This is a rush transcript from "Your World," September 25, 2012. This copy may not be in its final form and may be updated.
NEIL CAVUTO, HOST OF "YOUR WORLD": I remember this like it was yesterday.
Four years ago today, America's financial system was on the brink. Presidential candidates John McCain and Barack Obama get called into the Bush White House for a very important meeting, at issue, bailing out the banks.
But was it President Bush driving that bailout? Few people had as much face time with the main players and both presidents during that ongoing financial crisis then my next guest, Sheila Bair, the former head of the Federal Deposit Insurance Corporation, better known as the FDIC.
She holds nothing back in a very revealing book that frankly I thought was going to bore me to tears. I told Sheila that. "Bull by the Horns: What Main Street Must Do To Fix Wall Street." Love her dearly, but I thought I was going to fall asleep reading this. I didn't because it crackles with horrible stories about powerful people.
CAVUTO: I'm kidding. You don't do that at all.
But I did go back and remember that and covering that, and covering you at the time. And I didn't realize all the behind-the-scenes stuff and the desperate anything that sticks stuff. What I do remember is a lot money we were throwing at this.
SHEILA BAIR, FORMER CHAIR, FEDERAL DEPOSIT INSURANCE CORPORATION: Yes, a lot of money.
CAVUTO: And you were the person in the room, I remember this then, and you expand on in your book, who was just saying, guys, hello? Hello? Time.
BAIR: Yes. Yes.
CAVUTO: They didn't.
BAIR: There was a lot visceral reaction.
And we didn't -- even today, I don't think we did enough analysis to know what we did, why we did it, was it really helpful, were there other we could have done that would have been better.
CAVUTO: Why was there this rush? The whole world was melting down, right?
BAIR: I think part of it, I think -- and it built up.
I think -- you know, I go back to Bear Stearns, the bailout expectation that was created. And with that that happened early in 2008 there wasn't a crisis at that point. And -- but there was never, I thought, a clear public explanation of why the government needed to intervene to assist a transaction, a sell of Bears Sterns to J.P. Morgan Chase.
It was a smaller investment bank. I didn't know why it was systemic. But I think that that just set up expectations that crescendoed. And then the market got confused and when Lehman went into bankruptcy...
CAVUTO: In other words, that one, we let go. The argument, that was worth letting go.
BAIR: Well, it was. And so -- and in fairness, there was no playbook for this.
CAVUTO: But if we had rescued Lehman, Sheila, do you think that we would have experienced the problems we did?
BAIR: Well, actually, I would just go back earlier and say I think Lehman could have been sold off if the leadership of Lehman hadn't had an expectation that the government would come in and rescue it, as it had Bear Stearns, because I think Dick Fuld felt, well, Bear Stearns was smaller and less important than Lehman. How could they help Bear Stearns and not help me?
CAVUTO: And that changed people's views that the government is the backstop.
BAIR: It changed the expectations.
CAVUTO: Now, this is where Geithner came in.
CAVUTO: In the beginning, a New York Fed president, later on, the treasury secretary for Barack Obama. And I didn't realize there was a lot more fixation and worry at the time about Citigroup than there was, later, justifiably, over Bank of America and all it was taking on.
BAIR: Right. Right. Right.
CAVUTO: Explain that.
BAIR: Well, it was.
And we were not -- we learned in spoon-sized doses how bad -- we knew Citi wasn't in great shape. They'd had several quarters of losses, but I don't think we had full appreciation of just how sick it was until we got towards the end of 2008. They were -- their counter parties were running. They relied a lot on uninsured deposits that were not insured by anybody...
BAIR: ... foreign countries.
CAVUTO: So, they looked bad? Worse than Bank of America?
BAIR: Oh, definitely.
I mean, B of A got into trouble later on, and Bank of America was in trouble for -- well, if B of A had a problem, it was Merrill Lynch. It was not Countrywide. Later, Countrywide...
CAVUTO: And they merged those two.
CAVUTO: Then we end up bailing them all out?
BAIR: Well, yes. And...
CAVUTO: And you said what?
BAIR: Merrill Lynch was clearly insolvent. So, to the extent B of A was having problems, it was because they were buying Merrill Lynch.
Citi I think was insolvent. It's hard to know who was insolvent and who wasn't because let's face it; the accounting rules are not what they should be in terms of how institutions mark their assets.
CAVUTO: But everything was tumbling down, so the value of those assets was dropping by the minute.
BAIR: Look, I think that was exaggerated. I'm sorry. But I do.
BAIR: Yes, because both Goldman and Morgan Stanley -- the commercial banks had funding -- they had stable funding through insured deposits. They had higher capital ratios because the FDIC had fought a lonely battle...
CAVUTO: But you do not think we should have rescued them or all of them?
BAIR: Well, I think we had to do something. I'm questioning about what we did.
What we should have done was fix the mortgages. We never came up with an effective program to do that. And we should have forced all of them to clean up the balance sheets. We tried to launch a troubled asset relief -- that is what TARP was supposed to be about.
CAVUTO: That's right. And then it went into a myriad of other uses.
BAIR: It shifted.
CAVUTO: But I got the sense you were warning people -- and this wasn't just in your book, but I knew this at the time covering you -- but everything was a rush, rush, rush.
CAVUTO: And you were an annoyance to that. I know that Geithner and all, you know, will she shut up and just get out of the way?
CAVUTO: And you were the gal in the room. And, more or less, they tried to ignore you, keep you out of meetings. And you just raised holy hell.
BAIR: Yes. Yes.
Well, I did. And I am glad I did. People say, well, you were part of this. How can you complain now? And, yes, I decided early on I could throw up my hands and walk away and say I'm not going to play with you guys, or I could come to the table and try to make it better. And I think we did.
CAVUTO: You think it can happen again?
BAIR: I do.
And my concern is, is that all this talk now, oh, the bailouts made money. It's like, it's rationalizing it. Let's do it again. This is the most distasteful thing I have ever done in my public life. It never should have happened. It should never happen again.
People who are responsible for the financial system should be spending every waking moment making sure this never does have to happen again.
CAVUTO: But you think it could happen again.
BAIR: I'm worried.
CAVUTO: So let me ask you this. The argument with the new financial laws, Sheila, is that too-big-to-fail doesn't apply anymore, that if a Bank of America or a Citigroup were to hit the fan, and they're...
BAIR: Right. Right. Right. Right. Right. Right.
CAVUTO: No one’s going to be around to help them.
CAVUTO: I don't see the government letting that happen.
BAIR: Well, I do.
CAVUTO: Really? We would let them go?
BAIR: I think if there is a will, there is a way now with Dodd-Frank. And there needs to be a will.
And I think the FDIC has the will. I think FDIC -- this is part of the culture of the FDIC. People -- our process is basically a bankruptcy process. We've had it for a long time, ever since we have existed. For insured banks, it works. It does impose market discipline.
CAVUTO: I don't agree.
I think if we were -- and here's where I know things because I follow this on a teleprompter -- I think in all seriousness that if we have a big institution in trouble again, we're not going do risk letting it go because everyone fears there is hell to pay if you don't.
I think you are quite right to say, no, no, no, do not expect Uncle Same or the U.S. taxpayers are going to be your backup. But we time and again have done that and time and again we will. I don't think we should. But we will.
BAIR: I don't think we should either.
We didn't do it with WaMu. WaMu was dealt with...
CAVUTO: Washington Mutual, right.
BAIR: ... the way -- all these smaller banks. They were subject to the discipline of the market.
Again, Dodd-Frank has the tools. The question is whether the regulators use the tools. One thing Dodd-Frank requires which is really important, which we didn't have prior to the crisis, is to require all large financial institutions to submit living will plans, what they call living will plans, to both the FDIC and the Fed, which basically shows how they can be broken up if they get into trouble in a bankruptcy.
CAVUTO: But it's a moot point. If you are in the middle of a meltdown, the value of those assets is gone.
BAIR: I think that is a fallacy it's just that everyone was in trouble. If everybody is in trouble, no one is responsible.
There were outliers in the crisis. There were outliers like Citi that should have been restructured. The others perhaps need some liquidity support, some of them. But Dodd-Frank requires these institutions now to identify in advance what their credit exposures are.
So a Citi, a B of A, whoever, needs to identify to the regulators. If I go down, how many other institutions will take significant losses? What other institutions are out there if they go down will impose losses to me? They are supposed to be identifying those and reducing them now. I'm not sure that is happening. That's what should happen.
CAVUTO: But you are telling people who have faith in our financial system right now that it might be misplaced?
BAIR: Well, I'm saying that they need to make this an important political issue.
BAIR: And that is one of the reasons I wrote the book. They need to let members of both parties know that financial reform and stability is as important as unemployment and the economy, because they are intricately tied together. And if they just tune it out, they're afraid the book is going to be boring or whatever, they don't want to...
CAVUTO: It is not boring. I wish I had more time just to get into how much you clearly hate Tim Geithner, because you're very nasty to him.
BAIR: I don't know if I was nasty. I was candid.
CAVUTO: Candid is nasty.
BAIR: We have fundamental disagreements. There's no doubt about that. Yes.
CAVUTO: Even now, fundamental disagreements. I hate him. I hate him. I hate him. I hate him. I hate him.
BAIR: There's one thing we agree on.
CAVUTO: Sheila Bair, it is really. It's a very -- seriously -- I joke with her, but it's really a great book. And it was riveting history to watch up close. She recounts it here, very timely lessons in this book, "Bull by the Horns."
You've got to read it, because you do not want to repeat what became the source of all that information.
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