What the bank closures can tell us
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.
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