From the July 01, 2010 issue of Futures Magazine • Subscribe!

Bill Isaac: Was TARP necessary?

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William (Bill) Isaac is chairman of LECG Global FINANCIAL Services and served as chairman of the Federal Deposit Insurance Corporation (FDIC) throughout one of its most challenging periods during the savings bank and savings & loan crises of the 1980s.

Isaac’s recently published book “Senseless Panic: How Washington Failed America” details the numerous blunders of government officials during the recent credit crisis that ultimately resulted in the $700 billion Troubled Asset Relief Program (TARP), which Isaac says was completely unnecessary. The book also details steps taken by Isaac during his FDIC tenure that helped stabilize the banking industry during that time of crisis and which should have (but didn’t) serve as a template for dealing with the current crisis.

Shortly after the Lehman bankruptcy, Isaac wrote several op-ed pieces laying out a solution to the crisis, including a four-point plan published in the Washington Post.

Isaac’s recommendations included: reinstating a ban on short sellers, having the FDIC declare an emergency and proclaim all depositors and creditors of banks be protected in case of failure, immediately suspending mark-to-market accounting standards and having the FDIC restore capital in banks.

Following publication of his plan, several members of Congress from both parties urged Isaac to travel to the Capitol to lobby against TARP. He did, and it was defeated in its first attempt before eventually being passed.


Futures: What was your message to the members of Congress you spoke to prior to the TARP vote?

Bill Isaac: The basic message was that the TARP plan would not work. Purchasing $700 billion worth of toxic assets from a $14 trillion financial system just wouldn’t have mattered and it would be unduly expensive to taxpayers because the banks would sell too high and the investors take too little so the taxpayers would get hit coming and going and we would probably lose several billions of dollars if they [had] done the toxic asset purchase plan, which they never did do. After Congress passed this bill (Treasury Secretary) Paulson had second thoughts about it and decided that the toxic asset purchase plan was not going to work so they abandoned it and started doing capital infusions instead including bailing out two auto companies. The basic message I was delivering to them was this plan is not going to work; it is going to be unduly costly for shareholders. Ultimately everyone agreed because they didn’t do it.

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