Address by William M. Isaac
US Bancorp Financial Institutions Conference
Willard Intercontinental Hotel
Excellence in Banking Leadership
June 9, 2017
I’m delighted to be invited to keynote this conference hosted by US Bancorp for its correspondent banks for several reasons personal to me. After graduating from law school in 1969 I joined the Milwaukee law firm of Foley & Lardner. Today Foley & Lardner is one of the largest law firms in the United States. But back then the firm was focused primarily on Wisconsin, and its major banking client was Wisconsin’s then largest bank, First Wisconsin. I spent a good deal of time working with First Wisconsin including going about the state each year to talk with its various correspondent banks, including helping the correspondent banks do mergers and acquisitions, frequently financed by First Wisconsin. I left Foley & Lardner in 1974 to become Vice President General Counsel & Secretary of another regional bank, First Kentucky National Corporation.
I had every intention of coming back to Wisconsin to become general counsel of First Wisconsin, and I thought it would take about two years for First Wisconsin to miss me enough to offer me the position. First Wisconsin did finally reach out to me in 1977. Unfortunately or fortunately, depending on your point of view, I was already under consideration by President Carter to be appointed to the board of the FDIC. So I declined coming back to Milwaukee.
I was appointed to the FDIC board by President Carter, and confirmed by the US Senate in March of 1978. President Reagan named me Chairman of the FDIC after he was elected in 1980. I served two years past my six year appointment, leaving the FDIC Chairmanship at the end of 1985. My eight-year period of service at the FDIC was beyond my imagination with some three thousand banks and thrifts failing, including dozens of the largest banks and thrifts in the country.
I formed my own consulting firm, The Secura Group, in 1986 after leaving the FDIC. The firm was very successful, working with hundreds of banks and other financial institutions on regulatory compliance, risk management and strategy. It was in that capacity that I was retained by Star Bank in Cincinnati in 1990 to defend it against an unwanted hostile takeover by Fifth Third Bank, also in Cincinnati. We were successful in turning back the unwanted offer, after which the Star Banc board asked me what they should do to prevent other banks from coming after them.
I suggested that they quickly and quietly commence a search for a new CEO, and I gave them a list of five potential CEOs they should consider. At the top of the list was Jerry Grundhofer, with whom I had worked when he was CEO of Security Pacific’s lead bank in Los Angeles and who was later appointed Vice Chairman of Bank of America. Time was of the essence so a few directors and I soon met with Jerry in a private dining room at a Cincinnati restaurant. All went well and we signed up Jerry a week or two later, along with his right-hand associate, Richard Davis.
Jerry didn’t waste any time in acquiring one of the largest banks in Missouri, followed by acquiring the largest bank in Wisconsin – First Wisconsin, then called First Star. He changed the combined company’s name to First Star and moved its headquarters to Milwaukee. It was not a surprise to me when Jerry took the next step and acquired US Bancorp, which was run by his brother Jack, and moved the combined headquarters to Minneapolis. Jerry decided to retire about ten years ago, and it was certainly no surprise to anyone who knew them when Richard Davis was named his successor as CEO.
I have known and have had enormous respect for Richard Davis for nearly 30 years now. He is very smart and experienced, and is a person of high quality and great integrity. I am honored to be here today to wish him the very best as he moves toward retirement. Richard will be sorely missed by US Bancorp and the entire banking industry.
I have had strong connections with virtually every institution that today comprises US Bancorp. When I left the FDIC in late 1985, my former employer, First Kentucky, and First National Bank of Cincinnati (which later changed its name to Star Bank) were negotiating a merger and asked if I would consider becoming the CEO of the combined company. The merger didn’t happen but I would have been very receptive to their proposed offer. Incidentally, many years later in 2009, I accepted an offer from the board of Fifth Third Bancorp to become Chairman of the Board of that fine company.
All in all, I have been blessed with doing many challenging things in my career and with meeting and working with an incredible number of very high quality people. I want to share with you today a little bit about myself – not the stuff in my CV but rather who I am. I think it will help you understand where I’m coming from in my remarks today.
My grandparents came to the U.S. in the 1890s and settled in small Ohio towns. My father’s parents spoke little or no English and had little formal education or money. They had nine children, all of whom worked incredibly hard to build a successful family business.
They had very clear values and priorities: 1) a close knit family, 2) hard work and thrift to provide a better life for their family, 3) generosity to their community and those in need, and 4) absolute integrity. They didn’t talk a good game – indeed, they didn’t talk much at all – they lived it. Their values are the greatest gifts they shared with me.
My family and I lived the American dream. We bought into the notion that we would work hard, save and invest, educate our children, participate in our community, and give to those less fortunate. If we did these things our lives would have greater meaning, and our children and their children would have more opportunities than their parents.
We trusted that our government would protect us from external and internal threats, enforce the rule of law, ensure that the rules of the economic game are fair and equitable, would help educate our children, and would extend a hand to those in need.
Trust – confidence in the honesty, reliability and fairness of people and things – is essential to democracy, a free market economy, and the financial system. The breach of trust in recent years by our government and major financial institutions has been enormously damaging.
There were many breakdowns leading up to the most recent financial crisis: reckless growth of Fannie Mae and Freddie Mac; failure of the government to deal with the real estate bubble; excessive high-risk growth in major financial institutions; unwise and highly pro-cyclical regulatory and accounting policies; a highly politicized and fragmented financial regulatory system; rating agencies pursuing short-term profits at the expense of long-term excellence; flawed monetary policies; and excessive borrowing and spending in the public and private sectors.
Once the crisis took hold, misguided actions by government leaders escalated what should have been a controllable situation into a full-blown crisis of confidence. With Treasury at the helm, the government careened from one crisis to the next with inconsistent ad hoc solutions which created the sense that no one was in charge with a coherent strategy.
Bear Stearns was bailed out through a government financed shot-gun marriage to JPMorgan Chase, while Lehman was allowed to slide into bankruptcy. AIG was bailed out, including its large bank creditors, while Fannie Mae and Freddie Mac were nationalized with common and preferred stockholders left holding the bag. Washington Mutual was allowed to fail, wiping out $20 billion of bonds and $7 billion of freshly issued equity.
The inconsistency and uncertainty was too much for the markets to bear. They could not determine which firms would topple next or how the government would respond. Market participants lost faith in the government and each other, causing banks around the world to stop lending, even to each other.
In late September 2008 the government we had trusted to protect us from panics itself panicked. Treasury threw together a plan – the “TARP” – to use taxpayer funds to purchase $700 billion of toxic assets from Wall Street. The plan was sold to Congress using highly inflammatory language (“we are facing financial Armageddon!”), which scared the public even more and deepened the economic downturn.
Treasury lost faith in its own plan and abandoned it immediately. Instead of purchasing toxic assets, it invested TARP funds in large financial institutions whether or not needed or wanted. To add insult to injury, Treasury used TARP to invest in GM and Chrysler after Congress specifically rejected the idea. The public was and remains understandably enraged.
Government policy remains heavily focused on Wall Street and large institutions. The ill-conceived, public “stress test” applied to the 19 largest TARP banks so rattled the markets that the government was forced to declare all 19 “too big to fail.” Yet to this day no one has designed a meaningful program to assist smaller banks in smaller communities, which are deemed “too small to save.”
The Dodd-Frank financial reform legislation adds to the widespread belief that the system is rigged. The legislation does not address the major causes of the crisis, would not have prevented it from happening, and will not prevent the next crisis. The law is some 2,500 pages long and has spawned tens of thousands of pages of new regulations that are suffocating community banks and making it more difficult for banks to serve lower income people.
The fact that politicians repeatedly make false claims about the legislation fuels the public’s cynicism. Our leaders say it ends “too big to fail” while leaving in place a dysfunctional regulatory system to oversee very large and complex banks, which few believe could be allowed to fail without creating economic chaos.
They brag about the new “watchdog” – the Systemic Risk Council – created to indentify and control developing systemic risks. They fail to mention that the Council is highly politicized and is run by the very agencies – the Treasury, Federal Reserve, SEC and others – that led us into the crisis.
The damage to our institutions – public and private – will be very difficult to repair. A lot of people have lost faith in the American dream. We trusted that the system would be fair and just for those who played by the rules, but have learned that it is not.
We trusted our government to regulate our institutions properly and protect us from economic catastrophe, but it did not. We trusted our financial institutions to control and diversify their risks and maintain strong capital and reserves, but they did not.
We trusted our government not to panic in the face of adversity. We trusted our government to be fair to all of America – Main Street along with Wall Street.
Perhaps most importantly, we trusted our government not to so grossly mismanage our nation’s financial affairs as to lead us to the brink of disaster with $20 trillion debt that is growing exponentially with no end in sight. The debt is potentially so large that it could interfere with the ability of our nation to protect itself against foreign and domestic threats, to educate our children, and to care for those truly in need.
Despite our many challenges, there is nothing wrong with America that we cannot fix if we muster the political courage and will to do it. As bad as things might be today, we have been through worse – the Civil War, numerous financial panics and depressions, and two world wars.
There are three overriding issues that must be addressed without delay. I’ve already noted the first, which is getting our nation’s fiscal house in order. Federal spending is out of control and is robbing our children’s future.
There should be no debate that we must cut spending significantly, phased in to reduce the hardships. While I’m not a fan of raising taxes on income and production, we must find ways to increase revenues. The political reality is that everyone must contribute to the resolution of our fiscal crisis.
The second overriding issue is improving greatly our education system. We are leaving far too many people behind, creating a huge divide between haves and have-nots. Walter Shipley, the legendary CEO of Chemical Bank (which is the foundation upon which JPMorgan Chase is built), told me nearly 30 years ago that his number one worry was the sad condition of the New York City public school system. He lamented that fewer than half of the graduates of the New York City school system were trainable for entry level jobs at his bank. This is simply not acceptable in a civilized nation.
A third overriding issue is the growing income disparity in the U.S. between the top half and the bottom half of the economic spectrum. Nearly half of the adult population in the U.S. is not involved in the regulated banking system in a meaningful way (i.e., beyond having a simple checking account to receive their payroll checks).
One of the greatest strengths of America has been a large and growing middle class coupled with significant upward mobility. In my view, the Dodd-Frank law has forced much tighter lending standards, making it much more difficult for the middle class to gain access to credit from banks. This problem is magnified by a continued large decline in the number of community banks in the U.S.
I am by nature an optimist. I believe we can get our fiscal house in order. We can greatly improve the quality and fairness of our education system. And we can make banking services, including loans, more available to those in the lower half of our economic spectrum.
Underlying the deterioration of our society in recent years is a lack of quality leadership that adheres to the values held dear by my ancestors and no doubt by yours. Most people place a high value on working hard to create a better life for their families, contributing to their communities and those in need, and behaving with integrity.
We must demand that the leaders of our public and private institutions adhere to these values, and we must hold our public and private leaders to a much higher standard than in recent decades. When leaders in the private and public sectors bring us to the edge financial ruin, they must be held accountable and at the very least be swiftly removed from office.
If we are going to fix what’s wrong in America and much of the rest of the developed world it is going to require great leadership skills from the next several generations represented in this conference by US Bancorp and the community banks in attendance.
Thank you for inviting me to be part of your conference. I look forward to having a lively period of questions and answers.