In his first-person account comparing the 1980s bank crisis to the 2008 financial panic, William M. Isaac excoriates government officials for needlessly stoking fear and costing taxpayers billions of dollars through the Troubled Asset Relief Program (TARP). Isaac, the former head of the Federal Deposit Insurance Corporation (FDIC), navigated that agency through the 1980s bank and thrift debacle, and he voices sharp opinions on the TARP's shortcomings, politicization and mismanagement. His presentation details how the government (read the FDIC) could have prevented this entire systemic mess had it responded as it had in the '80s under his lead. Unfortunately, most of Isaac's remedies are bank-centric and thus gloss over the roles non-bank financial institutions played in the 2008 crisis. He also doesn't acknowledge any of the experts who say TARP ultimately succeeded in many ways. Nonetheless, getAbstract suggests this book for its well-informed treatment of the 2008 crisis in the context of recent bank history.
Breaking the banks
William M. Isaac chaired the FDIC during the economically turbulent 1980s. In the 1980-1982 recession, U.S. unemployment reached 11 percent and interest rates hit 21.5 percent. Within a decade, about 3,000 banks and thrifts went out of business; nine of the 10 largest banks in Texas collapsed. The failure rate was so great that the U.S. government considered nationalizing banks to save the financial system. Defunct financial institutions drained the FDIC's coffers by more than $100 billion.
Those who compare the 2008 financial emergency to the 1980s banking crisis often fail to note that the economy before the 2008 recession was stronger than it had been in the '80s. Yet the 2008 panic sent shock waves around the globe and threatened the stability of the world banking system, while the aftereffects of the '80s crisis were much more muted. Had government leaders better understood what really happened in the '80s and instituted the proper remedies, they might have averted the 2008 panic.
Lehman Brothers' collapse on Sept. 15, 2008, reverberated throughout the world. Starting on Sept. 18, Treasury Secretary Henry Paulson and Federal Reserve Board Chairman Ben Bernanke went to Congress to present their plan for a $700 billion Troubled Asset Relief Program (TARP), under which taxpayer funds would buy toxic assets from financial institutions. To drive home the severity of the situation, Paulson alerted lawmakers to an imminent "financial Armageddon."
Isaac disagreed with the plan. On Sept. 27, The Washington Post published his opinion piece listing his four recommendations for containing the crisis:
1. The Securities and Exchange Commission (SEC) should reverse its decision to allow short selling.
2. The FDIC should announce a "financial emergency" and cover all depositors and creditors in case of a bank's failure.
3. The SEC should shelve mark-to-market accounting rules.
4. The FDIC should act to reinstate bank capital based on its experience with the 1980s thrift crisis.
Adopting these proposals would have led to a better outcome, reduced the cost to taxpayers and raised less concern than Paulson's "ill-conceived plan."
Isaac's editorial prompted five House members of both parties to ask him to come to Washington. On Sunday, Sept. 28, he presented his ideas on the bailout and the developing financial crisis to 200 members of Congress, but not to the Democratic or Republican leaders, who had already decided to fast track the TARP vote for the next day. But lawmakers rejected the TARP, 228 to 205. Congressional leaders went right to work to reverse the bill's defeat. On Tuesday, Sept. 30, President George W. Bush's administration added provisions to appease and attract opponents, including higher FDIC insurance limits and $150 billion in unnecessary "pork" spending. After much debate and controversy, Congress finally passed the $850 billion bill, including the pet projects...
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