William M. Isaac’s Senseless Panic makes great reading for any banker seeking to understand the causes of the near-financial-meltdown. It should be required reading for lawmakers and regulators.
Guided tour of disaster, by a veteran
Isaac, longtime consultant, brings tremendous perspective to the crisis in that he headed the FDIC during the financial downturn of the 1980s.
To provide context he takes the reader back to 1978, and compares the regulatory environment in that recession to the one that existed coming into this one. He draws very clear distinctions between the way the saving and loan crisis was handled by the now-defunct Federal Savings and Loan Insurance Corp. (badly) and the treatment by FDIC of the savings bank downturn (better).
FDIC was able to get out ahead of the looming problems for the savings banks industry and was able to isolate issues, and to a large extent, prevent institutions from attempting to grow out of problems. The resolutions of problem institutions were well orchestrated and matched regulatory rigor with common sense. In Isaac’s opinion, much of this latitude went out the window when Congress subsequently passed legislation mandating Prompt Corrective Action.
From this point, Isaac walks the reader through the “high” points of the earlier crisis. These include the Penn Square failure, the collapse of the Butcher family’s banking empire, and the collapse of Continental Illinois. With the latter, front seats are provided in the boardroom as the issues developed, and FDIC worked to keep a lid on to prevent a systemic spread of the problems.
This brings light to the often-repeated buzzwords, “too big to fail”. The key issue is not the size of the institution, Isaac believes, but the extent to which it is interconnected to the financial system.
Putting modern crisis into perspective
Against this background, Isaac reveals the numerous mistakes made from the late 1980s up to, and including, the current situation. They are cataloged, and discussed in great detail. They include many issues which are frequently discussed at ABA events, and are reflective of many efforts by the ABA to help policymakers correct these shortcomings. Among the topics analyzed are mark-to market accounting; deposit insurance premiums; prompt corrective action; capital models which predict the future based solely on a slice of the recent past; loan securitization; loan loss reserves, and, of course, Freddie and Fannie.
Isaac and the ABA share the theme of the pro-cyclical effects that policymakers and regulators have unleashed on the banking industry.
Though a former agency chief, Isaac spares no one who he thinks messed up. Isaac turns a blinding light on the shortcomings of the SEC and FASB in establishing rules and regulations that literally burned billions and billions of dollars of capital out of the banking system, precisely at the worst time. His book provides tremendous depth of insight into their culpability, and should serve as a guide for policymakers in making some changes.
Analyzing Washington’s reaction to failure
Senseless Panic next takes the reader through the crisis and critiques each step taken in what Isaac calls a “schizophrenic failure resolution.” Inconsistencies and political interference are laid bare for the reader.
As the book ends, Isaac shows his prowess as not just a writer who can criticize the past, but one who can offer concrete suggestions for change in the future which, if implemented, could either avoid or blunt future crises.
The solutions are refreshingly laced with common sense, and are remarkably consistent with many ABA positions.
William M. Isaac has once again served his industry well in writing Senseless Panic. It will stand for a long time as a thorough review of what got the industry to where it is today, who is really responsible, and what should be done to prevent it from happening again.