Feeling Bairish? Why Sheila Bair Could Become Treasury's First Female Chief

There's growing support from a variety of sources for President-elect Barack Obama to appoint the Federal Deposit Insurance Corporation chairwoman Sheila Bair to succeed Henry Paulson as Secretary of the Treasury. Bair, a 54-year old Republican with a reputation for pragmatic solutions, would be the first female head of the Treasury in history.

Bair was appointed in June 2006 by President Bush to run a five-year term at the FDIC. Since that time, her common-sense solutions, on-the-ground learning, and prescient criticism of the Treasury's ad hoc responses have earned her a stellar reputation across the political spectrum.

In the Wall Street Journal's list of 50 Women to Watch in 2008, Bair tops the chart. According to Forbes Magazine, she stands just behind German chancellor Angela Merkel as the most powerful woman in the world. And Camden Fine, president and chief executive of the Independent Community Bankers of America, said Bair "may go down in history as one of the top two FDIC chairmen ever."

Indeed, as the L.A. Times pointed out on Tuesday, she is one of the few government officials "whose reputation has actually improved during the financial crisis."

While the incumbent Secretary has been widely criticized for initiating a series of impromptu responses to solve the ongoing crisis, Bair has been commended for her early recognition that the government needed to take aggressive action to prevent foreclosures.

Two months into the current crisis, in October 2007, Bair said that more than $300 billion worth of adjustable-rate mortgages would be reset in the coming years. "We have a huge problem on our hands," she said, recommending a common sense, public solution. "For owner-occupied housing where the loan is current, just convert the subprime hybrid A.R.M. into a fixed-rate mortgage. Keep it at the starter rate. Convert it into a fixed rate. Make it permanent. And get on with it."

Her ideas passed without much notice, but when IndyMac, a federal bank with $32 billion in assets, failed in July, Bair had the opportunity to implement them. After attending a foreclosure-prevention workshop in L.A. and witnessing the frightened faces of "working families trying to hold onto their homes," she created a program for modifying home loans to prevent foreclosures.

Under the plan, people who took out fixed-rate mortgages from IndyMac would be able to seek lower priced loans if they were in, or near, default. The FDIC authorized IndyMac to modify loans that were 60 days or more delinquent, allowing monthly payments to be reduced to a level no greater than 38% of monthly household income.

The IndyMac program - now being considered as a template for larger-scale reform that would cost an estimated $24.4 billion - involves government intervention, yet it's a moderate solution that can't be characterized as a bailout. Under the program, the borrower's monthly payments would be reduced, but the principal debt would remain unchanged. Meanwhile, the lender would be partially protected by the government, which would accept responsibility for half of the losses in the case of a second default.

The plan, bold but not radical, has succeeded in earning wide praise from pundits as well as the Democratic majority in the House.

"The FDIC has contacted all of IndyMac's mortgage holders who are in financial straits, and is working out easier mortgage terms," wrote Robert Kuttner, co-founder and editor of The American Prospect, a monthly magazine of liberal ideas. "This is the right approach to repairing the entire subprime mess. So Bair has both the background and the commitment to do the recapitalizing and regulating of American banks correctly."

Speaking about Bair's plan to refinance mortgages earlier this week, House Majority leader Nancy Pelosi said, "Further delay in implementing these solutions is unacceptable."

Barney Frank (D-MA), chairman of the House Financial Services Committee, has called Bair "great," adding: "She's shown you can be concerned about consumers and not skimp on your job as a regulator."

Another Democrat, Maxine Waters (D-CA), even wrote a letter to President Bush urging that he create a mortgage-refinancing entity and appoint Bair as its head.

On the political right, Bair has had an uneasy relationship with some Republicans because of her criticism of the Treasury's financial rescue package; yet CNBC anchor Larry Kudlow, a firm capitalist, has honored Bair as "the most powerful financial person in the country." He commended on her leadership in "coordinating smooth takeovers of distressed banks," and said that if Paulson fails, Bair will be the "ultimate backstop."

As a moderate Republican, she is arguably the least partisan candidate on the shortlist to head the Treasury, and unlike frontrunners Larry Summers and (to a lesser extent) Timothy Geithner, Bair was not part of the deregulatory "Washington consensus" during the 1990s. In fact, she was a regulator. In 1991, Bair became the acting chair of the Commodity Futures Trading Commission, a position she held for four years. 

"This is another crucial credential, since most of the financially-engineered derivative products, such as bonds backed by subprime mortgages and credit default swaps should have been subject to CFTC regulation, and probably will be under reform legislation," says Kuttner.

Before becoming head of the FDIC, Bair was the Dean's Professor of Financial Regulatory Policy at the Isenberg School of Management. She's also held high positions at the Treasury and the New York Stock Exchange, and she worked for seven years in the 80s under Republican Senate Majority Leader Robert Dole.

The political rationale behind appointing her runs just as smoothly as the economic arguments.

As the first African American president, President-elect Obama will be less constrained by identity politics than his predecessors have been in selecting a cabinet that reflects America. But many will be pleased to see a female Treasury Secretary, especially as her rival candidate, Summers, is perceived to have made sexist comments when he was president of Harvard.

Ironically, that Bair is a Republican actually helps her politically. It will be hard for conservatives to argue that Obama is enacting socialist reforms when his czar of the Treasury is a free-market Republican whose self-described goal is to "get the government out of these emergency programs" as soon as things normalize.

The concern for many liberals, who are often critical of the millions of dollars Henry Paulson made at Goldman Sachs before assuming the helm at the Treasury, is that Obama will hire someone whose reputation stems from the era of excess of the past two decades. As an academic with two children, Bair simply doesn't fit the mold.

In fact, Bair has authored two books aiming to teach financial literacy to children. And if small-town values are still game, it can't hurt that Bair was born and raised in Kansas, the birthplace of Obama's late mother.

Finally, the choice would support Obama's "Team of Rivals" philosophy of selecting candidates purely on pragmatic - as opposed to ideological - grounds.

"That has to be the approach that one takes, whether it's vice-president or cabinet, whoever," Obama said back in May. "And by the way that does not exclude Republicans either. You know my attitude is that whoever is the best person for the job is the person I want."

Of course, it's not clear if Bair would accept the position if it is offered, but her comments on the subject are far from dismissive.

Asked about the possibility by Larry Kudlow on CNBC Wednesday evening, Bair said, "I do think the new administration should have wide latitude to pick who they want on their economic team. So I will accommodate whatever the new president's wishes are."

Not everyone is convinced though. At Intrade.com, Bair enjoys a mere 13% chance of taking the position, compared to 60% odds for Timothy Geithner, and 22% for Larry Summers.

By Patrick McGee and edited by Sarah Sussman
©CEP News Ltd. 2008