WILLIAM ISAAC’S PUBLISHED WORK

Bill Isaac has authored hundreds of articles in top publications and has frequently testified before Congress.

RECENT PUBLISHED WORK

columns from William Isaac in top financial publications

Stock Options for the Little Guy, Helping companies give ownership to average workers is as easy as repealing 123.By William M. Isaac and Richard M. Kovacevich by The Wall Street Journal on February 13, 2017

Stock Options for the Little Guy, Helping companies give ownership to average workers is as easy as repealing 123.By William M. Isaac and Richard M. Kovacevich by The Wall Street Journal on February 13, 2017

February 13, 2017

One message from last year’s election is that American workers are discouraged and angry that the “system” is not working for them. The standard of living for low- and middle-income Americans is not keeping pace with historical growth. Worse, there seems to be a widening income gap between average workers and corporate executives whose income is increased by stock options and other benefits available to them.

Many people see this as a lack of respect for the contributions of the average worker. An important first step in turning around this perception would be to develop an affordable way for corporations to provide stock options to all employees. That wouldn’t solve income inequality, but it would help.

Stock options weren’t always reserved for those at the top of the corporate ladder. It used to be rather normal for employees to have the option of purchasing shares in the company for which they were working. But in 2006 the Financial Accounting Standards Board issued a rule called FAS 123, which requires companies to account for stock options as if they were a cash expense, therefore reducing the net income of the company. FAS 123 also requires stock options to be recognized as more shares outstanding, thus diluting share values for the company’s existing stockholders. This double cost became so expensive that nearly all corporations eliminated stock options for employees making less than $100,000 a year.

 

Here is the link to the full article

Winding Down Fannie and Freddie Is Easier Than It Seems By WILLIAM M. ISAAC and RICHARD M. KOVACEVICH published by The Wall Street Journal on December 15, 2016

Winding Down Fannie and Freddie Is Easier Than It Seems By WILLIAM M. ISAAC and RICHARD M. KOVACEVICH published by The Wall Street Journal on December 15, 2016

December 16, 2016

Donald Trump’s Treasury secretary nominee, former Goldman Sachs executive Steven Mnuchin, says he and the president-elect want to privatize the home-mortgage market and “will get it done reasonably fast.” That’s good news for American homeowners, the economy and taxpayers who were forced to foot the bill after the 2008 subprime mortgage meltdown.

For those familiar with global mortgage markets, this is not a radical proposal. The private sector provides mortgages in most major countries, and there is little difference in the share of homeownership between the U.S. and other developed countries. No other country has the equivalent of the private-public model of Fannie Mae and Freddie Mac—crony capitalism at its best.

The U.S. needs a new mortgage system that preserves the value that currently exists with Fannie and Freddie, never places taxpayers at risk again, promotes homeownership at affordable levels, and transitions to a new private model without disrupting the housing industry. Congress will also need to resolve the issues with shareholders of Fannie and Freddie resulting from the Obama administration’s unilaterally changing the terms of conservatorship in 2012 by seizing their capital and future profits.

Mr. Mnuchin won’t have to start from scratch. Positive steps have already been taken. Back office and securitization functions of Fannie and Freddie are being combined to increase efficiency. Fannie and Freddie’s huge portfolios are being reduced (albeit much of the reduction has been added to the Federal Reserve’s portfolio). The companies have also repaid taxpayers more than $240 billion against their $187 billion bailout.

Yet many politicians and industry participants believe that housing cannot prosper without government support. We disagree. The U.S. cannot afford to go through another financial crisis, which started with subprime mortgages and would never have been so large if the residential mortgage industry had been market-based.

Here is the link to the full article

How to Fix the Volcker Rule By WILLIAM M. ISAAC and RICHARD M. KOVACEVICH published by The Wall Street Journal on December 4, 2016

How to Fix the Volcker Rule By WILLIAM M. ISAAC and RICHARD M. KOVACEVICH published by The Wall Street Journal on December 4, 2016

December 4, 2016

President-elect Trump has promised to dismantle the 2010 Dodd-Frank financial law. Democrats have promised to keep it. The likely outcome is that the most controversial parts of the law will be altered by Congress or regulators. The Volcker rule, which Mr. Trump’s Treasury secretary pick, Steven Mnuchin, last week called “way too complicated,” would be a good place to start.

Named for former Federal Reserve Chairman Paul Volcker, an early proponent, the rule is intended to impose strict limits on commercial banks engaging in “proprietary trading”—i.e., investing bank capital to make speculative trading profits. Mr. Volcker himself thought a simple, four-page rule would suffice. Wishful thinking? The product of multiple financial regulatory agencies, the Volcker rule has ballooned to nearly 300 pages with more than 2,800 footnotes.

There is no evidence that proprietary trading caused or even contributed to the 2008 financial crisis. But like many financial products, especially making loans, there is substantial risk in proprietary trading. We believe this risk should be carefully and intelligently monitored and regulated.

The questions regulators are trying to answer are: Is the risk of holding an inventory of securities to enable customers to readily buy or sell securities through a bank reasonable? Or is the risk so excessive that changes in the market price of that inventory could put the institution in serious jeopardy?

Like any seller of products in any industry, it is perfectly logical that a financial institution would hold more inventory of a product to be sold to customers if it expects the price of that product might go up and hold less of it if the bank thinks the price might go down. We wouldn’t call this proprietary trading but rather common sense. Farmers and energy companies do it, as do manufacturers.

It’s foolhardy to try to get in the minds of traders at financial institutions to determine if the inventory they are keeping is larger than the expected demand. The solution to the problem is straightforward—simply limit the amount of “trading” revenue as a percentage of the firm’s total revenue to a de minimis level, say 10%. There is a precedent for this in the Federal Reserve’s decision to limit investment banking revenue of “Section 20 affiliates” as a percentage of total revenue during the 1990s when the Glass-Steagall restrictions were still in place.

Here is the link to the full article

Isaac Comments to CFPB on Proposed Short-term Lending Regulations

Isaac Comments to CFPB on Proposed Short-term Lending Regulations

October 12, 2016

Submitted via www.regulations.gov

The Honorable Richard Cordray
Director
Consumer Financial Protection Bureau
1275 First Street NE
Washington, DC 20002

Ms. Monica Jackson
Office of the Executive Secretary
Consumer Financial Protection Bureau
1700 G Street, N.W.
Washington, D.C. 20552

Re: Comments on the Proposed Rule for Payday, Vehicle Title, and Certain High-Cost Installment Loans

Dear Director Cordray:

As a former chairman of the FDIC, a consultant to financial institutions, and a consumer advocate,[1] I am very concerned with the prospect of regulations inadvertently strangling the small-dollar, payday loan market, thereby destroying a lifeline of credit for millions of responsible, low- and middle-income Americans. Thus, prior to the Consumer Financial Protection Bureau’s proposal on payday, vehicle title, and high-cost installment loans (the “Proposal”),[2] I was both hopeful and anxious about the upcoming rules.

In crafting the Proposal, the CFPB had the potential to help tens of millions of Americans who rely on these forms of credit. The CFPB plan could have eliminated regulatory uncertainty, which might have helped spawn innovation and improved lending options. However, I was also concerned that the CFPB might overreach and the rules could have negative, unintended consequences.

Continue reading →

Time to Restructure Debts of Chicago and Illinois is Now, published by The Bond Buyer By William M. Isaac

Time to Restructure Debts of Chicago and Illinois is Now, published by The Bond Buyer By William M. Isaac

September 8, 2016

Both the State of Illinois and the City of Chicago are in dire fiscal straits. Taxes keep rising, while staggering amounts of red ink are projected as far as the eye can see.

The city and the state should act now to restructure their liabilities and put the fiscal mess behind them. This can be accomplished by utilizing Chapter 9 and other tools Congress just gave Puerto Rico. The process would entail about two years of unpleasant headlines, but the city and the state will rebound far sooner and less painfully than if they stay on their current paths.

Illinois has the worst credit rating of any U.S. state. Republican Governor Bruce Rauner was elected in 2014 with a mandate to get the state’s financial house in order, but he and the Democrat-controlled legislature are at an impasse. Illinois is overdue on about $8 billion owed to healthcare providers and other vendors. If spending growth follows its 10-year average, the State projects a cumulative deficit of $17.5 billion over the next three years alone.

Continue reading →

Bring Back Glass-Steagall? No Thanks, By WILLIAM M. ISAAC and RICHARD M. KOVACEVICH published by The Wall Street Journal on August 8, 2016

Bring Back Glass-Steagall? No Thanks, By WILLIAM M. ISAAC and RICHARD M. KOVACEVICH published by The Wall Street Journal on August 8, 2016

August 9, 2016

The convention platforms of both political parties call for restoring the widely discredited Depression-era Glass-Steagall Act, which separated commercial from investment banking. What could they be thinking? Have they already forgotten the causes of the panic of 2008-09?

Some people mistakenly believe that investment banking is so risky that it should be separated from commercial banking. In truth, traditional investment banking entails very little risk and certainly less than traditional commercial banking.

Traditional investment banks engage primarily in underwriting debt and equity for corporations; providing advice on mergers, acquisitions and divestitures; buying and selling securities for institutions; and helping clients hedge their interest rate, commodity and foreign-exchange risks. Investment banks accept very little risk on their books in carrying out these activities.

Continue reading →

Forcing Creditors to Take Losses Is How We’ll End TBTF By William M. Isaac and Richard M. Kovacevich published by American Banker on August 5, 2016

Forcing Creditors to Take Losses Is How We’ll End TBTF By William M. Isaac and Richard M. Kovacevich published by American Banker on August 5, 2016

August 5, 2016

It seems like politicians, regulators and economists — from Sen. Elizabeth Warren to Federal Reserve Bank of Minneapolis President Neel Kashkari — have a new proposal almost daily for how to deal with the big banks.

Some urge breaking up the largest banks, while others suggest imposing punitive and unworkable levels of required capital. At least one academic, John Cochrane of the Hoover Institution, believes banks should be financed 100% with equity. But none of the critics are suggesting a realistic way to end “too big to fail” without inflicting serious damage to economic growth.

There have always been bank failures and always will be. The trick is to allow sufficient risk-taking to promote economic growth but not so much that it leads to widespread bank failures and panic.

Given the long history of financial crises, we should acknowledge that regulators, by themselves, are not capable of preventing failures without turning banks into public utilities — inhibited from taking sufficient risks to support essential economic growth. The failure to recognize this simple truth is a fatal flaw in the Dodd-Frank financial reform law hastily thrown on the books in an emotional pique following the housing crash of 2008-2009.

This most recent crisis was absolutely not caused by America’s mainstream commercial banks. The primary perpetrators consisted of a handful of large investment banks and S&Ls.

We need a system that assumes bank failures will occur and requires that the failures be handled in a way that punishes excessive risk-taking without devastating the economy or resulting in taxpayer bailouts.

Requiring large firms to increase their equity capital to breathtaking levels, say above 10% of assets, is not the answer. That will lower return on equity to the point that banks will be unable to raise sufficient capital to support growth and will be forced to shrink their balance sheets. This will result in the very companies and individuals who most need bank loans being denied access to banks. This is already happening throughout Europe and the U.S. today.

Here is the link to the full article

CFPB Small-Dollar Plan: Some Good Ideas, But Not Enough By William M. Isaac published by American Banker on July 22, 2016

CFPB Small-Dollar Plan: Some Good Ideas, But Not Enough By William M. Isaac published by American Banker on July 22, 2016

July 25, 2016

Prior to the Consumer Financial Protection Bureau’s proposal last month on payday, title and high-cost installment loans, I was both hopeful and concerned about the upcoming rules.

In crafting the proposal, the CFPB had the potential actually to help tens of millions of Americans who rely on these forms of credit. Ultimately, the CFPB plan could eliminate regulatory uncertainty, which might have helped spawn innovation and improved lending options. However, I was also concerned that the CFPB might overreach and the rules could have negative, unintended consequences.

I support the mission of the CFPB and believe that CFPB Director Richard Cordray is a thoughtful and intelligent public servant with a tough job to do. That said, the proposed rules appear to contain both things I hoped for and feared.

The main problem with the proposal is the likely impact on the lenders and customers who rely on single-payment payday lending. While far from perfect, payday loans are the only real-world source of short-term credit for lower-income Americans in many states. In the 35 states that allow single-payment payday loans, the proposed rules will eliminate access to credit for millions of working Americans, negatively impacting on people who rely on payday loans for unexpected expenses such as auto repair and healthcare.

 

Here is the link to the full article

 

A ‘get out of jail free card’ for Puerto Rico? Subordinating bonds to pension liabilities would violate the law By William M. Isaac published by The Washington Times on May 17, 2016

A ‘get out of jail free card’ for Puerto Rico? Subordinating bonds to pension liabilities would violate the law By William M. Isaac published by The Washington Times on May 17, 2016

May 19, 2016

Most state and local governments provide defined-benefit pensions to their employees. An employee earns his or her pension benefits over many years of employment, and then receives the benefits throughout retirement. It is “Pension 101” that the employer should set aside enough money throughout the employee’s years of service to ensure that the money will be there to pay the pension benefits during retirement.

Unfortunately, many state and local governments have been cheating big-time. They have not been setting aside nearly enough each year to fund their pension commitments. The resulting shortfall can be staggeringly large.According to a recent report by the Federal Reserve Board, state and local governments have $1.7 trillion of unfunded pension liabilities — up a whopping 22.4 percent from just a year earlier. To put this into perspective, state and local governments have $3.0 trillion of municipal debt — incurred to fund things like schools, highways and other infrastructure.

Elected officials are primarily to blame for this problem by allowing it to go unattended for so long. If the appropriate pension contributions had been made annually, the true cost of the pensions would have been factored into each year’s budget. Doing so would have required that taxes be increased, funds be diverted from other programs, or pension benefits be negotiated to more affordable levels. These options are always unpalatable, but they are the only responsible ones.

Instead, many elected officials have been kicking the can down the road for years, which is bad for everyone else. Future officials inherit a far greater challenge, public employees cannot count on receiving their well-deserved pension benefits, and taxpayers are potentially facing a very big bill.

Here is the link to the full article