Senseless Panic: How Washington Failed America

July 31, 2010 07:00 PM

Senseless Panic: How Washington Failed America
By William M. Isaac with Philip Meyer
John Wiley & Sons Inc.
$24.95; 190 pages

Former Federal Deposit Insurance Corporation (FDIC) Chairman William (Bill) Isaac details the mistakes made leading up to and following the 2008 credit crisis in this book, but not from hindsight as other critics have. Rather, he does so from the perspective of a regulator who has navigated the banking industry through other significant crises, arguably on par or greater than what was facing us in 2008.

At 190 pages, Isaac’s book is not the definitive work on the economic crisis of 2008 and the subsequent TARP (Troubled Asset Relief Program), but it provides a remarkably broad perspective of many of the pertinent issues and a recent history of banking regulation considering its length.

The book starts out with Isaac weighing whether or not to travel to Washington to argue against the expected TARP legislation after being urged by several legislators to do so. He establishes himself as an expert who has respect on both sides of the political aisle and does make his case, which temporarily helped ward off the passage of TARP.

Isaac lays outs his solution to the problem, breaks down his arguments against TARP and then goes about providing a history of the banking crises he worked through while he was at the FDIC and the lessons that they taught.

Unlike a lot of analysis on complex issues, “Senseless Panic” is clear and easy to read. The issues are straightforward and the history of how the FDIC and other regulators have handled, and in some cases mishandled, past crises provides a solid analysis of the situation.

Isaac harshly criticizes those responsible for TARP, particularly Treasury Secretary Hank Paulson. He correctly points out that our leaders panicked and used the panic the economic crisis created to jam their agendas through. One chapter is titled “Schizophrenic Failure Resolution” and details the ad hoc approach the Treasury took in handling the various brush fires that arose during the crisis. This led to more uncertainty just when our country needed our leaders to communicate that there was a consistent plan in place to handle the crisis. He makes a solid case against the “no other option” argument. In fact the four policy recommendations he made in lieu of TARP were all eventually executed, only after the $700 billion TARP legislation was passed.

He also points out the all too cozy relationship between policy makers and Wall Street, highlighting how some insiders apparently had more access to decision makers than their direct supervisors.

Isaac describes some of the specific problems that led to the crisis, mark to market accounting standards for one; and also the general recurring cause, a pro-cyclical approach to regulation. He points out our tendency to let our guard down in good times, loosening capital standards when the money is flowing and getting tough during difficult times just as the banks need a little help. The end result is we exacerbate both the bubbles, making them frothier, and the downturns, making them more painful.

Perhaps the issues involved in the 2008 crisis were more complex than Isaac presented them (as some of his critics in Congress argued), but after reading the book you will be left with a much better understanding of the current crisis as well as past crises and how they led to where we are today. You may disagree with some of his conclusions but you will realize that these issues can be presented clearly, and you’ll wonder why our current leaders can’t explain their solutions in such a clear and concise way.

If Congress approached financial reform with the same efficiency as Isaac took with “Senseless Panic,” it would have been passed quicker and we would understand what is in it.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.