The Center for Public Integrity

Sheila Bair, one of the chief regulators overseeing Bank of America’s federal rescue, took out two mortgages worth more than $1 million from the banking giant last summer during ongoing negotiations about the bank’s bailout and its repayment.

In the weeks between the closings on her two mortgage loans, Bair met with Bank of America’s chief negotiator in the bailout talks.

To avoid conflicts of interest, the Federal Deposit Insurance Corp., which Bair heads, prohibits employees from participating in “any particular matter” involving a bank from which they are seeking a loan.

Bair did not seek or receive an exemption until last week, when her agency gave her a retroactive waiver from the rules after an inquiry by the Huffington Post Investigative Fund.

FDIC officials said there was no link between Bair’s duties and her mortgages. They also contend that even without the waiver Bair violated no ethics rules. Moreover, the FDIC said, Bair received no preferential treatment for either loan, paying interest rates at or above the national average. [Editor's Note: The FDIC also responded to this story in a Jan. 22 statement.]

However, the circumstances surrounding the mortgage on Bair’s house in Amherst, Mass., raise questions about whether she and her husband should have qualified for the terms they received.

Bair was teaching financial regulatory policy at the University of Massachusetts in Amherst when President Bush appointed her to head the FDIC in 2006. Her family rented a house in Washington until they borrowed $898,000 from Bank of America in July 2009 to buy a $1.1 million six-bedroom home in the Maryland suburbs. Seven weeks later, they borrowed $204,000 from Bank of America to refinance the Massachusetts house as a second home.

As federal hearings into the cause of the financial crisis got underway this week, attention has focused on one key outstanding question: Whether the giant insurer American International Group committed fraud in the run-up to its $182 billion bailout.

The records of AIG’s actions presumably are contained in company documents and e-mails. Some of those records have been obtained and published by news organizations and congressional investigators. But some lawmakers and former financial prosecutors argue that most details remain unknown and should be made public—an idea resisted so far by congressional Democrats and AIG’s regulators.

The little the public knows about AIG’s bailout pertains to the company’s use of $25 billion in government money to buy back toxic securities from Wall Street’s big banks.

Last week, Rep. Darrell Issa (R-Calif.), ranking member of the Committee on House Oversight and Government Reform, released e-mails showing that the Federal Reserve Bank of New York, AIG’s regulator, kept details of these payouts secret while now-Treasury Secretary Timothy Geithner was in charge of the New York Fed. The Financial Crisis Inquiry Commissionscrutinized the payouts—specifically to Goldman Sachs-- at a hearing Wednesday. Then Rep. Ed Towns (D-N.Y.), chairman of the oversight committee, subpoenaed the New York Fed this week for all documents related to the payouts, including Geithner’s e-mail and phone logs.

After deftly dodging federal regulation for years, the nation’s top credit rating companies now must get past the formidable Barney Frank.

Last week, as the U.S. House debated the Wall Street reform package crafted largely by Frank, the Massachusetts Democrat quietly slipped regulations into the bill that would force the most significant overhaul of the credit rating industry to date.

The top raters — Standard & Poor’s, Moody’s and Fitch — seemed ripe for regulation ever since they awarded inflated grades to investments that ultimately unraveled the economy.

If the provisions in the bill, passed by the House last Friday, make it through the Senate, investors who lost billions of dollars on those top-rated financial products would likely find it easier to sue the raters for fraud. Also, by no longer mandating that mutual funds buy only top-rated investments, the bill has the potential to squeeze the raters out of their special status in the financial system.

“This really sounds like progress,” said Lawrence J. White, an economics professor at the Stern School of Business at New York University and a specialist in the credit rating industry.

The credit raters have embraced some of Frank’s changes — an indication they’re not exactly frightened by the entire proposal. They are, however, engaged in a yearlong lobbying campaign, which has cost them about $2.7 million so far, a record for the rating industry, documents show.

The plan by Frank, chairman of the House Financial Services Committee, does not eliminate the conflicts of interest in the credit rating industry, an omission he said he regrets. And it does not contain another idea that has been gaining traction among critics of the raters – a ‘public option’ that would create an alternative government-run credit rating agency to compete with the private sector.

Even by the distorted standards of the national housing bubble, north central Florida was a hot market. Between 2004 and 2006 new houses and property markers spread across cow pastures and horse farms, their values soaring so fast that bankers and builders could hardly believe their good timing, or keep up with the workload.

California investment groups would swoop in, order 40 or 60 homes at a pop, then flip them for a quick profit. “It was the Sunbelt’s time. It was stupid,” said Ocala builder Michael J. Kaufman of those heady days. “But was I supposed to say no? We live in a capital gain country.”

Ocala National Bank, like many lenders at the time, had trouble saying no, too. With high demand in its community and a steady flow of easy financing from Wall Street, the small, locally owned bank embarked on a lending binge for real estate and construction. By 2006, its outstanding loans so outweighed its core capital that Ocala National became in effect one of the most risk-prone banks in America.

When the bank finally collapsed last year it cost the federal government’s deposit insurance fund $100 million. That is a tiny fraction of the fallout from big bank failures and bailouts. But the story of Ocala National carries lessons far beyond its size, illustrating how government regulators condoned the speculative behavior of hundreds of smaller banks that helped drive the economy toward a cliff.

As many as 3,000 of the nation’s 8,100 financial institutions are said to be in troubled health, and some analysts expect as many as 250 to fail in the next nine months.