‘We’re going to see more heartache’: Ex-regulator Sheila Bair is still trying to prevent you — and now your kids, too — from losing money

Welcome to?Human Capital , an open exploration of the ideas and people moving financial services forward. In each edition, we feature a leader or rising star who’s changing the game in his or her own way. “Finance is an apprentice business,” one often hears in this sector. Here are some of the teachers. Click Subscribe above to be notified of future editions.

Sheila Bair has a penchant for prescience.

From her vantage point atop the Federal Deposit Insurance Corporation, or FDIC, the former top cop on Wall Street “called the financial crisis ” several years ahead of Lehman’s collapse. Today, a decade removed from chairing the regulatory agency, Bair continues to scan the road ahead. We spoke in the first quarter, before volatility struck financial markets with nauseating ferocity, yet she knew pain was on the horizon — particularly for novice investors and cryptocurrency holders.

After years protecting people from bankers and bankers from themselves, Bair has lately channeled her energy into a portfolio of efforts — from prolifically penning op-eds to advising boards and businesses to authoring a series of children’s books replete with cautionary tales of money traps and moral dilemmas. Over the course of an hour, we discussed where she is sounding the alarm today, the current regulatory landscape, her rise to the top job at the FDIC, and more.

Bair’s track record precedes her. Personally, I’m now reading every op-ed she writes as soon as I see it. On LinkedIn, you can follow her activity here .

Below are excerpts from our conversation.

We have to start with the children’s books. How did you go from top regulator to children’s book author?

As a regulator, I’ve always had a consumer focus. When I chaired the FDIC, my job was to keep people’s money safe. Most people — working families — have most of their money in a bank and certainly cannot afford to lose it. So, we were really laser-focused on protecting those deposits during the 2008 financial crisis, and did so successfully.

But there are so many ways people can lose their money. And so much of the financial education that goes on — we just don’t do a very good job of it. A lot of the content out there is, for example, on how to open a bank account, how to apply for a credit card, how to trade stocks. There’s not much in the way of cautionary tales about how you can lose money.

I think a big impediment to wealth accumulation is that people just don’t understand how to manage it. They don’t understand that when you get a credit card and don’t pay it off every month, you’re being charged 20% interest. Or that overdraft protection is costing $35 for a $5 cup of coffee. Or that products like buy-now-pay-later may be fine if you use them right, but they’re really designed to get you to buy on impulse and borrow on impulse without thinking about whether you can afford it or not.

So, I try to write stories that help children at a very early age just learn how to not lose money. That is my passion. I don’t think there is anything worse than a family having financial hardship, and the stress and the worry that come with it. “How are we going to pay for the gas and the food and the house?” It’s getting worse now with inflation.

The little piece of it that I feel I can contribute is around financial education. The extent that I can help, especially working families, not unnecessarily lose their money on products that are meant to enrich lenders and impoverish them — that’s what I want to do.

And that education should start at an early age. The thing I like about the picture books is that parents read them with their kids, so the adults learn too. By the way, Devin, you will find when your daughter gets older that children will read certain books over and over and over again. So, the message sinks in.

Which trends in the industry concern you most right now?

I’m very concerned about the heavy marketing to young people — teenagers, college students, young adults — around speculative stock trading, derivatives, leverage, now crypto. Did you see those ads on the Super Bowl? Those are all targeted at younger people.

We put stars in their eyes and say they’re going to make a lot of money — that they can take a little bit of money, add leverage, buy Dogecoin, and make a million dollars.

It’s sending all the wrong signals about gambling and speculation to achieve quick riches.

We know most of those young people are going to step into something and lose money, not make money. Or worse, like that young man who committed suicide after doing a leveraged options deal he didn’t understand.

I’m very worried about the danger of getting young people into this without the basic financial knowledge and skills to understand what it is they’re doing. It’s going to end badly.

With the Fed raising interest rates, all of these markets are going to correct — we’re seeing it already. Leverage works great on the way up and it kills you on the way down, and a lot of these are highly leveraged bets through derivates speculation. I think we’re going to see more heartache as a result of it.

At the same time, much of the fintech ecosystem has delivered on its promise to ease and widen access to financial services. You formally advise a few fintech companies. How can fintech players and the industry at large grow responsibly?

It’s the gamification of financial services going on that I don’t like. I’m an adviser to Wealthfront , which I call the anti-Robinhood . It’s a robo-advisor, it’s about steady wealth accumulation, it’s about a diversified portfolio. No platform is perfect, but I would use something like that before I’d use anything else.

Even with crypto, I’m on the board of Paxos . I think there are good financial innovations that can take a lot of risk out of the system, like going to real-time clearing and settlement. There are so many efficiencies we could achieve with an appropriately regulated stablecoin or central bank digital currency (CBDC) to facilitate payments, especially internationally, which would save people a lot of money.

And then I love cash-flow underwriting. At Fannie Mae , where I chaired the board until recently, we were doing rental data to help underwrite loans and we were looking at cash-flow underwriting too. A lot of large financial institutions are — getting away from imperfect surrogates, like credit scores, which I do believe have racial and other biases embedded in them. Underwriting can and should move toward actual transparency around somebody’s cash flows and how they’ve managed their money, so that you don’t need to rely on how many credit cards they have or other crazy things that FICO uses.

I mean, they give you a high credit score if you’ve borrowed a lot and paid it back. Meanwhile somebody who has paid their rent on time, paid their phone bill on time, paid all these bills on time and never carried a credit-card balance, or they may not even have a credit card, they’re going to have, like, no credit file. How upside-down is that? So, I think cash-flow underwriting is another really exciting area where we can expand access to people, especially with homeownership, and make our economy more inclusive.

What’s an area where regulation, in your mind, needs to catch up?

I feel like the regulators are behind on crypto.

Let’s start with stablecoin, which a lot of work has been done on. I think there are current authorities you could use, between the SEC and CFTC, to basically require any stablecoin issuer to back their stablecoin dollar-to-dollar with true cash equivalents — issuer deposits or short-term Treasuries.

Some of the stablecoins out there aren’t stable. They’re like the prime money funds or worse — they’re invested in foreign debt, commercial paper, things that are volatile and can be illiquid given market conditions. So, you want true U.S. dollar cash equivalents for a U.S. dollar stablecoin, or similarly for any other stablecoin based on a different fiat currency. We don’t have that now.

There should also be requirements around periodic public audits and attestations. These are things that are pretty straightforward and easy to do. The regulators need to get a little creative and find some authority to create that, or even create a safe haven for those who do it that would help distinguish the safe ones from the bad actors out there.

There is just a lot of fraud and manipulation in crypto. It’s kind of obvious, isn’t it? Is it just frustrating to me?

I won’t name names, but just look at all of the celebrities out there who hold crypto and then tweet things to boost the price. I mean, what’s that about? Manipulation is manipulation, whether it’s a regulated security or a crypto asset.

The regulators seem to be a bit frozen. They seem to be looking for this big solution, or this big crypto regulatory universe to create. I say let’s tackle the specific, discrete issues we’re seeing right now: fraud, manipulation, and in the context of stablecoins, representing a coin to be stable that’s not stable.

Going after that kind of conduct would help the good players. There are plenty of good players in crypto, and we should want them to succeed.

How did you decide that this was the work you wanted to do?

I guess I’ve always been kind of a do-gooder at heart, for better or worse. I grew up in southeast Kansas — William Allen White country, prairie populism, Lincoln Republicans, Midwestern values, all that good stuff. I worked for Bob Dole for many years; he was my mentor. He always said the role of government is not to help the rich and powerful, but to help people who can’t help themselves.

So, in all my roles I’ve tried to keep an eye on public impact. Even in regulation and oversight that apply to institutional markets, there is going to be some ultimate impact on the broader public. I think viewing all issues through that prism is critical.

The first question any regulator should ask is: How is this going to impact the public? Is it going to help? Is it going to hurt? Is it going to put them at risk? Is it going to destabilize services that they rely on? I think regulators are uniquely equipped to have a positive benefit, to help people, to protect them.

People need the financial system — I’m not anti-bank! We need a functioning, stable financial system that will serve the real economy.

By the way, I say that like it’s easy, but it’s hard. I sometimes criticism them, but I have sympathy for the regulators. There are a lot of pressures on them.

What career lessons do you pass on to others?

You have got to be open-minded.

I think people who try to pre-program their careers just end up being disappointed.

Then, once you have a job, focus on it and do it well. It may not be the greatest job, or you may want another job, but I think people who are always looking to the next step as opposed to focusing on what they’re doing in the moment do not do well. Whatever your job is, if you truly do it well, people are going to notice and the offers and opportunities will follow. If instead you’re always distracted or you get a reputation of just being a climber without really wanting to contribute to the company or team, that’s the worst thing you could do, and you will frustrate yourself too.

So, whatever job you have, do it well and keep your mind open. The greatest job you ever have might be one you never expected.

Sounds like some of your own favorite jobs might have been unexpected. Was that the case?

I had been working for Bob Dole for many years, mainly on judiciary issues. I was not focused on financial services at all. But I was his research director during his presidential campaign, and we had the market crash in 1987. I had to become an expert on the stock market, so I reached out to the New York Stock Exchange, which was a public utility back then, and got to know some of the people there.

I quickly became fascinated by what had happened and the interplay of derivatives and stock markets. Then they offered me a job after the campaign was over — taking a risk on me because they thought I was a quick study. At the time, after the campaign, I just thought, “OK, sure.” I learned a lot about markets then. So, that was a very unexpected job.

The FDIC job was also not something I had thought about pursuing. I got the call from the Bush administration and so I started thinking about it. Eventually I thought it was a perfect fit — protecting depositors.

At the end of the day, that is where Main Street’s money is — in banks — and it needs to be protected.

I was very proud of the role we played, especially the work we did leading up to and in response to the financial crisis. Again, a very unexpected job.

Join the conversation with your own take on these topics in the comments below.