Sheila Bair's Irony of History

If you spend any time watching the small-enough-to-fail financial market, you're familiar with the media's swooning love affair with Federal Deposit Insurance Corporation Chairwoman Sheila Bair. Only Bair, we're told, has the courage to stand up to the too-big-to-fail mentality that has hobbled the government and calcified the credit economy.

The Bair version of thinking small, of course, isn't about keeping banks small by refusing to give them free money and extend every possible advantage in lending terms and monetary policy. Instead, it's about using procrustean regulation to make sure they can't outgrow Uncle Sam's bed.

In a fawning profile earlier this summer, The New Yorker's Ryan Lizza depicted Bair as a Quixotic fighter for justice in a hard political universe, citing her (unsuccessful) effort to impose more restrictions on Citigroup, her (unsuccessful) effort to get President Obama to toughen his position on regulation, her willingness "to take her fights public" (i.e., to reach out to pliable journalists), her status as the "only voice" in the administration to express "tremendous popular discontent," and her Teddy Rooseveltian outrage at (in Bair's own words) "the inequities of how the smaller institutions are dealt with versus the larger institutions."

Smaller is better—who could say no? Nobody, according to a recent The New York Times headline that informs us, "You Gotta Love Sheila Bair."

Maybe we gotta, but it's pretty hard ta, when you measure what's actually happening to the U.S. banking system on Bair's watch against what she claims to want. On Friday, Community First Bank of Prineville, Oregon became the 72nd bank failure of the year. This Friday will bring a few more liquidations. Corus Bank continues its Rasputin-paced death. The roster of other teetering banks is vast, and last month Bair discussed the possibility that another 500 banks could fail. Now comes this from Congress' TARP watchdog:

According to a report from the Congressional Oversight Panel, which is charged with overseeing the $700 billion Troubled Asset Relief Program, or TARP, the 18 largest financial institutions with over $600 million in assets would "be able to deal with" whole-loan portfolio losses projected in an analysis the group completed.

However, the report's analysis of troubled whole loans—based on a model developed by SNL Financial—suggests they pose a threat to smaller public banks, those with $600 million to $100 billion in assets.

What do all these dead and dying institutions have in common? They're not tall enough to ride the government's fun train. Bair's administration-straddling tenure is a period of punctuated equilibrium, in which the U.S. banking industry is rapidly evolving into a system with no small players and a class of mammoths that will be dependent on taxpayer largesse forever.

Bair's fans would say that none of this is her fault, that the FDIC doesn't have the resources to cope with large bank failures, and that fighting the good fight deserves praise. That may be good enough for government, which is paved with good intentions. But it goes against contemporary pop psychology: If your actions keep leading to result B, it doesn't matter that you claim to want result A; your actions prove you want result B. (And why shouldn't you? It's easier for a national regulator to deal with a few big institutions than with many little ones.) The New Yorker and The New York Times tell us Sheila Bair wants to stop the public/private giganticization of banking. But former New York Giants coach Bill Parcells tell us that you are what your record says you are.