06/12/2012 - If Spain’s weekend request for up to $125 billion in bailout funds was a reminder of anything, it was of the lingering threat of systemic risk to the global financial system.
Here in the U.S., the Dodd-Frank law was designed, in part, to eliminate systemic risk — that is, the idea that the failure of one institution could be big enough to bring down an entire economy. Implementing financial reform has taken longer than expected, though, and that has many watchdogs increasingly on edge.
Count Sheila Bair among the concerned. Last week, Bair, the former chairwoman of the Federal Deposit Insurance Corporation, announced she will be leading a new private sector group called the Systemic Risk Council whose mission will be to encourage reform.
The council’s members are a who’s who of regulators, lawmakers, and academics, including Paul Volcker, former chairman of the Federal Reserve; Brooksley Born, a former chairwoman of the Commodity Futures Trading Commission; and Paul O’Neill, who served as Treasury secretary under George W. Bush.
As the council prepares to issue its first call to action on June 18, Bair spoke to FRONTLINE about the challenges she sees facing reform.
Q: What does it say about the state of financial reform that you felt a need to launch the Systemic Risk Council?
A: I think it’s getting bogged down. I think it has become confusing to the general public. They’re losing confidence in the reform effort, which I think is unfortunate because if we don’t have public support for reform to counter some of the more special interest influences that are always brought to bear, we’re not going to get good reforms in place.
So I do think there is a need for an independent voice, a monitor if you will, a group of wise men and women who have established track records of public confidence and knowledge of financial regulatory matters to provide some clarity and commentary on what the priorities should be.
Q: When Dodd-Frank passed, it was one of the few pieces of recent legislation to win bipartisan support. What happened? Why have people grown so weary of reform?
A: Dodd-Frank is a very complicated law. … I also think, frankly, there are some who oppose various elements of reform who have played for time. I think they think, quite rightly, that the longer you drag this out, the more controversy and confusion you can generate, the more the public and the political support will lose its steam. You can just wear people down. You can wear the regulators down. You can wear the public down and eventually get the rule that you want.
That’s not to say that everything that industry says is wrong. Obviously you need to listen to industry, but your job is not to protect the industry. Your job is to protect the public. When industry lobbyists come in, it is their job to advocate for their own interest, so they will be advocating for whatever it is that’s going to make them the most money. And regulators just need to understand that, and members of Congress need to understand that when these positions are advocated.
Q: What do you hope to accomplish through the council?
We will make commentary at a high level … We’re not going to be trying to write the rules for the regulators. We’re not going to be second-guessing them. We are going to be saying these are [areas] where you need to be focused.
I think really the effort is to try to provide better focus and clarity about what the remaining risks are, the things that need to be finished sooner than later to protect the broader public. Because not much has changed frankly, I’m sorry to say, from 2008, and it needs to change, because the system we had prior to 2008 was not a stable one. It was one that brought us a lot of economic hardship for a lot of people and it needs to be fixed.
Read the full interview, Sheila Bair: From Regulator To Watchdog, on FRONTLINE's website.