TARP made matters worse, former FDIC head says

By David Markiewicz

The Atlanta Journal-Constitution

When Bill Isaac heard the current banking crisis referred to as the worst financial calamity since The Great Depression, he couldn't have disagreed more.

As chairman of the Federal Deposit Insurance Corporation in the 1980s, he saw situations he said were far worse: 3,000 bank and thrift failures and "out of control inflation" that hit double digits. Isaac, appointed by President Jimmy Carter and reappointed by President Ronald Reagan, held the post during the nation's savings and loan crisis.

"We got through it," Isaac, now a Washington, D.C.-based financial industry consultant, said Monday during a visit to Georgia where 26 banks have shut down since 2008.  Isaac, chairman of global financial services at consulting firm LECG,  spoke at the Rotary Club of Atlanta.

The problems bedeviling banks today could have been a lot less damaging, too, Isaac said, if not for the government's response, which he said promoted a crisis mentality with public statements and inconsistent policies.

Isaac ripped the federal Troubled Asset Relief Program, which allowed the purchase of up to $700 billion in mortgages and other toxic loans.

"I still believe it was a horribly bad idea," he said.

Isaac criticized the inconsistent treatment of troubled financial institutions.

"We handled one transaction after another in an ad hoc fashion without giving people any sense that anybody was in charge and knew what they were doing," he said.

Some banks were bailed out, he noted, while others were allowed to fail.

Maintaining confidence is key in a crisis, he said, and government actions during the crisis had a destabilizing effect.

Isaac  blamed the use of an accounting rule, put in place in 2007, that measures the  current market value of assets, for destroying $500 billion in capital, or $5 trillion in lending capacity.

All that money, he said, "went down the tubes needlessly." He argued in favor of accounting that measures the value of assets based on actual and projected cash flows.

Isaac also said the focus on excessive executive compensation and its role in the financial crisis is beside the point.

Blaming greed for a bank failure, he said, "is like blaming gravity for the crash of a plane."