Not all banks are the same. A handful of banks — such as the one that invited me to speak in Austria this autumn– were not happy to see the multibillion-dollar bailouts, the hue and cry of the public and the resumption of the indefensible bonuses on Wall Street that have, again, given banks a bad name.
I had never been to Salzburg before, so I was heartened to see another American there who had not been either: Sheila Bair, the outgoing head of the Federal Deposit Insurance Corporation, the federal agency that insures bank deposits and unwinds the banks that fail. Bair has been very busy these past few years.
Bair was the only other female speaker in a sea of bank governors, finance ministers and consultants from a wide range of European nations. What united the group, however, was a sense of urgency in examining the origins of the global debt crisis and its possible solutions. A prominent boutique bank in central and eastern Europe, Erste Group, held a series of panel discussions at a private castle in the Alps on Lake Fuschlsee with provocative titles such as “Who needs banks?” (The answer, according to the moderator, was that we would like more “normal banks, banks that take our deposits and don’t try to gamble with them.”)
Ms. Bair offered her own pearls of wisdom in a keynote speech sizing up the banking system and the current state of the world’s financial affairs from the perspective of a Washington insider:
– On the highly popular banking credo of profits will be privatized; losses will be socialized: “There is still an issue with Wall Street’s perception of too big to fail,” Bair says. “The problem is, too big to fail is not over until Wall Street thinks it’s over. I have argued that the ratings agencies should not be rating banks more highly than they deserve, based on the expectation they will be bailed out. It is unfair for the taxpayers to have to put their money at risk again.”
– On bank bonuses: “We have got to do something about these huge bonuses…We are still seeing huge political movements based on the anger generated from this. We do need some tough love to address this.”
– On the fight over the U.S. debt ceiling (our nation, by the way, now owes over $54.5 trillion): “I am not going to defend our politicians…it was appalling, unnecessary and self-imposed,” Bair says, adding: “I am not going to defend it and I feel somewhat helpless about it. It’s a very sad situation.”
– On U.S. politicians primarily being driven by “short-term interests” and “the idea of driving decisions based on keeping your job” (her words): “It’s not like you get into public service for the money, so if you’re not doing the public good, it’s like, why are you doing this?'” Bair, who has worked for George Bush senior and Bob Dole — both military men — offered her suggestion for a better type of leader: those who have gone to war. “If you are willing to go to war for your country, then you’re not just willing to lose your job, you’re willing to sacrifice everything.”
– The prognosis for global growth and stability…very poor. “The U.S. economy is moving at stall speed,” she says. “People just don’t wish to come to grips with reality,” which makes it difficult to tackle the outstanding problems. The small-business sector, in particular — the main source of U.S. job growth — is “really hurting,” she adds, because it is unable to secure affordable funding from banks.
– On the “interconnectedness” of global financial institutions: “We need to be asking the tough questions of banks: what is happening inside your bank? What is your board doing? Who are you connected with and who is connected to you? If we bail out an institution, we need to know who we’re helping and, if we don’t, who are we hurting? I often couldn’t get any good answers to these questions.”
– More on this: “With Citigroup, we had no idea what was going on,” Bair says. “We couldn’t even identify what was inside the bank and outside the bank, which legal entities were housing various businesses. We did not know who they were tied to legally, which is astonishing to me…And we are now seeing lots of pushback to financial reform in the U.S. and we need to be more aggressive about addressing this.”
– Euro bonds as a silver bullet: Bair approves of the concept, noting that while many European nations share a common currency, they have broadly different debt profiles. Bundling them together into one shared debt load could help stabilize countries like Greece, although it would chafe healthier countries like Germany and France. On the bright side, the entry of a euro bond would force the U.S. to keep its own debt competitive, she says. “We joke in Washington that the U.S. Treasury bond is the best-looking horse in the glue factory.”