Sheila Bair told me she loves Seattle. She was here Monday to give a speech before the 67th CFA Institute Annual Conference at the Washington State Convention Center.

But it was tough love from her during the panic of 2008. As chairwoman of the Federal Deposit Insurance Corp., she was the driving force behind the closure of Washington Mutual on Sept. 25, 2008, and the sale of its healthy portions to JPMorgan Chase for $1.9 billion.

It was the largest banking failure in American history; shareholders were wiped out; and thousands of Seattle jobs were lost.

But no insured depositors lost their money, and the FDIC fund wasn’t hurt.

Bair told me her concern about WaMu grew “early on, in 2007. They had large exposure to the West Coast housing market and subprime.” She said the thrift “did a slow burn through the summer (of 2008),” when trouble at IndyMac in July caused depositor worry at other institutions. Large customers began leaving WaMu. The crisis reached a new level with the failure of Lehman Brothers on Sept. 15, 2008.

For years, WaMu’s primary regulator, the Office of Thrift Supervision (OTS), had been a lap dog, following the dogma of deregulation and a “self-regulating” market as the thrift took on ever greater risk (my words, not hers).

“Closing banks is something you never want to have to do,” Bair said. “But the longer you wait to close a bank in trouble, the more the costs to the fund and potentially to the taxpayers. That’s what happened in the S&L crisis (of 1990-91).”

Earlier that September, CEO Kerry Killinger had been ousted and replaced by Alan Fishman. Outside investors led by TPG Capital had pumped $7 billion into the ailing thrift in April. But it was not enough as the housing market continued its collapse and the financial system headed toward the cliff it would reach that fall.

“We tried very hard to get other bidders. We didn’t want JPMorgan to be the only one. They didn’t emerge. The OTS had waited too long and the others (potential bidders) thought it was too risky.”

The situation was made worse when regulators halted short sales of the biggest banks. This led Wall Street’s short sellers to focus on WaMu, driving down the price of its shares and increasing the unease. A slow-motion bank run began.

TPG “was not willing to put more real capital in,” she said. “We asked them, but they wouldn’t do it. Not without government help. We didn’t have the statutory authority to do that. The Fed didn’t want to do it.”

The FDIC lacked statutory authority to, say, save the healthy part of WaMu and keep it as an independent institution. Thus, JPMorgan, a Too Big to Fail bank, got even bigger.

The major regulators didn’t see WaMu as “systemically important” enough to make a special exception, even though, according to David Wessel’s “In Fed We Trust,” then-New York Fed President Timothy Geithner vowed there would be “no more WaMus.” Two weeks after WaMu’s failure, the federal government pledged to stand behind all financial institutions, including their shareholders.

“Was it fair? Absolutely not,” Bair said of WaMu’s fate. However, “I never heard a peep from other regulators that WaMu was systemic.” Indeed, when WaMu was seized, it was “below the fold” news on the East Coast.

Now, Bair said, the Dodd-Frank legislation and other reforms, with their enhanced oversight and resolution authority even for the biggest banks, should ensure there will not be a repeat of the panic.

“The tools are there, and so is the will to use them. In my opinion, there will be no more bailouts.”

Bair is now a senior adviser for government performance at the Pew Charitable Trusts. What keeps her awake now?

“I worry about the instability created by monetary policy” as investors search for higher yields in an environment juiced by Federal Reserve easing.

“Nobody’s ever tried this before. There are distortions and imbalances. It has contributed to wealth inequality. The Fed can create supply (of credit and base money) but not demand.

“We need the president and Congress to get busy with policies to increase demand. We need fundamental tax reform and spending on infrastructure. Without this, we are squandering our strengths,” Bair said.

You can reach Jon Talton at jtalton@seattletimes.com.