For decades, William Isaac’s insights on the U.S. financial system have been featured in leading news publications. Now, you can browse them all in one location.

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ABA misses the mark in its defense of the Federal Home Loan banks by Cornelius Hurley published by American Banker, May 30, 2022

ABA misses the mark in its defense of the Federal Home Loan banks by Cornelius Hurley published by American Banker, May 30, 2022

June 1, 2022

My long-time friend, Con Hurley, has had a long career of service as a top lawyer at the Federal Reserve Board in the 1970s when I first met him, general counsel of one of the largest banks in Boston, a partner who ran the Boston office of my former consulting firm The Secura Group, a professor at Boston University, and a member of the board of directors of the Federal Home Loan Bank of Boston for 14 years. To say he is intelligent and knowledgeable about the financial system is an understatement. Con is a patriot and even ran for public office (for the wrong party I might add) years ago. Con recently published an article in the American Banker newsletter suggesting that it might be time to review and perhaps reform the charter/mission of the Federal Home Loan Bank System, perhaps to broaden the types of low and moderate income loans it makes beyond mortgage loans. I believe this article and the discussion it advocates are both timely and appropriate. I hope you will enjoy and perhaps participate in the discussion. Bill Isaac, Chairman, Secura/Isaac Group.

About six months ago I co-wrote a Bank Think article stating that, in light of its declining fortunes and its failure to adapt to a changing marketplace, the mission of the Federal Home Loan Bank System ought to be reevaluated. I followed that up weeks later with an open letter to FHFA director-designate Sandra Thompson, who regulates the system.

These articles led to a particularly useful meeting with Ms. Thompson and her senior staff on the topic. Later at a public event, Ms. Thompson commented favorably on the notion of establishing an advisory committee to explore the possibilities of modernizing the Home Loan Bank System.

These calls for reform were met with silence from the System and from the Federal Home Loan banks. Then last week, a community banker who also serves as vice chair of the American Bankers Association, came to the system’s defense. Her exhortation, “Don’t mess with success,” was a disappointment. Touting the dubious success of a deeply flawed system fails to recognize the enormous potential of that system.

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Is crypto too cool to question? by Thomas P. Vartanian published by The Hill on May 13, 2022

Is crypto too cool to question? by Thomas P. Vartanian published by The Hill on May 13, 2022

May 15, 2022

My longtime friend and financial expert, Tom Vartanian, just published a very important and piece in The Hill on the potential dangers in allowing crypto currencies to continue operating throughout the world, including the US, without appropriate government oversight and regulation. Like Tom, I believe it is past time for Congress to hold hearings and to begin considering potential legislation/regulation. I urge you to read Tom’s article published in The Hill and become involved in the discussion.

What exactly is cryptocurrency? Is it secure? Should I invest in it? We’ve all heard and been asked these questions. The most recent thefts of $600 million of cryptocurrencies from the non-fungible token (NFT) gaming company Axie Infinity and $182 million from the algorithmic stablecoin Beanstalk adds to the questions. Perhaps that is part of what caused a 20 percent decrease in crypto stocks and a 60 percent decrease in crypto-focused companies in the first quarter of 2022. The algorithmic stablecoin TerraUSD lost no time in “breaking the buck” and causing fear and dislocations in the stablecoin market just this month.

But hype continues to overwhelm common sense, and fundamental stability questions about cryptocurrency go unanswered. Crypto is simply too cool to question. As TV commercials featuring Larry David suggest, it is old-fashioned to disbelieve in cryptocurrency’s bright future.

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Important Comment from a Banker

Important Comment from a Banker

April 13, 2022

Readers: A few days ago, I posted on my website a Wall Street Journal article by my friend and housing expert Ed Pinto and his colleague on the potential to improve housing outcomes for minorities. That provoked a banker, Stephen Lange Ranzini, to send me a thoughtful note suggesting how the government might improve home ownership for minorities. Our nation has devoted significant resources over most of the past century to promoting affordable home ownership for working class Americans, which helped many families climb the economic ladder and create a large and vibrant middle class in our country. Ranzini’s letter suggests a potentially important way for us to return to more sensible housing policies. It’s certainly worthy of consideration:

Bill – Thanks for sending the article by Ed Pinto.

In Ann Arbor at the intersection of Maple and Pauline they are building an apartment complex that will have about 400 bedrooms. It was originally proposed as condominiums but changed to apartments after the site plan was approved. This is not an isolated instance. All the many tall buildings that have been built downtown in Ann Arbor over the past two decades are apartments, because they were built using HUD Multifamily loan programs.

Why did this 400-unit project switch from for sale condos to apartments? Probably because the funding for condos is very hard to come by but the funding for apartments is very easy to obtain. Why? Most of these loans are backed by HUD loan guarantees. HUD will back apartment loans, but not condo construction or condo permanent financing loans for projects with more than 4 units. A developer can obtain a loan from HUD up to 90% of the “as built” appraised value of the project. Condo loans come from banks and banks will lend up to 70% of the “as built” appraised value of the project. An investor needs to put triple the investment into a condo project versus an apartment project and gets 1/3rd the return on investment relative to the dollars invested.

The bigger picture problem is that apartments don’t allow the building of inter-generational wealth. Only condos and homes do. Government money is flooding into the housing market, however virtually all of these funds are targeted at building more apartments, not promoting home ownership.

HUD’s programs are warping the market supply. This problem could be fixed if Congress would just fund the HUD 234d Multifamily loan program (which is the only HUD program that could be used to build 5 or more-unit condos for sale), which is on the books but has not been funded by Congress in decades. Only Congress can fix this problem for us. If we want to do something practical, we should all call on them to fix this. I have repeatedly done so myself both in writing and in person.

Best wishes,
Stephen Lange Ranzini
President & CEO
University Bank
Ann Arbor, MI

A Wasted Opportunity to Improve Housing Outcomes for Minorities by Edward Pinto and Tobias Peter published by WSJ on March 28, 2022

A Wasted Opportunity to Improve Housing Outcomes for Minorities by Edward Pinto and Tobias Peter published by WSJ on March 28, 2022

April 12, 2022

The home-valuation industry has become the federal government’s latest target for a massive and unjustified power grab. Unless stopped, the government, not markets, will set home prices, which could have catastrophic consequences.

To justify its takeover, the government is trying to scapegoat the appraisal industry—which is 97% white, 70% male and not well-organized—for having caused large disparities in racial wealth and homeownership. Cue last week’s report from the Interagency Task Force on Property Appraisal and Valuation Equity, or PAVE, led by Housing and Urban Development Secretary Marcia Fudge and the director of the president’s Domestic Policy Council, Susan Rice, which asserted the existence of “inequities within current home lending and appraisal processes” for communities of color.

The government’s case is unsubstantiated. The PAVE report relied on three pieces of research. The first one was a blog post by the Federal Housing Finance Agency, which quoted 16 examples of racially charged language out of millions of appraiser reports but refused to disclose the total number of occurrences. The second was what Freddie Mac—one of the two mortgage giants—called “exploratory research” that was later directly contradicted by a report from the other giant, Fannie Mae. The third was a report by the Brookings Institution, which boldly claimed that 23 variables could completely account for all possible non-race-based factors affecting a home’s value. This left only racial bias as the explanation for the remaining value differences between white and black neighborhoods, which research we did for the American Enterprise Institute thoroughly discredits.

PAVE’s blatant disregard of pertinent research, use of cherry-picked data and discredited research lead it to flawed conclusions. This suggests either a lack of interest in getting to the truth or, more likely, that the report is only a pretext for centralizing valuation regulation under a new Federal Valuation Agency.

What comes next shouldn’t surprise anyone. On Tuesday, less than a week after the PAVE report’s release, the House Financial Services Committee will hold a hearing on the proposed Fair Appraisal and Inequity Reform Act, which would hand over the nation’s entire home valuation process to this new agency.

More-rigorous research shows that rather than being the fault of the appraisal industry, the racial homeownership disparity exists because of the failure of past efforts on welfare, school quality, crime, urban renewal or public housing by the federal government to address differences in socioeconomic status. The data clearly show that Americans with higher income and who are married have higher homeownership rates regardless of race. When they were of similar socioeconomic status, black, white and Hispanic households all had similar outcomes when we replicated the Brookings and Freddie studies.

We don’t dispute a legacy of past racism and lingering racial bias, which leaves blacks at a large income and wealth disadvantage, but history shows that government attempts to solve socioeconomic gaps through housing policy often backfire.

Examples abound, but consider these two. The 1967 Presidential Task Force on Housing and Urban Development proposed a 10-year housing program to eliminate all substandard housing in the U.S. It ended up destroying many American cities through a combination of lax lending to underqualified borrowers, careless government oversight (particularly in appraisals), and predatory business arrangements between the Federal Housing Administration and lenders. In the end, these actions wreaked havoc on black households and neighborhoods.

Or consider HUD’s 1995 National Homeownership Strategy, designed to achieve a homeownership rate well in excess of any in the nation’s history. The housing boom it unleashed went bust, leading to more than 10 million foreclosures and costing taxpayers dearly. Black homeowners and neighborhoods were among the hardest hit.

If home prices were no longer determined by markets but instead by a politicized valuation process, it is easy to see how the results could exacerbate racial and ethnic disparities in wealth and homeownership. The politicization of home prices to address perceived valuation inequities could lead to misvaluations on a massive scale. The areas most affected would be minority and rural areas, where home sales generally are sparser. This could engender even larger home price peaks and troughs, ultimately hurting lower-income households, which have the least wherewithal to withstand price declines.

Unless policy makers address disparities in socioeconomic status directly, make-believe solutions won’t be enough to raise housing outcomes for minorities. Sadly, PAVE seems to have wasted yet another opportunity to improve the lives of many disadvantaged groups in any lasting way.

Mr. Pinto is an American Enterprise Institute senior fellow and director of the AEI Housing Center. Mr. Peter is an AEI research fellow and assistant director at the Housing Center.

Taxpayer support for Federal Home Loan Banks is no longer justified by Cornelius Hurley published by The Hill on March 29, 2022

Taxpayer support for Federal Home Loan Banks is no longer justified by Cornelius Hurley published by The Hill on March 29, 2022

March 30, 2022

The U.S. taxpayers found out the hard way the cost of their “implicit” guaranty of Fannie Mae and Freddie Mac debt. Even after paying $191 billion, taxpayers are still on the hook for these government-sponsored enterprises (GSE). But the final chapter has yet to be written.

Another GSE, the Federal Home Loan Bank System, is flying under the radar propped up by the same implicit taxpayer guaranty. Like Fannie and Freddie, it issues debt at a discount due to the perception that taxpayers will make good on it. But unlike Fannie and Freddie, this GSE competes for its funding with the same taxpayers that underpin it.

The Federal Home Loan Bank of the United States, let’s call it “Bank U.S.,” is in dire straits. The fictional Bank U.S. is based on the consolidation of each of the 11 existing Federal Home Loan Banks. This makes sense because the GSE issues consolidated debt on behalf of all FHLBanks, plus all the banks are jointly and severally liable for the obligations of their sister banks.

If Bank U.S. were a commercial bank its total assets of $723 billion would rank it #5 just behind Citigroup.

Have you ever wondered why Bank A pays 0.75 percent on its savings accounts while Bank B pays 0.50 percent? You probably thought it was because of competition. That is partly true. However, in the funding market, Bank U.S. competes with both banks and with you every day. Bank U.S., you may be surprised to learn, is your bank. And, unlike you, Bank U.S. pays no federal income taxes.

In 2020, according to my calculations of SEC filings, the 11 Bank U.S. CEOs gained over $39 million in total compensation for overseeing what are essentially quasi-governmental agencies. As a practical matter, they cannot fail. Bank U.S. offers just one product: secured loans on favorable terms to member financial institutions. They have no dissident or activist shareholders to worry about and are immune from unwanted takeovers. Their innovation is restricted by law and regulation. Their geographic and customer market is fixed by statute.

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Edward T. Hida II Joins Secura/Isaac Group and Blue SaaS Solutions as Senior Executive Advisor

Edward T. Hida II Joins Secura/Isaac Group and Blue SaaS Solutions as Senior Executive Advisor

March 15, 2022

“It is my distinct pleasure to welcome Ed Hida as Senior Executive Advisor to both the Secura/Isaac Group and our technology advisory firm Blue SaaS Solutions. Ed looks back on an exceptional and distinguished career and is widely considered one of the TOP risk and regulatory experts in the financial services industry. Our clients could not be in more capable hands“, said William Isaac, Chairman of Secura/Isaac and Blue SaaS Solutions.

Ed Hida is among the most preeminent risk and regulatory experts in the financial services industry. He has worked with global, national and regional banks, insurers, asset managers, financial infrastructure and specialized finance companies. Ed is a trusted, strategic advisor to the C-suite and boards of many of the world’s largest and most recognizable brands in the financial services industry. He is a financial expert and Qualified Risk Director®.

Prior to joining the Secura/Isaac Group’s leadership team as Senior Executive Advisor, Ed spent more than 30 years leading risk and regulatory practices and large-scale projects as a Deloitte Advisory Partner, serving Deloitte’s most important clients, among them 7 of the 10 largest global banks. He led his clients through the most significant disruption to the banking industry during and after the 2008 financial crisis, helping them with the execution of regulatory remediation, enterprise risk management program development, CCAR and DFAST stress testing program design and implementation, and bank charter conversions among other programs.

He has advised major financial institutions on multi-billion dollar M&A transactions by conducting asset quality, infrastructure, risk management and regulatory due diligence. He has also served as the lead capital markets partner for large domestic and global banking audit clients, executing the assessment of risk management programs and reporting to the SEC and CFTC. Given the strategic and high-stakes nature of his work, Ed often reported directly to the Boards of Directors and to bank regulatory bodies, including the Federal Reserve, OCC and FDIC.

He served as an advisory board member of the Global Association of Risk Professionals and on the Blue Ribbon Panel of The Professional Risk Managers’ International Association. Ed is a prolific writer and speaker and has been featured in The Wall Street Journal, Financial Times, The Nikkei, Time Magazine, Bloomberg TV, Sky Business TV and Yahoo Finance TV.

He received his Master of Science in Management, Accounting and his Bachelor of Business Administration, Finance from the University of Wisconsin-Milwaukee. He is also a Chartered Financial Analyst and a Certified Public Accountant in the state of New York. Ed is a member of the Japanese American Citizens League and the Ascend Asian Executive Network.

Strong banks are essential to national security by Thomas P. Vartanian published by The Hill

Strong banks are essential to national security by Thomas P. Vartanian published by The Hill

March 11, 2022

The horror of war in Ukraine changes everything. It forces the world to recalibrate its priorities and convince democracies that they must fortify their economic security to maximize national security. It is more than luck that the United States possesses the economic power and banking system to orchestrate the imposition of global economic sanctions on Russia and any country that conspires with it. It is the result of two centuries of relentless commitment to entrepreneurialism and economic expansion. It has not always worked perfectly, but it has worked better than any other system on the planet.

The U.S. and other nations have equivocated about their need to maintain energy independence and are now paying the price. A war against climate change that reflexively shutters pipelines and delays drilling while the principal climate offenders in the world continue to mass-produce carbon-driven energy plays into the hands of the country’s adversaries and competitors. We need only look to Germany to understand how degrading its energy production resources in return for a bag of Russian beans produced an unhealthy addiction to Russian energy sources.

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‘Biden Inflation’ made simple: Borrow from the Fed, take away from the rest of us by Alex J. Pollock published by The Hill

‘Biden Inflation’ made simple: Borrow from the Fed, take away from the rest of us by Alex J. Pollock published by The Hill

February 14, 2022

“What is the difference between banking and politics?” a pointed old witticism goes. “Banking is borrowing money from the public and lending it to your friends. Politics is taking money from the public and giving it to your friends.”

The current American government has a new twist on this, however: Politics is borrowing money from the Federal Reserve and giving it to your friends. Clever, eh? The Fed can print up all the money it wants and the government can borrow it and pass it out. Except that, eventually, you find out that this depreciates the nation’s currency and brings high inflation.

So now we have the ‘Biden Inflation’, which I calculated as running at an annualized rate of more than 7 percent from the end of 2020 through June.

Let us state the obvious facts which everybody knows about a 7 percent rate of inflation. It means that if you are a worker who got a pay raise of 3 percent, the government has made your actual pay go down by 4 percent — that is, plus 3 percent minus 7 percent = minus 4 percent.  If you got a raise of 2 percent, the government cut your real pay by 5 percent.

If you are a saver earning, thanks to the Federal Reserve’s policies, the average interest rate on savings accounts of 0.1 percent, then with a 7 percent rate of inflation, the government has taken away 6.9 percent of your savings account.

If you are a pensioner on a fixed pension or annuity, the government has cut your pension by 7 percent.

In a sound money regime, in order to spend a lot, the politicians have to tax a lot. They then have to worry about whether workers, savers and pensioners will vote for those who escalated their taxes.

With the borrowing from the Federal Reserve ploy, the politicians avoid the pain of having to vote for increased taxes but they still savor the pleasure of voting for their favorite spending. Nonetheless, all the money for the politicians to give their friends has, in fact, been taken from the workers, the savers and the pensioners. It has just been taken in a tricky way by using the Fed.

In a previous generation, when the Federal Reserve was led by William McChesney Martin, for example, the public discourse was clear about this. Martin, who was Fed chairman from 1951 to 1970, called inflation “a thief in the night.” He also said, “We can never recapture the purchasing power of the dollar that has been lost.”  This was long before the Fed newspeak of today, which pretends that inflation at 2 percent forever is “price stability.”

But not even today’s Fed can languidly face a 7 percent rate of inflation. So while still planning to create perpetual inflation, it keeps repeating, and hoping against hope, that the very high inflation is “transitory.”

However transitory the current high inflation may be, the money of the workers, the savers and the pensioners has still been taken and won’t be given back. If the rate of inflation falls, their money will still be being taken, just at a lower rate. If inflation speeds up further, as it may, their money will be taken faster.

William McChesney Martin was so right.

The ‘interest rate comet’ is about to slam into the U.S. economy by Peter Tanous published by CNBC

The ‘interest rate comet’ is about to slam into the U.S. economy by Peter Tanous published by CNBC

February 11, 2022

Adam McKay’s recent movie, “Don’t Look Up,” was a timely example of how our elected leaders react to crises. In the film, a comet is about to destroy all civilization, but the country’s leaders don’t pay much attention until it is too late and we are all doomed.

Welcome to our next major debt crisis.

In just a few years, over half of every dollar we pay in income taxes will go to pay the interest on our national debt owned by the public. And it will get worse.

When that financial comet strikes, what will our politicians say or do?

First, let’s have a look at how we got here.

Most informed Americans are aware that the national debt and interest rates are both rising. Americans will soon wake up to the fact that the interest on our national debt is costing taxpayers a frightening percentage of our national income and wealth.

The comet is about to hit.

According to the U.S. Treasury, in fiscal 2021, the amount of interest paid on the national debt was $562 billion including government transfers. The amount actually paid out to holders of U.S. securities was $413 billion.

That figure alone, which is over 20% of what we paid in income taxes in FY 2021, should be alarming when compared to other government expenditures.

Compare the $413 billion we pay in interest to holders of these securities to the annual budgets of other parts of the government. The State Department annual budget is “only” $35 billion and the Justice Department $39 billion.

But this interest rate crisis will soon get worse, a lot worse.

Cost of debt is on the rise

Here’s why: According to the Congressional Budget Office, the average interest rate paid on the national debt in FY 2021 was approximately 1.5%, historically a very low figure.

Most experts agree that interest rate increases are coming, and a consensus expectation is that there will be three or four rate hikes by the Federal Reserve in 2022. The central bank on Wednesday strongly hinted that the first rate hike will happen in March, and the market is now pricing in as many as five increases this year alone.

As interest rates rise, which they have in dramatic fashion in January, so will the interest rate paid on newly issued Treasury securities. While this is happening, our national debt is exploding.

In 2017, the national debt was $20 trillion. Just four years later, that amount is approaching $30 trillion. The recent stimulus programs brought on by the Covid crisis helped add a staggering $6 trillion to the total.

The math is easy.

Interest rates are still near an all-time low. According to the Monthly Treasury Statement, in 2001, interest paid on the national debt was an average of 5.4%, about 3½ times what it is now.

If we get back to that rate, which is far from inconceivable, interest on the debt would cost American taxpayers $1.4 trillion, based on our present level of national debt. That is twice the budget of the Defense Department.

In FY 2021, the total amount of personal income taxes collected was $1.9 trillion. Moreover, the future budget deficits projected by economists will add over a trillion dollars a year to the overall debt, adding substantially to the rising interest cost.

The interest rate comet is now visible on the horizon.

Americans will not stand for a situation where most of the income taxes we pay go to pay interest to holders of our national debt who live in Japan, China, the U.K. along with others here who own Treasury securities.

How will Congress react to this crisis? We won’t have to wait too long to find out.