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What the bank closures can tell us
William M. Isaac, chairman of the Secura Group and former chairman of the FDIC.
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TEXT OF INTERVIEW
Kai Ryssdal: If the recession actually is over -- and the economy actually is actually getting better -- then riddle me this: How come we had 140 banks go under last year? That's the total from the Federal Deposit Insurance Corporation. Pretty much every Friday afternoon last year FDIC inspectors shut down at least a couple of banks. Not, on the face of it, a promising economic sign. To get some idea of what's in store for the 8,000 banks in this country that don't fit the big Wall Street bank category, we've got William Isaac with us. He ran the FDIC back in the '70's and '80's. Good to have you with us.
Bill Isaac: Nice to be here.
Ryssdal: This number of 140 banks that the FDIC took over last year, is that enough to worry about or maybe not?
ISAAC: I think it's somewhere between those two. It's a lot higher than we've been experiencing over the past 10 or 15 years. But it's a lot lower than we experienced in the 1980s. I would say that the number is going to remain at this level, maybe a little higher for the next year or maybe year-and-a-half and then it is going to start to decline.
Ryssdal: Why are these banks still failing though? Is it bad real-estate loans, toxic assets, all those things that we read about with the big Wall Street banks?
ISAAC: It's all of those things. We have commercial real-estate losses, we have toxic assets, market-to-market accounting is causing failures among some of the banks. A lot of the banks bought stock, preferred stock, it's called trust preferred stock in other banks. That's been a problem for a number of banks. So those are all issues. And we're in a recession and bank customers in a recession sometimes suffer and that means the banks suffer.
Ryssdal: Is this going to mean that the credit crisis might last longer than we think it will? That people will have trouble getting access to credit if these banks are still in trouble?
ISAAC: Right now we're in a stage where it's very hard to get access to credit if you're looking for real-estate loans, particularly commercial real-estate loans. There's some funding coming to residential housing if you have good credit, but in the commercial real-estate area, it's hard to find it even if you have good credit. I think we're going to have to live with that for the better part of another year. It might start loosening up sometime next year, I hope.
Ryssdal: Well, what can the government do? I mean Ben Bernanke has flooded the market with liquidity, there's been the TARP, I mean what else can we do?
ISAAC: Well, those are a couple of things that we need to do. The bank examiners need to be told to be reasonable in working with banks, and allowing banks to be reasonable in working with their customers. The regulators have been trying to do that, they need to continue that and make sure they know that we mean it. We really do need for them to let banks work with their borrowers. That's certainly a big part of the problem.
Ryssdal: Do you agree with Fed Chairman Bernanke and the speech he gave this weekend about the cause of the crisis really being lax regulation?
ISAAC: Ineffective regulation I think is an important contributor to the crisis. I think the government bears a large responsibility for the crisis. Fannie Mae and Freddie Mac were out of control for about the past 20 years -- wild growth rates, decreasing their lending standards, under a great deal of pressure from the Congress to do that. The Congress wanted them to loan more, and to lower their standards, so more people could borrow more money, and it had to come home to roost and it has.
Ryssdal: What do you think about the regulations that are making their way through Congress now? Are we going to get substantive reform out of this crisis or not?
ISAAC: I think what I've seen so far in the House has been highly ineffective. I've very disappointed in what came out of the House, I don't believe it's meaningful reform. I don't believe it will do anything to prevent another crisis. In fact, it may speed the next crisis. I'm hoping that we can get this thing turned around in the Senate. That the Senate will really have the courage to do meaningful reform that the House has not done.
Ryssdal: Bill Isaac, former chairman of the FDIC. Currently, the chairman of the financial consulting firm LECG GLobal. Mr. Isaac, thanks so much for your time.
ISAAC: My pleasure. Glad to be with you.
Follow the money trail!!
I quote Mr. Isaac:
"Ineffective regulation I think is an important contributor to the crisis. ... Fannie Mae and Freddie Mac were out of control for about the past 20 years -- wild growth rates, decreasing their lending standards, under a great deal of pressure from the Congress to do that. The Congress wanted them to loan more, and to lower their standards, so more people could borrow more money, and it had to come home to roost and it has".
I don't believe Mr. Isaac for a second.
Lending money at lower borrowing standards and passing that RI$K to the taxpayer is just what the lending companies lobbied for. They got it.
Only the little people pay taxes.
American turns from creating items for sale, to creating financial schemes like derivitives, to sell. Small banks can loan to business to sell items, buy property for factories, etc, but the small banks have little power in financial schemes, and thus get their shirts handed to them when they try to play with the big boys.
General Electric and General Motors, came up from creating objects for sale, to go into finance. How are they doing now?
Government deregulation? You mean Senator Phil Gramm's deregulation of those trying to return to the overnight profits of the S&L days? The neocons' desire to let the markets self regulate?
The people who declare government is too big, and yet it doesn't create jobs (if not, what makes government so big? Its all those middle class jobs that it creates).
First, this page needs a rec button. Second to Derek in Austin - it was OBM alright, but it was investors at GS, JPMorgan, et al, whose hedge funds were using OPM to trade pie-in-the-sky derivatives (Read Frank Partnoy for starters - F.I.A.S.C.O. Blood in the Water on Wall St). Fannie & Freddie aren't blameless (I can still see Mark Haines fawning over Franklin Rains on CNBC in the 90s), but they were NOT the source of the melt-down. Wall St. needed loans to package, slice and dice and sell the poor saps - their clients - as Grade A investments.
So basically this guy blames poor people for bringing the world economy to it's knees, and no one calls BS on him? Well, I will. Copy & paste the following in your browser and read:
http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11...
This is exceptionally poor journalism. First of all, far more banks failed in the 1980s S&L crisis than failed in the past two years. Second, much of mess was caused by finance companies not subject to the Community Reinvestment Act or other congressional prodding.
At the end of the day this was caused by the deregulation and loss of ethics that began with Reagan and has now imploded with Bush. It is time to put this laissez-faire crap to bed.
I expect better Mr. Ryssdal.
How could you let this man peddle such an outright lie about the cause of this nation's financial crisis?
The key part of the interview is here:
Ryssdal: Do you agree with Fed Chairman Bernanke and the speech he gave this weekend about the cause of the crisis really being lax regulation?
ISAAC: Ineffective regulation I think is an important contributor to the crisis. I think the government bears a large responsibility for the crisis. Fannie Mae and Freddie Mac were out of control for about the past 20 years -- wild growth rates, decreasing their lending standards, under a great deal of pressure from the Congress to do that. The Congress wanted them to loan more, and to lower their standards, so more people could borrow more money, and it had to come home to roost and it has.
Please see my post at Daily Kos:
http://www.dailykos.com/story/2010/1/4/821919/-The-Government-Caused-the...
to see why your follow up correction to this man's answer to your question was necessary.
You have helped perpetuate a Republican talking point/meme and I hope you will at least correct this online.
Two snippets from interview:
1. Mr. ISAAC says regulators of commercial real estate loans need to be reasonable. Or in other words if loan standards were lower then Issac is saying regulators should look other way. Okay wasnt that the cause of current problem.
2. Commentator says fannie/freddie have grown rapidly. Okay, when govt took over them a year back fannie/freddie were supposed to shed their assets 10% each year begining this year 2010. But on Chrismas eve Obama admin quietly issued a statment saying they are removing the limit on bailout money for Freddie and Fannie and on top of that they removed the provision of shedding assets. In other words they are preparing to take toxic assets from other big banks on to freddi and fannie books and ultimately on to tax payers. There was no mention about that.
*Finally* you find a commentator to tell you the obvious, that governmental insistence that lenders lower standards is a major cause of our present crisis--though it wasn't just Fannie Mae et al. The thing is, when we're in a recession largely caused by government intervention (the push to lend more to unsuitable debtors), what makes you think that more regulation will help?
OPM - Other People's Money
That what Congress plays with, so why is it any surprise when they tell Freddie and Fannie to take on unreasonable risk with OPM (the taxpayer's backing) so that they can gain some favor with those constituents with poor credit(Dems), as well as with the real estate industry middlemen lobbyists(GOP)? America, we've been getting it from both ends for far too long and it's all going into the pockets of the unscrupulous wheeler-dealers on the very very top and the clueless, entitled, mooching masses at the bottom. Meanwhile we all fearfully knee-jerk our pious selves into disastrously expensive wars against a comparative fly of a threat to our overall system, and we stand around spectating as the last of the Greatest Generation and Baby Boomers consume 10X in health care costs as they ever paid in. Let's reduce government to just essential coordination and regulation functions and a truly DEFENSIVE-only military. After all, government has always demonstrated that it is a NECESSARY EVIL, so why should it be any bigger than is absolutely necessary?
