Isaac on a Needless Panic
William Isaac, who led the Federal Deposit Insurance Corp. from 1978 to 1985, thinks the panic that gripped financial markets in 2008 and the ensuing recession did not have to happen and that the Troubled Asset Relief Program, which was sold to Congress and the public as essential to calm the markets, actually did more harm than good.
When Fed Chairman Bernanke and former Treasury Secretary Paulson were flogging Tarp in the fall of 2008, Isaac wrote an op-ed article for the Washington Post opposing the bailout and recommending a four-step alternative: impose temporary short-selling curbs, suspend mark-to-market accounting rules and use the FDIC's emergency power to protect all depositors and other bank creditors and to restore bank capital.
By Isaac's account, the article triggered a series of phone calls and meetings with (mostly rank-and-file) congressmen from both sides of the aisle, culminating in the House of Representatives' initial rejection of the bill on Sept. 29.
Nevertheless, a sweetened version of the bill subsequently passed, with House Financial Services Committee Chairman Barney Frank reportedly telling its detractors that, though Isaac "did a good job running the FDIC in the 1980s," this crisis was "much more complex" and Isaac's experience was "outdated."
"Senseless Panic: How Washington Failed America" is Isaac's rebuttal. In it, he argues that the economy and the banking industry were actually in much worse shape heading into the S&L crisis — with the prime rate having recently been at 21.5%, unemployment near 11%, the real estate, energy and agriculture sectors depressed, the thrift industry insolvent and money-center banks loaded with Third World debt — than they were just before the 2008 meltdown.
How bad was it? "We were so concerned about the condition of our major banks during the 1980s that we developed a contingency plan to nationalize all of them," he said in the book.
The book is also a behind-the-scenes account of the way the FDIC handled some of those failures, like Penn Square and Continental Illinois, and an analysis of how policy fixes adopted in the 1990s contributed to the 2008 crisis.
Having failed to dissuade Congress from passing the Tarp legislation, Isaac hoped his book would influence the debate on how to overhaul financial regulation. "Senseless Panic" is probably hitting bookstores too late to make a difference, now that the Senate has approved legislation that falls far short of his goals.
"One reason we were able to keep things under control in the '80s, and avoid creating panic, was that the Fed and the FDIC were independent agencies," he said in an interview. "They had the ability to step in and take some action to keep things calm without political interference."
"The FDIC lost its crisis resolution power around 1991; it's got to go to the Treasury and say 'mother, may I.' That really hurt us this time." Moreover, "with this legislation, the Fed is largely going to be stripped of its ability to lend to contain a crisis. It almost guarantees some future secretary of the Treasury is going to be running up to the Hill to declare financial Armageddon" again.
As the legislation heads to a conference committee, Isaac said his priorities would be "first, to make the systemic-risk council an independent agency; second, to make sure that the FDIC and Fed have authority to declare a systemic risk and take action needed to contain threats to the system; third to restructure the agencies along the lines [Senate Banking Committee Chairman Christopher] Dodd proposed in November and, fourth, to reform the SEC and put the FASB under adult supervision."
Then he reconsidered. "Put that [SEC and FASB reform] in third position. Put them both under the oversight of an independent systemic-risk council. If they did those first three things, I'd support the bill, almost no matter what else was in it." He added that he strongly supports the Volcker rule and hopes it isn't gutted.