed, the FDIC settlement with the Deutsche Bank mortgage lender subsidiary MortgageIT in 2009 was not made public until last month, long after the U.S. Attorney’s Office of SDNY’s own litigation and subsequent settlement with the same Deustche Bank subsidiary in May of 2012.
Bair’s decision to stifle efforts at meaningful accountability before, during, and after the mortgage crisis calls into question her credentials as a meaningful public servant—”the little guy’s protector in chief.” Bair might do well to answer her critics questions on the subject and issue a mea culpa for failing to hold financial institutions and their cronies truly accountable. Fordham Law may have done well by addressing her failures before celebrating her story.
-David Farber, Contributor
*David Farber is a 1L at Fordham Law and worked for the US Attorney’s Office doing civil fraud cases as a paralegal from 2010-2012.