Today’s Economic Problems Are a Hangover From the Financial Crisis: Sheila Bair (Part 2)
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If the economy is the key issue in this year's presidential race, why aren't President Obama and Mitt Romney talking more about the financial crisis? Not only did it unravel the economy, it caused the Great Recession, which still haunts us today.
Former FDIC Chairwoman Sheila Bair tells The Daily Ticker that she wrote her new book "Bull By the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself," partly because the presidential candidates are not talking about the financial crisis.
Related: Liquidate Fannie & Freddie: Sheila Bair's Rx for the Financial System (Part 1)
"Our economic problems are a hangover from the financial crisis," says Bair. "If we had forced banks to clean up their balance sheets in 2009 and broken up really sick ones like Citi (C), they would have done a better job of supporting the economic recovery."
The bank bailout left the sickest banks "nursing their balance sheets," Bair says, and trying to work off bad loans. But four years later banks are still not making new ones, which is what the economy needs.
She favors breaking up the big banks into separate subsidiaries which would "wall off" commercial bank operations from units that trade securities and derivatives, or those that sell insurance and maintain international operations. "That would make them easier to resolve in a crisis," says Bair.
Related: Sandy Weill Is Wrong About How to Fix the Banking System: Kotlikoff
Bair would like to see the return of Glass-Steagall — the 1933 law that separated commercial banking from securities trading — but admits that's not politically feasible. What is possible, says Bair, is separating commercial banking from noncommercial activities because regulators could do that themselves without changing the law.
She also supports Basel III, a framework for the biggest global banks that would require more and better quality capital reserves including a certain ratio of loans to equity, known as leverage ratio. Bair says 40% of the big global banks would have to raise more capital to meet the 3% leverage ratio. Last week an independent audit of Spain's troubled banking system revealed that Spanish banks need an extra €59.3 billion ($76.3 billion) in reserves for protection against further economic shocks.
Fears of Spanish banking problems sent stock prices lower around the global last Friday. Bank stocks themselves have made a comeback this year. The KBW Banking index has gained 22% year-to-date—far more than the 13% gain in the S&P 500—but it's down 40% from mid-September 2008, when Lehman Brothers filed for bankruptcy.
Related: Stocks Will Rise in Q4 if History Is Any Guide
Bair says the banking system today is healthier than it was during the financial crisis but "significant risks" remain, including interest rate risk.
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