Bair Says Dodd-Frank Could Prevent Replay of Financial Crisis

U.S. regulators can prevent a repeat of the financial crisis that toppled Lehman Brothers Holdings Inc. if they fully apply new authority granted by lawmakers, Federal Deposit Insurance Corp. Chairman Sheila Bair said.

The Dodd-Frank law, which empowers regulators to guard against systemic risk and dismantle failing firms, could have prevented the tumult that followed Lehman’s September 2008 bankruptcy, Bair said today in remarks prepared for a Financial Crisis Inquiry Commission hearing in Washington.

“The new resolution powers, the enhanced regulatory and supervisory cooperation mandated in the law, and the resolution planning authority provide an infrastructure to end ‘Too Big to Fail,’” Bair said. “Applying high standards for transparency and simplification of overly complex financial firms must be pursued aggressively to make this a reality.”

Bair, 56, and Federal Reserve Chairman Ben S. Bernanke are testifying in the second day of FCIC hearings on why the government let New York-based Lehman fail during the credit crisis while assisting takeovers of firms including Wachovia Corp. and Bear Stearns Cos. Richard Fuld, Lehman’s former chief executive, said yesterday that regulators used “flawed information” in denying aid.

The FDIC’s successful unwinding of Seattle-based Washington Mutual Inc., the largest bank failure in U.S. history, shows how the agency’s new power to resolve all systemically risky financial institutions can be applied with minimal impact on markets, Bair said.

‘Orderly Fashion’

“Market concerns about a meltdown of the financial sector should be diminished because, under the Dodd-Frank Act, the FDIC should have advance access to the information necessary to have a plan in place to resolve large, complex financial companies in an orderly fashion,” she said.

The new financial rules make it so that “regulators simply have no authority to do bailouts anymore,” Bair told commissioners during the question-and-answer session. “We think that’s a good thing,” she said.

The FCIC, created by Congress to study the causes of the worst economic crisis since the Great Depression, has held a series of hearings examining the roles played by subprime lending and securitization, credit ratings and derivatives.

The bipartisan panel, led by former California Treasurer Phil Angelides, is scheduled to report its findings to Congress and President Barack Obama by December.

Wachovia

Bair also addressed the sale of Wachovia, the Charlotte, North Carolina-based lender acquired by Wells Fargo & Co. after the government brokered a deal for the company to be purchased by Citigroup Inc.

The compressed timetable to bring in bids from banks willing to purchase Wachovia at the height of the financial crisis “sharply limited the FDIC’s options,” Bair said.

On the morning of September 29, 2008, the FDIC’s board voted to recommend that Wachovia be labeled a “systemic risk,” a step that would permit U.S. assistance to facilitate a sale.

In a transcript of the board meeting released by the FCIC, Bair voiced concern with the determination, which would make Wachovia eligible for open-bank assistance. Bair today attributed that reluctance to “philosophical differences” with the other government officials involved, including -- Angelides noted -- Treasury Secretary Timothy F. Geithner, who was president of the Federal Reserve Bank of New York at the time.

“The other parties had spoken on this and felt strongly” the decision would provide “the greatest amount of stability,” Bair said. In the transcript, Bair noted that the Fed and the Treasury Department had been pushing hard for the determination.

The systemic risk determination “was a discussion I wanted to have more of, but we didn’t have time,” Bair said.

To contact the reporter on this story: Phil Mattingly in Washington at pmattingly@bloomberg.net.

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FDIC Chairman Sheila Bair

Andrew Harrer/Bloomberg

Sheila Bair, chairman of the Federal Deposit Insurance Corp. (FDIC), speaks during a hearing of the Financial Crisis Inquiry Commission (FCIC) in Washington, D.C.

Sheila Bair, chairman of the Federal Deposit Insurance Corp. (FDIC), speaks during a hearing of the Financial Crisis Inquiry Commission (FCIC) in Washington, D.C. Photographer: Andrew Harrer/Bloomberg