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

Comment by David Scudder on Vartanian/Isaac OP-ED

Comment by David Scudder on Vartanian/Isaac OP-ED

July 19, 2021

Tom Vartanian and I have received many comments on our recent American Banker article (“Financial Crisis is Edging Closer. There’s Still Time to Fix it.”). It has clearly struck a chord with a lot of thoughtful and respected people worried about the future of our nation and its economy. The letter below from David Scudder is particularly thoughtful so with his permission I am posting it on my website and my LinkedIn site. David is a well respected investment manager who has spent over 50 years in high-level management of several large and successful investment funds. I could not agree more with the conclusion that it is past time for mainstream Democrats, Republicans and Independents, alike, to come together to fix what is terribly wrong with US monetary and fiscal policies.

Bill, I like your paper very much but I do have some questions.

First, I am very much in agreement with the following statements:

  1. “What we have been doing over the past half century is creating an endless continuum of booms and bigger and bigger busts”.
  2. “Financial crises are built brick by brick through a collision of government policies and private sector actions and reactions, often in periods where the velocity of innovation and pace of economic growth are the greatest”.
  3. We are “creating too much money, too little market discipline, and too many misplaced expectations”.

As for the twelve points, I could quibble about some and want to add others. But let’s leave those quibbles aside.

I do agree with “the regulation of institutions and markets must become smarter… and the government must begin deploying technology…to provide regulators with mountains of real-time information”. And “the country must be serious about reimagining job education”.

I think you leave out some other points:

  1. Banks must be subject to much stricter rules of transparency, especially for opaque instruments like derivatives, and any asset backed security that is not immediately understandable by regulators and other observers of a bank’s balance sheet.
  2. Regulation must become not just smarter but also tougher and earlier in the business cycle.
  3. If it is too late to go back to Glass-Steagall, then at the very least make too-big-to-fail institutions hold even more capital than the Dodd/Frank regulations require, and enforce transparency rules more strictly, despite the howls that sophisticated bankers will utter.

I am a believer that finance—which is both one of the greatest innovations of an economy of all time, and also one of the most dangerous—must be carefully tamed by a recognition that bankers’ self-interest will drive the most venturous towards too much leverage, too much gambling on brand new financial instruments which are comparatively untested, and eventually too much risk. Actually, this has been the story of finance for at least two centuries, although clearly the pace of speculative innovation has picked up in the last 50 years.

I am also a believer, in order to make real progress towards federal budget discipline, that it will take significant sacrifices from each major political party. That is a tall order. Let me make what I consider to be a radical suggestion, sufficiently radical that at least 95% of your readers (both Republicans and Democrats) will immediately disagree with it. Only after some careful thought might some of them see its worth.

Remember that before the 2017 tax cut was passed, we had nearly full employment and still a deficit of about 2 to 2 ¼% of GDP. After the tax cut, the deficit went to 3 3/4 to 4% of GDP. Let’s set the goal of getting back to a budget deficit of no higher than 2 ½% of GDP. To get there, I propose two things:

  1. The Republicans agree support a bill for higher taxes amounting to about the same percentage of GDP that was removed by the tax bill passed in 2017.
  2. The Democrats agree that no further big spending initiatives, after the $500 billion already agreed on infrastructure bill, will be enacted (i.e., withdraw in totality the $3.6 trillion plan).

Then, both parties also agree that no new spending initiatives will be undertaken without added revenues being raised to support them. No sane Republican or Democrat is going to agree to this compromise right off the bat. Which is exactly why I like it. It exposes the politicians for what many of them are: not at all interested in the betterment of the country’s fiscal picture but only in their own priorities.

To accomplish what I think your paper is really after will take such a compromise.

David W. Scudder,
Boston, MA

BankThink The next financial crisis is edging closer. There’s time to stop it. By Thomas P. Vartanian, William M. Isaac published by American Banker

BankThink The next financial crisis is edging closer. There’s time to stop it. By Thomas P. Vartanian, William M. Isaac published by American Banker

July 15, 2021

My friend Tom Vartanian and I are very troubled by the condition of the U.S. and global economy in the wake of the recent pandemic and the incredibly loose fiscal and monetary policies over the past decade with even more on the drawing board. Feeling we needed to do something to help unleash a public debate about these dangerous policies, Tom and I co-wrote an article published today by the American Banker. I hope you will read the article and join the debate.

The next financial crisis is on its way.

Over the last two centuries, the United States has averaged a financial panic every twenty years, the second-highest incidence of economic disaster of any country on the planet.

Sure, many expect a post-COVID period of accelerated financial growth. Financial ups and downs are a natural part of any economy. But what we have been doing over the last half century is creating an endless continuum of booms and bigger and bigger busts that is increasingly difficult to break.

Financial crises are built brick by brick through a collision of government policies and private sector actions and reactions, often in periods where the velocity of innovation and pace of economic growth are the greatest. It all climaxes when a loss of public confidence converts the energy of economic euphoria into a race from risk. Nomura Bank’s Cassandra model recently warned that the U.S appears vulnerable to a financial crisis over the next twelve quarters.

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How Congress can prevent a post-pandemic financial crisis, by Blaine Luetkemeyer and William M. Isaac

How Congress can prevent a post-pandemic financial crisis, by Blaine Luetkemeyer and William M. Isaac

September 5, 2020

“Everyone is convinced that accounting standards are simply too boring and too intricate for anyone to pay attention to.”

Those were the opening remarks of Rep. Brad Sherman, D-Calif., during a House Financial Services subcommittee hearing earlier this year with accounting standards officials. Sherman, a CPA and the chairman of the subcommittee, is absolutely right. To most Americans, accounting is boring and appears too menial to spend time reviewing.

However, when looking at the astonishing impacts accounting standards have on the U.S. and world economy, everyone would be well served to resist glazing over the rules, and pay close attention to what’s brewing in Norwalk, Conn., where the Financial Accounting Standards Board is headquartered.

Paying close attention, however, is not sufficient. FASB is a self-appointed private entity operating with impunity and virtually no supervision from Congress or the federal financial regulators. Congress must act soon to ensure the Securities and Exchange Commission and other financial regulators have proper oversight of this powerful, private-sector organization.

Lack of oversight of FASB has resulted in devastating impacts on the nation’s economy in the past and will continue to do so in the future if safeguards are not enacted soon.

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BankThink Strip FASB of its powers by William M. Isaac, Howard P. Milstein published by American Banker

BankThink Strip FASB of its powers by William M. Isaac, Howard P. Milstein published by American Banker

June 12, 2020

The latest Financial Accounting Standards Board debacle may finally cause the government to step in and end its monopoly power to dictate accounting standards on banks and financial regulators.

The most recent step in that direction was a June 4 letter from a bipartisan group of four U.S. senators to Treasury Secretary Steven Mnuchin, in his role as chairman of the Financial Stability Oversight Council.

The letter requests that the oversight council conduct a study on lending and the economic consequences of FASB’s new requirement that insured depository institutions adopt (a senseless) form of mark-to-market accounting rules called the current expected credit losses, or CECL.

The CECL requires banks to estimate credit losses over the life of a loan, and to book those losses upfront. Thus, a bank that makes 30-year mortgage loans would have to estimate and book its losses on that portfolio on day one.

How the U.S. Fought the 1957 Flu Pandemic by Emily Moon published by Smithsonian Magazine, June 2020

How the U.S. Fought the 1957 Flu Pandemic by Emily Moon published by Smithsonian Magazine, June 2020

June 12, 2020

[Everyone knows that the COVID-19 virus the world has been suffering through is the first global pandemic since the Spanish Flu in 1918.  So we’re talking about an event that perhaps occurs only once every century, right?  Everybody knows this is a once per century event, Right?  What if I told you that is not right?  What if I told you we had another pandemic that no one seems to remember a little more than 50 years ago?  I was 14 years old in 1957, so surely I would remember such an event.  Who could not?  Well, the answer seems to be that nearly all of us don’t remember it.  Pause for a moment from the daily grind and read this article from the Smithsonian Magazine of June 2020.]

The story of the medical researcher whose quick action protected millions of Americans from a new contagion

In April 1957, a new strain of lethal respiratory virus emerged in East Asia, caught local health authorities by surprise and eventually killed masses of people worldwide. Today, in the age of Covid-19, that scenario sounds frighteningly familiar – with one key difference. Maurice Hilleman, an American microbiologist then running influenza monitoring efforts at the Walter Reed Army Institute of Research, saw the problem coming and prepared the Unites States ahead of time.  “This is the pandemic,” he recalled. “It’s here.”

Hilleman arranged for the U.S. military to ship samples of the pathogen, believed to be a novel influenza virus. From Hong Kong to his lab in Washington D.C.  For five days and nights, his team tested it against blood from thousands of Americans. They found that this strain, H2N2, was unlike any flu that humans were knows to have encountered.  When it reached the United Stated, no one would be immune.

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Isaac | Milstein Letter to Congress, May 5, 2020

Isaac | Milstein Letter to Congress, May 5, 2020

May 5, 2020

 

 

As our nation’s banking institutions, and particularly small banks, face unprecedented strain in the midst of the COVID-19 pandemic, we thought you might be interested in an article we recently wrote for American Banker on Congress’s recent decision to freeze the implementation of a new accounting standard on small banks – the Current Expected Credit Losses standard, or CECL.

This counterproductive mark-to-market accounting standard that was put forth by FASB (a private entity) required banks to estimate credit losses over the life of its loan (including 30-year mortgages) and book those supposed losses immediately. Congress wisely delayed implementation of CECL for small banks (the biggest banks have already been required to do it during the current year), but we argue more is needed. CECL has the perverse impact of freezing banks’ ability to lend just as our economy needs it most. It should be repealed, and no private entity like FASB should have the ability to force new accounting standards on our nation’s financial institutions without proper oversight of Congress, the Federal banking agencies, and the SEC.

Our full article follows. We are happy to discuss in further detail as appropriate.

Best regards, and hope you are safe and healthy in these challenging times,

William M. Isaac
Co-Chairman
Howard P. Milstein
Co-Chairman
 

Congress was right to freeze CECL
by Willam M. Isaac and Howard P. Milstein

The Financial Accounting Standards Board is at it again.

The counterproductive and harmful mark-to-market accounting rules imposed by FASB led to the near-collapse of the global economy during the financial crisis, and to the $700 billion Troubled Asset Relief Program.

Now, FASB wants to require banks to adopt another form of mark-to-market accounting rules known as the Current Expected Credit Losses standard, or CECL.

CECL requires banks to estimate their credit losses over the life the loans, and book the losses upfront. Thus, a bank that makes 30-year mortgage loans would have to estimate and book its losses on that portfolio on day one.

This policy is terribly wrongheaded. And we fervently disagree with a recent op-ed in American Banker that urged Congress to impose CECL on the entire banking industry as soon as possible.

Lawmakers recently delayed the CECL standard for certain banks as part of its response to the coronavirus pandemic and concerns about the financial constraints that implementation would create amid a crisis.

It is essential that all bank regulation be countercyclical. CECL is the opposite.

In good times, banks will be unrestrained in their lending because their models will underestimate probable losses. In bad times — like we are in right now — the models will demand excessive capital and reserves, causing banks to withdraw from lending at the worst possible time, when it’s needed most.

The larger banks have already implemented CECL, while the smaller banks received a little more time to comply. The delay granted by Congress for the smaller banks speaks volumes about what is wrong with CECL.

If CECL were not hurtful to bank lending in troubled times, lawmakers would not have further delayed small-bank compliance. Not only was Congress spot-on correct in delaying implementation of the CECL for small banks, it should immediately take whatever steps necessary to repeal CECL’s application to larger banks.

Tom Brown, a veteran bank stock analyst and hedge fund manager, recently pointed out CECL’s impact on two of the nation’s largest banks, JPMorgan Chase and Bank of America.

At the end of 2019, Chase’s loan loss reserve was $14.3 billion, “and not a single analyst or investor questioned its adequacy,” Brown said in his April 17 newsletter.

Chase then adopted the CECL standard Jan. 1, resulting in a 30% increase in its loan-loss reserve, by $4.3 billion.

“Then in March, the global economy stopped in its tracks, and JPMorgan had to estimate the lifetime losses in its loan portfolio using an entirely different set of economic assumptions, based on what it thinks will happen in an environment that no one has ever experienced,” Brown said.

The combination of the coronavirus pandemic and CECL standard caused a 37% jump in Chase’s loan loss reserves, by $6.8 billion.

Bank of America, however, was “the best at avoiding” analysts’ questions about economic assumptions used in its forecasting, Brown noted.

The bank refused to disclose line-item forecasts, such as the assumed peak unemployment rate, because there are so many variables in its model and comparisons to other large banks would be misleading.

Home Bancshares Inc. CEO John Allison also expressed frustrations that the CECL standard was being implemented during a crisis.

“In the midst of a pandemic, with thousands of people dying and hundreds of thousand people infected, and Americans locked in their homes, the accounting clowns show up with a new circus called CECL,” Allison said during his company’s latest earning call. “Total disregard for the mess they created and [it will] create an uncertainty in the market. The circus genie should have never been allowed to get out of the bottle.”

It is past time for Congress to intervene and strip FASB of its self-anointed authority to dictate generally accepted accounting principles without any meaningful oversight from the government.

The FASB is a private entity, created by the accounting firms in 1973. It obtains its funding from the accounting industry. Its seven-member board is selected by the accounting industry, and it is not subject to meaningful government regulation.

This system cannot stay in place any longer. The Securities and Exchange Commission should set the accounting standards for the banking industry. There should also be a requirement that the SEC formally seek and consider the views of the public. This includes input from the accounting industry, the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency before adopting or amending any rules.

William M. Isaac, a former chairman of the Federal Deposit Insurance Corp. and Fifth Third Bancorp, is co-chairman of the Isaac-Milstein Group. 

Howard P. Milstein is chairman of Emigrant Bank and New York Private Bank & Trust. He is also co-chairman of the Isaac-Milstein Group.

Source: https://www.americanbanker.com/opinion/congress-was-right-to-freeze-cecl

BankThink Congress was right to freeze CECL by William M. Isaac, Howard P. Milstein

BankThink Congress was right to freeze CECL by William M. Isaac, Howard P. Milstein

April 24, 2020

The Financial Accounting Standards Board is at it again.

The counterproductive and harmful mark-to-market accounting rules imposed by FASB led to the near collapse of the global economy during the financial crisis, and to the $700 billion Troubled Asset Relief Program.

Now, FASB wants to require banks to adopt another form of mark-to-market accounting rules known as the Current Expected Credit Losses standard, or CECL.

CECL requires banks to estimate their credit losses over the life the loans, and book the losses upfront. Thus, a bank that makes 30-year mortgage loans would have to estimate and book its losses on that portfolio on day one.

This policy is terribly wrongheaded. And we fervently disagree with a recent op-ed in the American Banker that urged Congress to impose CECL on the entire banking industry as soon as possible.

Lawmakers recently delayed the CECL standard for certain banks as part of its response to the coronavirus pandemic and concerns about the financial constraints that implementation would create amid a crisis.

It is essential that all bank regulation be countercyclical. CECL is the opposite.

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BankThink How small banks can help small companies get through coronavirus published by American Banker by William M. Isaac, Howard P. Milstein

BankThink How small banks can help small companies get through coronavirus published by American Banker by William M. Isaac, Howard P. Milstein

April 7, 2020

The coronavirus has brought together a badly divided country in a way almost never seen.

With an invisible enemy uniting the nation, the vibrant network of more than 5,000 local banking institutions, if properly harnessed, can be a crucial weapon. There is no better vehicle available to stabilize the nation’s economy than the banks rooted in their local communities.

These banks are closely connected to individual and small-business borrowers, with loans usually secured by residential and commercial real estate, farmland and automobiles in cities, suburbs and towns across the country. While all banks, their customers and the communities they serve will benefit from the CARES Act recently adopted by Congress, more help specifically for smaller banks and middle America is necessary.

The Troubled Asset Relief Program enacted in response to the last financial crisis primarily helped major financial institutions in metro cities recover. In this new crisis, Congress and federal banking agencies need to encourage community banks with assets of less than $10 billion, and with satisfactory ratings from their federal regulators, to provide immediate temporary relief to the borrowers most adversely by the economic downturn amid COVID-19.

Community banks provide roughly half of the business loans in the country, and they must be enlisted to help their communities and borrowers. The current legislation provides that new SBA- guaranteed loans can be offered by banks. The problem is that community banks also need help to protect themselves and the individual, agricultural and small-business borrowers with existing loans.

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BankThink Calls for CECL delay expose standard’s flaws published by American Banker by William M. Isaac and Thomas P. Vartanian

BankThink Calls for CECL delay expose standard’s flaws published by American Banker by William M. Isaac and Thomas P. Vartanian

March 24, 2020

The Federal Deposit Insurance Corp. chief has fired up what could be the opening barrage in the war over accounting supremacy.

Specifically, FDIC Chairman Jelena McWilliams urged the Financial Accounting Standards Board to suspend or defer the adoption by banks of the new Current Expected Credit Losses methodology for recording losses.

When or if CECL becomes effective, it would require a bank to estimate and book the losses it might incur over the life of a loan. The bank would not be allowed to estimate and book the interest it would receive on the loan even though that is a much more certain calculation than estimating losses.

Consider the absurdity of federal agencies, such as the Federal Reserve, the FDIC and the Comptroller of the Currency, having to go to FASB hat-in-hand to protect the financial integrity of the U.S. banking system.

All hands are on deck in Washington as policymakers are trying to determine how long the pandemic will last; how many lives will be lost or debilitated as a result; and how devastating the economic damage might be.

And yet, the federal agencies established by Congress to implement protections over the banking system and economy must go on bended knee to a self-appointed group of accountants (FASB), who are not subject to government oversight or regulation, not even the Administrative Procedures Act and Freedom of Information Act.

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