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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in leading business publications

Will the real financial bubble please stand up? By Thomas P. Vartanian, published by The Hill

Will the real financial bubble please stand up? By Thomas P. Vartanian, published by The Hill

March 8, 2021

My longtime friend, Thomas P. Vartanian, formerly a bank regulator at two different federal agencies and then a private practitioner for four decades, is the executive director and professor of law at George Mason University’s Antonin Scalia Law School’s Program on Financial Regulation & Technology. He is the author of “200 Years of American Financial Panics,” which will be published in May 2021.

As Congress begins to reconcile the different versions of financial stimulus passed by the House and Senate to relieve the devastation of the COVID-19 pandemic, we can only hope that someone brings a rigorous sense of financial reality to the table. There is a lot at stake beyond the immediacy of the devastating effects of the pandemic. Congress may once again be paving the path to the next financial crisis.

Financial collapses typically follow the creation of economic bubbles, so it is useful to understand when bubbles are forming. Most bubbles are characterized by too much credit chasing overvalued assets. Many financial bubbles often masquerade for some time as strong economic growth, shedding their disguises only when it is too late to stop them from bursting. Just like the contestants in the popular 1960’s TV game show “To Tell the Truth,” which climaxed when the real baseball player or plumber was asked to stand up and surprise the audience, many bubbles are quite accomplished at fooling even the most sophisticated viewers.

While there are undoubtedly Americans in distress from the pandemic, a short-term fix should be made with full knowledge of the longer-term economic issues that the country faces. As the effects of the pandemic appear to be retreating, the firehose approach to economic assistance should be jettisoned and replaced with targeted assistance. The more pork and unnecessary subsidies that Congress includes, the closer we get to our next financial panic given the context we find ourselves in.

What is that context? Take the bubble that no one seems to ever worry about — the national debt. It sits today at $28 trillion and is growing by the minute. Over the last quarter century, it has continuously been nurtured by Congresses and White Houses that seem to believe that there are no restraints on the country’s borrowing and spending power. That has necessitated an endless series of governmental actions that have distorted markets, which then of course requires further attention and adjustment as markets evolve, leading to even further market distortions.

Since interest rates hit 21 percent in the early 1980s, the Federal Reserve has taken increasing control of the economy, managing it through ups and downs. During the panic of 2008, the Fed rescued a reeling economy by purchasing, among other things, Treasury notes and mortgage-backed securities, ballooning its balance sheet from a meager $870 billion in 2007 to an eye-popping $4.5 trillion in 2014.

Even before the Fed could shed itself of that portfolio and return markets to “normality,” the pandemic of 2020 and the relief efforts enacted by Congress compelled it to increase its portfolio to a whopping $7.6 trillion. It is not clear how long it will take the Fed to unwind its current holdings, if it happens at all. This combination of relentless spending and borrowing has maneuvered the economy into a position that requires constant realignment by the government to avoid new catastrophic economic events.

Exhibit A is how desperately the country needs low interest rates. It is not that it is stimulative to have low interest rates. The country needs rates to be low to avoid even greater financial distress. According to Jimmy Chang, the insightful chief investment officer at Rockefeller Capital Management, a 1 percent uptick in the general level of interest rates would increase America’s annual interest payments on its outstanding debt by about $280 billion, which is 54 percent higher than its interest outlays in 2020, more than 5 percent of the federal government’s total spending in a typical year (pre-pandemic levels) and 40 percent more than the Pentagon’s annual budget for the Navy. Consider what would happen to the U.S. economy if rates climbed to a 6-8 percent level, which traditionally would not have been considered abnormal.

But this is only the tip of the economic iceberg. The United States continues to borrow and print money at a furious rate. The money supply represented by checking deposits, cash and other financial figures is up an unprecedented 26 percent on a year-over-year basis. That means that about a quarter of all money in the U.S has been created in the last year.

This is not a sustainable course of action. The longer-term effects, which may include inflation, deflation, increases in interest rates, increased unemployment and devaluation of the dollar, will all trigger further governmental intervention and adjustments, which will lead to the need for yet further action. While I am not suggesting that the government should not be acting to avoid financial calamities, there is a limit to what it should do. It has acted to bail out markets in every financial crisis since the 1980s, conditioning them to expect soft landings. But not everyone has received a soft landing.

Notwithstanding these and other troubling trends, our leaders seem to be tone deaf to financial realities. Ten financial panics in the last two centuries are proof of that. There will be clear consequences, and perhaps none more likely than the U.S. economy and dollar being surpassed by China as its economy continues to grow and as it surpasses the rest of the world in investments in technology and rare earth metals.

Consider the recent canary in this cave. Some U.S. corporations seem to be hedging their bets against future collapses of the U.S. economy or dollar. Why else would companies such as Tesla and MicroStrategy move billions in Treasury funds into cryptocurrencies that have no intrinsic value? Is it the hype described by Chang as the “Tinker Bell Effect,” or is it that Bitcoin is becoming more trusted than the dollar?

As Congress decides how much to provide in additional relief to Americans, an estimated $1 trillion of the $4 trillion already appropriated has not been spent. But it is difficult to stop the music and actually identify what has been spoken for and what has not been spent.

Those who have been devastated by the impact of COVID-19 should be helped. But using a firehose to distribute that relief will result in more financial pain down the road.

Congress Must Ensure Election Integrity By Senator Rick Scott

Congress Must Ensure Election Integrity By Senator Rick Scott

January 24, 2021

[The horrid election season we just went through in America is by far the worst I have witnessed in my 50 plus years as a voter. Before I say another word, let me be clear about what I am not saying. I’m not saying that Joe Biden should not be President of the United States or that Donald Trump should be. And I’m not saying Democrats should not control the Senate and Republicans should. I am saying, as strongly as possible, that our electoral system is badly broken and our great democracy cannot continue to make our nation the envy of the world unless we come together very soon to make essential repairs so that we can believe that nearly all votes were honestly tendered and counted. I came across an article in Newsweek written by Senator Rick Scott on this very subject and want to pass it along to you.]

After the despicable acts of violence in our Capitol building, it is hard to imagine a worse moment to undermine hopes for political stability in our nation. Democrats, big tech and the media are doing exactly that, however, despite president-elect Biden’s call for unity. They are tarring the 74 million Americans who cast votes for Donald Trump as insurrectionists and silencing legitimate dissent. They are also pretending that Republicans who want to repair our broken election system incited the unforgivable violence in the people’s house on January 6th.

Unlike Democrats who justified the violence and rioting this summer by explaining that “a riot is the voice of the unheard,” Republicans in Washington and around the country expressed near-universal condemnation of the violence and mayhem at Capitol Hill—and they did so without hesitation. Several rioters and a police officer were killed. Dozens of law enforcement officers were beaten and injured. The lives of Democratic and Republican elected leaders were threatened. The shining symbol of American unity, the Capitol building where both parties come together to govern, was desecrated. It was a sad day for all Americans, not just those of us who work there.

Yet Democrats have decided to salt the ground on which they pledge to grow political stability. Though we should respect their resolve to prevent political violence, they are not stopping with that goal.

Big tech, the news media and the Democratic Party have come together to de-platform not just violent voices, but 10 million Parler users. They’ve kicked Republicans who called for stability out of the tech-monopolized public square, while providing a platform for Iran’s Ayatollah to spew anti-Semitism and hate. They’ve proposed adding two Republican U.S. senators to the no-fly list, as if they were terrorists. They are campaigning to get peaceful Americans who disagree with them fired. They propose to impeach the departing president—not to remove him from office, since he is already leaving, but to keep him around and in the news. They want America to stay divided. After all, Biden’s campaign was about Donald Trump, not the Democrats’ own agenda. They are even mobilizing corporate America to withdraw its support of Republicans who are working to stop socialism and ensure that our broken election process regains respect.

Partially due to the Covid-19 pandemic, much of our country rushed without preparation to universal mail-in voting last year. In the process, we blew away some long-standing laws, procedures and constitutional requirements that guarantee fair elections. The thrown-together process in Pennsylvania, for example, may have violated the state constitution. Since the 19th century, that constitution has required all votes to be cast in person, with narrowly defined exceptions. Nevertheless, for 2020, the Pennsylvania legislature voted to allow no-excuse mail-in ballots.

That same state extended election day voting deadlines, creating a two-tiered voting system where some citizens had opportunities to vote not enjoyed by others. The Democratic state auditor general concluded he was unable to confidently ensure that the system used to determine who could vote was secure. Democrats seem to have forgotten that the U.S. Supreme Court also said there was a “strong likelihood” that Pennsylvania’s actions violated the Constitution of the United States.

In elections past, when Democrats have objected to the presidential electoral process, they’ve been lauded as heroes safeguarding the right to vote, not insurrectionists subverting it. My vote objecting to Pennsylvania’s process wasn’t about the 2020 election. It would not have changed the outcome. My vote was about elections to come, in 2022, 2024 and beyond, and seeing that they are conducted fairly. We have to repair the mess at the polls in 2020 if we are to restore Americans’ trust in our elections process. How can either the House or Senate fix our electoral problems unless we are willing to examine them?

That is why I introduced an important piece of legislation last September, the VOTER Act, which would address systemic problems in voting systems across the country and rebuild trust in our electoral process. Over the last few months, I’ve made some changes to the bill and will be re-filing it shortly. The VOTER Act mandates Voter ID in every state, institutes measures to ensure timely results, including allowing every state to begin processing absentee ballots before Election Day, and creates uniform national standards for voting by mail.

De-platforming Republicans, censoring dissent, intimidating GOP supporters and promoting the myth that Republicans supported the violence in the Capitol is corrosive and dishonest. Suppressing speech is fundamentally un-American. It undermines the institutions we need at this critical moment to lend stability to the Republican Party and our country. When the party that controls both the legislative and executive branches abuses its power, it is more than a destabilizing influence on our political system. It is authoritarianism masquerading as the force that will keep America safe.

What President-elect Biden can do to fix outdated financial system by Thomas P. Vartanian published by American Banker

What President-elect Biden can do to fix outdated financial system by Thomas P. Vartanian published by American Banker

November 23, 2020

[My friend, Tom Vartanian, who served in government during the Reagan Administration, wrote the article that follows to suggest steps the Biden Administration should consider taking to update and improve the regulation of financial services in the U.S. The article, published by the American Banker, is well worth reading.]

Dear President-Elect Biden:

Your administration stands at an unprecedented financial crossroads. The course you choose will impact the pocketbook of every American for decades to come.

Four years ago, I wrote a similar letter to President-Elect Trump, calling on him to address the exponential regulatory costs since the 2010 Dodd-Frank Act. But a lot has changed since, and your administration faces a whole new set of challenges.

Some will tell you that sound financial regulation is just a matter of rolling back the regulatory policies of the last four years, and writing more and harsher rules. Nothing could be farther from reality.

Financial services in America will only thrive if you appreciate that new delivery systems and new financial products require an overhaul of our obsolete concepts of oversight. Four critical economic and financial challenges lay before you.

Read Full Article >

BankThink Wall Street’s Cohn is wrong about community banks by Rebeca Romero Rainey published by American Banker

BankThink Wall Street’s Cohn is wrong about community banks by Rebeca Romero Rainey published by American Banker

November 2, 2020

[Rebeca Romero Rainey, President & CEO, of the Independent Community Bankers of America, wrote the following article for the American Banker in response to comments by Gary Cohen, formerly of Goldman Sachs, predicting at the American Bankers’ Association recent meeting the demise of community banking as we know it. I believe and certainly hope Rebeca has the better side of this argument.]

Former Goldman Sachs executive Gary Cohn’s recent assessment of the community banking industry proves that Wall Street has very little understanding of what’s actually happening on Main Street.

Contrary to Cohn’s hot take as a National Economic Council ex-official, these challenging times have elevated the role of community banks, which have paired technological prowess with relationship-based banking to serve as predominant lenders, particularly under the Paycheck Protection Program.

In fact, Small Business Administration data shows that community banks made nearly 2.8 million PPP loans — more than half of the program’s total loans — that helped save millions of jobs. With a national presence in every congressional district, community banks reached neighborhoods both with technology and in personal ways that big banks couldn’t.

Cohn’s remarks at an American Bankers Association event about technological evolution simply do not reflect the current state or the bright future of community banking.

Community banks have long had a history of being more nimble than mega banks. And it’s commonplace for community banks to partner with core providers and other third-party vendors to provide the latest technologies and services to their customers.

They are increasingly partnering with and investing in innovative fintech companies to transform the banking system. As a former community banker, I’ve seen firsthand how technology service contracts are scaled for the size of the bank, based on asset size or the number of transactions.

This means that a bank with $200 million in assets can afford the same technology and services for their customers as a $50 billion or more asset bank. For some reason, this isn’t common knowledge, but it is how bank service and software contracts are structured.

What should really concern industry pundits is the withdrawal of the largest banks from the local communities most in need of access to financial services.

Community banks added 628 new offices for the 12-month period that ended in June 2019, according to the Federal Deposit Insurance Corp.’s latest annual report. Noncommunity banks added only 498 offices and closed 2,387 offices over the same period.

Meanwhile, community banks also held more than 75% of deposits in roughly 1,200 U.S. counties, of which, more than 600 of those counties had a community bank provider as their only banking office option, the FDIC study said. Meaning, these communities would not have physical access to a federally insured depository institution if not for community banks.

Through the ups and the downs, community banks have continued to operate within the strenuous regulatory requirements often provoked by the misbehavior of the megabanks and the subsequent economic fallout like the 2008 financial crisis.

In fact, it was Cohn who testified before Congress on the role of Goldman Sachs during that crisis, so he should remember it well.

Wall Street representatives, and their supporting groups, should take another look in the mirror. With the continued scandals and fines levied against megabanks for wrongdoing harming consumers, it’s clear community banks are not the culprit.

The 5,000 community banks across the nation continue to get the job done without fail while serving as the backbone of local economies through nimble decision-making, personal relationships and yes, technological innovation.

President Reagan signing Garn-St. Germain Depository Institution Amendment on October 15, 1982

President Reagan signing Garn-St. Germain Depository Institution Amendment on October 15, 1982

October 13, 2020
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Tom Vartanian, served as a lawyer at the Comptroller of the Currency in the late 1970s and then became General Counsel of the Federal Home Loan Bank Board in the newly elected Reagan Administration. We have remained friends to this day. Tom sent me a video from youtube of the ceremony in the Rose Garden in which President Reagan signed the Garn-St. Germain Act of 1982 marking beginning the official deregulation of insured depository institutions to enable these institutions and the government to better cope with sky high interest rates (21 1/2% prime rate) in a highly inflationary environment. It brought back great memories of an extremely challenging and rewarding time serving my country in an extraordinary financial crisis and much needed restructuring of our financial system.

BankThink OCC official: We want to be diversity role model for banks by Grovetta N. Gardineer, published by American Banker

BankThink OCC official: We want to be diversity role model for banks by Grovetta N. Gardineer, published by American Banker

October 6, 2020

Dear Grovetta,

I’m writing to thank and congratulate you for the wonderful article you wrote for the American Banker recently on the challenges you dealt with as a woman of color growing up in the North Carolina in the 1960s and 1970s, becoming a lawyer and devoting your career to bank supervision at the FDIC, the Office of Thrift Supervision and the OCC. I believe you arrived at the FDIC shortly after I left as Chairman, and your story makes me very proud.  “Carry yourself with dignity so you may earn respect” is a central lesson you learned from your mother, who was principal of your high school, and your father, who was a minister active in the Southern Christian Leadership Conference.

I enjoyed reading your article and plan to include it on my website.  My congratulations as well to Comptroller of the Currency Brian Brooks for supporting your efforts to improve bank supervision and the Community Reinvestment Act.

All the Best,
Bill

Carry yourself with dignity so that you may earn respect.

I learned that lesson growing up in rural North Carolina in the ’60s and ’70s from my mother, the principal of my high school, and my father, a minister who marched for civil rights as part of the Southern Christian Leadership Conference.

They were examples of what African American leadership and service meant, and they inspired me to a life of public service. They also prepared me for the reality that, as a woman of color, I would encounter bigotry and ignorance in the course of my life. Those life lessons proved valuable personally and professionally.

I chose to stay in North Carolina to pursue my dream of becoming a lawyer. I believed that path would allow me to address persistent racial and economic injustices.

As a student in the early ’80s at Wake Forest University, where African Americans were a tiny fraction of the population, I was told when seeking help from an instructor, to ask someone of “my own kind.” Those words shocked me, but I was undeterred.

I engaged that moment with dignity — although it was not met with respect. And I realized the truth of another childhood lesson: I would have to work twice as hard to get half as far.

Following Wake, I chose North Carolina Central University Law School, a historically Black school and my father’s alma mater. NCCU had a great pass rate for the bar. More importantly, the dean, the instructors and other students looked like me. I was supported, challenged and pushed — hard.

I carried myself with dignity, and there, it was met with respect. I became part of the moot court team where we had great success — not among small schools or just other historically Black colleges and universities but against the big-name schools and Ivies.

We were coached to argue without notes, a respected tradition of NCCU law with no safety net to catch us. Looking back, I recognize this was preparation for the relevant life lesson — twice as hard, half as far.

In my third year during a career fair, I discovered the Federal Deposit Insurance Corp. honors program and became the first African American admitted to the program. I joined the FDIC after earning my law degree with honors from NCCU in 1987 and began a 33-year (and counting) career regulating banks. I began at the FDIC, then at the Office of Thrift Supervision and now at the Office of the Comptroller of the Currency.

During this time, I have seen progress in our country, in banking and in federal service. Yet I still see too few people who look like me in board rooms, in senior leadership positions among federal agencies and among international bank supervision leaders.

In those settings, just as in the nearly all-white classrooms of Wake, I am still among the very few women, and almost always the only woman of color.

That fact bestows a huge responsibility on me to represent other women, particularly women of color with the dignity to garner the respect we deserve. I am proud and humbled to have the opportunity to be an envoy for my gender, race and nation, demonstrating that there is strength in diversity.

As the head of bank supervision policy at the OCC today, I work with many talented and diverse women and men to ensure that the federal banking system operates in a safe, sound and fair manner.

For me, fairness is not a sound bite. It is a rally cry that my heritage obligates me to work toward. Bank supervision offered me an opportunity to fight inequality in a system that is fundamental to the livelihoods of all Americans — aligning, unexpectedly, with my career goal when I went into law. Fair access is built into the mission of the agency I serve by statute. I take this charge to heart. Unfairness stings in visceral ways.

We have a purpose and responsibility to model the kind of people we hope others become, through our work and behavior. That is why I have dedicated my career to breaking down the structural barriers that prevent some from being afforded dignity and respect that accompanies full and fair participation in the financial system.

It is why I am proud to associate my parents’ name with modernizing the Community Reinvestment Act of 1977, to promote lending and investment in underserved communities. And also, supporting an OCC venture called Project Reach to tackle stubborn systemic issues that shut people out of a system that has bestowed wealth and benefits on others.

Few might have imagined that a Black preacher’s daughter from rural 1960s North Carolina would someday be responsible for shaping the standards for the largest banks in the world and community banks across our country.

At such a heady moment in our history, when social unrest continues as a consequence of too many people being excluded from or underserved by our financial system, I feel a special obligation to use this extraordinary opportunity to work toward making things fair for all.

James C. Watkins Joins The Isaac | Milstein Group as Senior Managing Director

James C. Watkins Joins The Isaac | Milstein Group as Senior Managing Director

September 6, 2020

The former Senior Deputy Director of Supervisory Examinations at the FDIC will head the firm’s new Washington, D.C., office

WASHINGTON, D.C. (September 8, 2020) ––The Isaac | Milstein Group (IMG) announced today that James C. Watkins, who served as the Senior Deputy Director of Supervisory Examinations at the Federal Deposit Insurance Corporation (FDIC), will lead the IMG’s new Washington, D.C., office as Senior Managing Director. Mr. Watkins has nearly 40 years of experience with the FDIC and is an expert on bank stress testing, resolution plans, and prudential regulatory standards relating to large banking organizations. Mr. Watkins also has expertise in community banking and the formation of new banks.

IMG is a strategic advisory firm specializing in corporate governance, risk management and compliance for the global financial sector. The firm is co-chaired by William Isaac, former Chairman of the FDIC, and Howard Milstein, Chairman and CEO of New York Private Bank & Trust (NYPB&T).

Since September 2013, Mr. Watkins’ role as Senior Deputy Director has involved leading allsafety and soundness programs nationally. Regulatory programs overseen under Mr. Watkins’ authority included remediation for severely troubled institutions and organizations, leadership of Bank Secrecy Act and Anti-Money Laundering activities, issuance of enforcement actions on culpable individuals, development of the current large bank examination strategies,and processing of complex applications. He has also participated in international policy development through his service on the Basel Committee on Banking Supervision’s Supervision and Implementation Group.

Mr. Watkins will head the new Washington, D.C., office of IMG.His extensive expertise in issues of bank supervision, risk management, finance, consumer protection, and regulatory policy will bolster the firm’s ability to offer critical guidance and counsel to institutions in today’s rapidly evolving global regulatory and competitive environments.

William Isaac, Co-Chairman of Isaac | Milstein and former Chairman of the FDIC, said, “Howard Milstein and I are delighted to have Jim Watkins join us. In a tightly knit group of former regulators and financial executives, his leadership in financial management and risk mitigation will be invaluable to the institutions we serve.”

“It’s an honor to lead Isaac | Milstein’s D.C. office,” said Mr. Watkins. “William Isaac and Howard Milstein are bringing together an incredible team with diverse experience, offering invaluable advice for today’s institutions.”

Prior to serving as Senior Deputy Director, Mr. Watkins was Deputy Director of Supervisory Examinations at the FDIC, having joined the Washington Office at the height of the financial crisis in 2010. As Deputy Director, he directed initiatives that resulted in streamlined enforcement actions, reduced processing times, and lowered resolution costs; strengthened the processes to reduce the number of problem banks; and arranged for the orderly resolution of hundreds of banks.

Mr. Watkins rose to his role at FDIC’s headquarters from executive positions in New York and Atlanta. He received an M.B.A. from the University of Massachusetts, Amherst’s Isenberg School of Management and a B.S., cum laude, from James Madison University.

About The Isaac | Milstein Group

As a premier strategic advisory firm specializing in corporate governance, risk management and compliance for the global financial sector, The Isaac | Milstein Group serves financial institutions, including central banks and regulatory agencies as well as their boards of directors, throughout the world. Its team of former regulators and financial executives also focuses on organizational culture, business ethics, data security issues, and global financial transparency. The firm’s team of former regulators and financial executives also focuses on organizational culture, business ethics, data security issues, and global financial transparency.

More information can be found at www.isaac-milstein.com.

###

Contact:
PRCG | Haggerty LLC
(212) 683-8100
Lucy O’Brien, lobrien@prcg.com
Jim Haggerty, jhaggerty@prcg.com

William M. Isaac Remarks Honoring James Watkins upon his Retirement after 40 years of Service Federal Deposit Insurance Corporation

William M. Isaac Remarks Honoring James Watkins upon his Retirement after 40 years of Service Federal Deposit Insurance Corporation

September 4, 2020

It’s an absolute privilege for me to participate in this celebration of Jim Watkin’s service to his nation and the FDIC and to thank Jim’s wonderful family for sharing him with us for all these years.

The FDIC was a quiet agency that didn’t have much to do from the Great Depression to the late 1970s when the financial system was heading into a massive restructuring that continues to this day.  Jim’s 40 years at the FDIC from about 1980 to today witnessed three distinct periods of crisis and disruption that have shaken the financial system and the FDIC to their cores.

Jim is a wonderful and unique FDIC employee who can legitimately declare he’s seen it all.  Jim’s service began in 1981 when a young man from Bryan, Ohio was Chairman navigating a severe banking crisis running from 1978 through 1992.  Roughly 3,000 banks and thrifts failed during this time, including nine of the ten largest banks in Texas and the seventh largest bank in the country, Continental Illinois.  Most of the savings banks and S&Ls failed and/or were merged.  Congress directed the FDIC to assume the duties of the failed FSLIC with its $150 billion negative net worth.

Jim served nine different appointed Chairmen – four women and five men — during his career including our current Chairman, Jelena McWilliams. Jelena’s background is amazing even by U.S. standards. She came to the U.S. from Belgrade at age 18, getting her undergraduate and law degrees from the University of California at Berkeley. I couldn’t be prouder to stand with Jim and Jelena today (virtually, of course).  And I couldn’t be prouder that Jim is joining me in a new firm to help guide financial institutions on how best to serve the public while remaining strong and resilient.

When I arrived at the FDIC in 1978, the agency had been handling roughly a dozen relatively small bank failures each year for decades.  Depression-era legislation limited the growth of banks, controlled pricing on deposits and loans, restricted bank investment powers and permissible activities, and limiting branching and new bank charters – all designed to provide a safe environment for insured depository institutions.

Yet, storm clouds were forming. Our nation was facing considerable turmoil. Intense anti-Vietnam war protests led to violence and demonstrations throughout the country.  Protests against racial and gender inequality led to even more violence and turmoil in major cities.  Important leaders advocating peaceful reforms — Martin Luther King and Senator Robert Kennedy – were assassinated.  Guns and butter spending on the war and social programs, without tax increases, led to massive deficit spending, rapidly rising inflation, and higher interest rates.

President Carter took bold action and appointed Paul Volcker as Chairman of the Federal Reserve, telling him to do whatever was necessary to break inflation’s back.  Volcker raised interest rates beyond anyone’s imagination, causing two back to back recessions in the early 1980s.  President Carter was defeated by President Reagan, and I was named Chairman.

We knew that much higher interest rates were going to create severe problems in the financial system – the first and hardest hit would be the savings banks with their long-term fixed-rate home mortgages. Money market funds offering market interest rates to savers, caused massive deposit outflows for thrifts. We had no choice but to remove deposit interest rate controls from banks and thrifts as quickly as possible, which in turn caused these institutions to incur massive losses. Within months we began to get hit with savings bank failures with each one costing the FDIC enormously.

Old hands like Alan Miller, the FDIC’s legendary corporate secretary, speculated that somewhere around 20 bank failures in a year is all the public would tolerate before causing a banking panic.  Thankfully, he was proved wrong, in part due to the way we handled things, including a decision we made to announce publicly at the beginning of each year how many bank failures we were anticipating during the year ahead.  We believed the public could accept almost any bad news so long as they believed we were being open and doing our best to avoid inflicting unnecessary harm.  Heroes like Jim Watkins were working 24/7 and moving themselves and their families around the country to wherever they were most needed – I believe Jim and his family made more than a half dozen moves.

The savings bank failures alone were more difficult than anything the FDIC had faced since the 1930s.  Next came the collapse of energy prices and bank failures throughout the energy producing states. Farm prices collapsed, and we faced hundreds of ag bank failures.  Some farmers protested by burning to the ground one of the FDIC’s offices in the Midwest.  Another protestor got into the Federal Reserve’s headquarters building and with a bomb strapped under his coat, sitting down in the middle of the floor right outside the board’s meeting room. A deep recession in real estate came next, bringing down larger banks in various regions around the country.

Finally, we were faced with the potential collapse of our largest banks.  These banks had invested far too heavily in loans to Less Developed Countries. The FDIC joined with the Federal Reserve and the Treasury to plan for nationalizing our major banks, which would likely be triggered if one or more of the LDC countries were to renounce its debts. Very fortunately, this did not come to pass.

The FDIC had about 3,000 employees when I joined the agency in 1978.  We increased the staff to over 10,000 very dedicated people, like Jim Watkins, during my Chairmanship to keep pace with the bank failures.  That total reached about 20,000 people after I left the FDIC and the failures continued.

From day one we focused on the people of the FDIC – people like Jim Watkins — and those were by far the best investments we made.  We decided to raise the pay for our most senior people to levels above the top civil servant pay grade, and we instituted a bonus program to recognize superior performance.  We added new and expanded benefit programs, including a 401K retirement program with matching from the FDIC.  We were delighted when a few years later Congress used our groundbreaking programs as a template available to other federal financial regulators.

We created a formal management training program to identify the FDIC’s leaders of tomorrow and rotated them in various jobs throughout the FDIC and even other government agencies to broaden their experience.  And we encouraged them to attend courses at universities to broaden their education.  Jim Watkins benefitted from these programs and received an accounting certificate from Northwestern followed by his CPA license, and then added his MBA from the University of Massachusetts.

Finally, we purchased land in Arlington alongside George Mason University and built a state of the art training center for the FDIC and other banking agencies around the US and even the world.  I’m delighted it’s being put to very good use.

I have never seen a more motivated and energized group of people than we had at the FDIC.  I really hated to leave the FDIC after eight years of service, but I have been followed by a wonderful group of talented and dedicated staff members like Jim Watkins along with very special board members and Chairmen.  They have continued the proud traditions of the FDIC and have led the agency through even more financial panics and government-led financial rescues.  Bill Seidman, Bill Taylor, Sheila Bair, Marty Gruenberg, and Chairman McWilliams have been the right people at the right time for an agency that deserves nothing but the best.

Presidentially appointed leaders of the FDIC would not get much done if it were not for the incredibly dedicated permanent employees of the FDIC.  None have been more loyal or more dedicated than Jim Watkins.  Jim has served the FDIC in something like 15 different positions throughout the country, including being in charge of two important regional offices.  He has been in charge of bank supervision nationally for the past decade, and it is in that position that I was able to get to know just how talented, thoughtful and dedicated he is.  I know Jim will be missed by his many friends and colleagues at the FDIC, but I also know the FDIC has a very deep bench of outstanding professionals behind him.

Yale Journal of Financial Crises A Conversation with Paul A. Volcker

Yale Journal of Financial Crises A Conversation with Paul A. Volcker

July 20, 2020
[It is no secret that Paul Volcker was and remains a hero to me.  Paul died in December 2019 at the age of 92, so the interview below with Yale University might be the last in-depth interview with a great American (and citizen of the world).  The interview is extensive, and I’m not sure how Paul was able to pull it off as he was struggling from the effects of cancer.  Paul and I had disagreements when he and I dealt with the banking and thrift crises that ran from 1978 through 1992 during which some 3,000 banks and thrifts failed and thousands more were severely weakened.  The Great Depression was a more difficult period but it did not have nearly as many very large banks in serious trouble. And it is possible our current economic struggles resulting from Covid-19 might in the end be more difficult, but I pray not.  I am very thankful that our nation had a Paul Volcker when he was really needed.  And I am honored to have served at his side.]

Yale Program on Financial Stability Lessons Learned

A Conversation with Paul A. Volcker
By Andrew Metrick, Rosalind Z. Wiggins and Kaleb Nygaard

On March 26, 2019, Andrew Metrick, the Janet Yellen Professor of Finance at the Yale School of Management and Founder and Director of the Yale Program on Financial Stability1 sat down with Paul A. Volcker to discuss his perspectives on the Federal Reserve, central banking autonomy, “too big to fail,” and how his perspectives on these topics have changed over the decades. It turned out to be one of the last interviews given by the former Chairman of the Federal Reserve System who passed away on December 8, 2019, at the age of 92.

An Esteemed Legacy
During the 2007-09 financial crisis, the government’s interventions to shore up the collapsing financial system were unprecedented as to scale and quantity. Support to specific entities was often discussed as being made on the basis that the entity was “too-big-to-fail,” a term first coined in 1984 when the government intervened to save Continental Illinois National Bank and Trust Company, a large national bank that was about to fail. It would have been the largest bank failure in U.S. history at the time and would have remained the largest until the 2007-09 crisis. The Federal Reserve coordinated with the FDIC to save Continental, the rescue of which gave rise to the term “too-big-to-fail.”

Paul A. Volcker was Chairman of the Board of Governors of the Federal Reserve System during the administrations of Presidents Jimmy Carter and Ronald Reagan from August 1979 to August 1987. In 1984, he was instrumental in the decisions and actions taken to save Continental Illinois. Previously, Volcker had also, from August 1975, served as President of the Federal Reserve Bank of New York, where he was actively involved with monetary policy decision-making processes and became a proponent of monetary restraint. He also served as an economist with the Federal Reserve from 1952 to 1957 when he left to work in the private sector.

Volcker was the proponent of the namesake, Volcker Rule (adopted in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act), which limits proprietary trading by banks. Volcker was appointed by President Barack Obama as the chair of the President’s Economic Recovery Advisory Board on February 6, 2009. He also was the founder of the Volcker Alliance whose mission is “to advance effective management of government to achieve results that matter to citizens.”

Continental Illinois and Too-Big-To-Fail
Metrick: Today we were hoping to talk to you about topics that we focus on at the Yale Program on Financial Stability where we study crisis fighting. Of all of the many things that you worked on, the decisions around Continental Illinois [National Bank and Trust Company] were really important at the time and important for the future. It only received five pages in the Silber Volcker book but I detect in reading your book7 that you’re happy about some parts of it and unhappy about other parts of it. There are hints in the book that you wish you had objected more to certain things or done some things a little bit differently.

Volcker: There are a number of lessons to be drawn from that scenario. You know from the book or otherwise that at that time, the penchant of the Federal Reserve, or any other regulator, for effective regulation was not very great. At one point I think they had been worried about capital positions, but that had all died away. By the time that I becameChairman [in 1979] there weren’t any capital requirements that meant anything.

We knew that Continental Illinois was in trouble after learning about a bank in Oklahoma, Penn Square Bank, that was having trouble. The Oklahoma bank had made all these oil loans and then pitched them off to Continental Illinois and another bank, Seattle First.

In the summer of 1982 Roger Anderson, the chairman of Continental Illinois, visited me on a fishing trip and told me they were going bust. At some point we said we were ready to lend them quite a lot of money.

We kept an eye on it, but I didn’t think that Anderson was doing enough to fix their problemand I said as much to the lead director, but he deferred to Anderson. I remember that was typical of the kind of strength of banking regulation and of the seriousness of which directors and so forth took supervision.

The Oklahoma bank, Penn Square Bank, had preceded this by about a year. We finally let that go, but they had almost no uninsured deposits, so there wasn’t much [good business] about it except that one of the big depositors was a credit union of the U.S. Congress.

We had had this earlier situation with another bank, First Pennsylvania, right after I became Chairman. It was an interesting case because that was the first big failure. They had bought a load of long-term Treasuries and then they went sour. They had so many of them that it jeopardized the whole bank. In the end we arranged a rescue where, as a formality, some of the private banks put some money in with us so it looked like a private rescue.

That was the plan that I had in mind with Continental, which was a much bigger fish. So, we put the proposition to FDIC Chairman, William Isaac.

We were together on this. The FDIC put in a little capital and we asked the banks to put some more capital, and we would provide all the liquidity it needed. Well, the banks weren’t in the mood to put any more capital in.

So, we had to go ahead anyway. And I was unhappy about it at the time, I thought Isaac was probably right. I had to go get an honorary degree that day at Columbia, and if I didn’t showup….

Metrick: They would know something was wrong with Continental Illinois.

Volcker: Right. So, we left it to Isaac to arrange it all. And when I got back it was basically all arranged with one difference, he was going to guarantee all the deposits.

Metrick: Even the uninsured ones.

Volcker: Yeah, which, as a matter of policy I didn’t want to do. I thought if the FDIC put in some more capital, the Federal Reserve would pledge to provide all of the liquidity and so forth, and things would straighten out without formally guaranteeing the deposits. But Isaac wanted to be sure, and he may have been right. He thought he was protecting the FDIC by going all the way.

I don’t remember any debate about this, but the way he put in the capital included protection for the subordinated debt of the holding company as well. We didn’t want to do that, but that was Issac’s decision. So, the bank stumbled along and eventually got sold to some company and then it disappeared.

On the Role of Financial Supervision
Metrick: You hinted about the role of Fed supervision during the time of Continental Illinois as being very different from its monetary policy function. Care to elaborate?

Volcker: Continental Illinois was an example of a lack of effective supervision that existed back in 1984. It was all an illustration of what the matter with the regulatory system was. You had three regulators for the bank (the Fed, the FDIC, and the OCC was the third because it was a national bank) and certainly Continental looked at the Fed as the principal supervisor as they should have. At the time, I also thought that we were the premier agency in terms of supervision. But we were not doing a good job, nobody was.

I never read the book, The Secrets of the Temple, because I knew it was anti-Federal Reserve, but it’s actually a very knowledgeable book. So, in this book the author interviewed Chuck [J Charles] Partee, who was head of the Federal Reserve staff for many years. He was put on the Board, which is a precedent in itself.

The author of the book interviewed him, and the author says that he thought we were very efficient in dealing with inflation, but he said, “Even if I grant your case that inflation was an enemy and you had to deal with it, you could have dealt with it more effectively if you used your supervisory tools instead of putting us all in a recession. Why didn’t you do that?” It’s a good question.

You are politically exposed, particularly when you’re tightening up. But by and large, at the end of the day people know you’re responsible for monetary policy and they don’t really lobby you that much.

In supervision, they lobby the hell out of you. And all the lobbying money goes into supervision and you don’t want to take on two enemies at the same time.

The supervised is never happy, and the supervisor is never happy, and it’s just as true today. This continues to be a big problem today. How do you effectively supervise these institutions?

It’s just very hard to get a Federal Reserve Bank to toughen up its supervision. I think it’s probably better now than when I was first there. The Presidents of the Federal Reserve banks weren’t so noisy as they are now on policy and so forth.

The Presidents have a dilemma. They want to be an established member in the business community in Kansas City. They want to be friendly; they want to be on the Chamber of Commerce. And you don’t get to be a respected figure in Kansas City if you’re attacking, or seen to be attacking, the local banks in Kansas City.

It’s not a comfortable place to be, but the Reserve Banks can hide behind the Board regarding the supervisory responsibilities.

Metrick: And not be so tough on their own banks?

Volcker: Right. But, once in a while you get a tough regulator. Dan Tarullo—now he was the toughest supervisor I think the Federal Reserve had. Dan Tarullo was very experienced, very knowledgeable. And Tarullo wasn’t brought up in the banking world; he was a lawyer.

Metrick: But you think he did a good job?

Volcker: I think he made a difference, he made it more consistent and toughened it up and so forth.

I love to describe this experience Janet Yellen had when she was being quizzed by this government report about supervision when she was the president of the San Francisco Federal Reserve Bank. The conversation, not quoting directly, went something like this. Theysaid, “We understand Mrs. Yellen, that you’re one of the people who called attention to thedeteriorating mortgage market and subprime loans.”

She said, “Thank you for mentioning it; that’s true.”

Next question, “Why didn’t you do something about it?”

Yellen says, “Well, it wasn’t the responsibility of the San Francisco Fed. It was up to the Board. We mentioned it to Mr. Greenspan, but they weren’t much interested, and it wasn’t really our business anyway, so I didn’t get aggressive and the Board was not aggressive.”

It was a good question, and the Partee answer [splitting-off the regulatory role from the Federal Reserve] was compelling. I strongly believe that the Federal Reserve ought to be the principal regulator, but when you listen to Partee’s answer you begin wondering whetherwe ought to have a special regulator. But the British tried that.

Metrick: And it didn’t work.

Volcker: They fell completely on their face because that independent, special regulator was more overwhelmed by lobbying than the Federal Reserve would be.

But how do you deal with this problem? You have it today. It’s not going to go away, so what do you do? That’s what you’re struggling with still.

Deciding Between Non-Ideal Choices
Metrick: Yes, that’s what we’re struggling with. So, what I think I’m hearing you say is that in the Continental Illinois case, because of how weak regulation was going into it, the situation just had no good choices. And ultimately, you’re not happy with the fact that some too-big-to-fail beliefs got created by what happened, but at the same time you don’t have a specifically different path that you think would have worked better.

Volcker: No, I don’t. The thing I disagreed with was, I wanted to put so much firepower behind it, but I didn’t want to guarantee everything. But it didn’t make much difference. If we had not guaranteed everything, I think the same thing would have happened.

Metrick: So, if you had done the alternative strategy of, “we’re not going to make this statement about guaranteeing everything, but the Federal Reserve is going to lend, lend, lend…” It wasn’t the statement that created the belief, it was the firepower.

Volcker: Isaac’s issue was, “Okay we, the FDIC, don’t guarantee everything. You, the Fed, are going to put in all this liquidity. But if it goes bad, we’ve [the FDIC] got to pick up all the mess, and the Federal Reserve will go home with all the collateral.” And he was absolutely right. If it had happened that way, he would have been right.

And he said, “That’s not going to happen.”

Metrick: It sounds like, with regards to the FDIC’s specific decisions, you would have done things a little bit differently, but you think it would have engendered basically the same result in the market.

Volcker: I don’t know. Suppose in the original plan the banks had put in a billion or so and the FDIC had put in two billion.

The Federal Reserve would have put in the liquidity. There was some discussion of this scenario, but the banks turned it down. Whether the appearances of that would have modified the too-big-to-fail rhetoric, I don’t know. The stockholders did fail.

Metrick: Yes, and that’s an important distinction, the same thing happened in the recent crisis. Stockholders often got hit badly. But the big alternative would be to have let them go. And your view was that that would have led to real panic.

Volcker: Continental was a big correspondent bank in the Midwest, so it probably had 400 little Western, Midwestern banks that had a big investment in it, and it had those big oil loans, which would have been exposed, which eventually were exposed anyway. That exposure killed First Seattle Bank. Chase Bank had a lot also. I don’t know what would have happened to Chase if Continental Illinois had failed. Chances were very high that you would have had a run on some of the other banks and you certainly would have had runs on some of the smallbanks. You can say, “So what? They’re mostly FDIC insured and so forth…” But it sure would have shook up the system. How much it would have shaken up the system, I don’t know.

Metrick: Enough that you didn’t want to risk it.

Volcker: That’s for sure. Not on my watch.

The Federal Reserve as Regulator was Different Then
Metrick: Now you had talked a little bit I think in one of the events that you came into at Yale about how you had gone out to Chicago earlier to try to get Continental Illinois to get their act together. Can you reflect on that?

Volcker: Actually, it was just a routine visit. Right after I became the new Chairman of the Federal Reserve, I was visiting the Chicago Reserve Bank.

While I was out there, I looked at the position of First Chicago and Continental, and I said I want to talk to those guys. I had both the Chairman and a Director in the room. I said, “Look here, you’re undercapitalized, you got to get your capital up.” Here I was, brand new Chairman of the Federal Reserve. I was going to be the boss, “You got to get your capital up.”

And they basically said, “You have no authority over our capital.” Which at the time was a debatable point, whether we could have used our general supervisory authority. But theytold me, “You don’t have any authority over our capital.”

If you went back ten years earlier the Fed did have a formula for capital, but nobody followed it and they finally dropped it.

So, I say “We’re going to get you guys supervised.” And that got me off on this capital business. But I admit being a little shocked at the rude treatment as the new Chair of the Federal Reserve.

I’ll tell you another similar story. Years earlier, when I was the brand-new President of the Federal Reserve Bank of New York, I’m sitting in my little office and the First Vice Presidentcomes in and sees me and he says, “Tomorrow we have our annual lunch with Citibank.”

“Having lunch? What’re we having lunch for?” I ask.

“We get together and discuss what’s going on in the market and what problems they foresee.” “Do you use this to get them in shape, with capital?”

“No, no, this is just chatting about good customer relationship.”

So, I say, “Let me see their goddamn balances.”

He gives me the balance sheet. And I look at it and I don’t understand it. I’m thinking he gave me the wrong bank. It says National Citi, but I don’t recognize any of the figures. “What’sgoing on here?”

He said, “Oh, that’s just the domestic bank, that’s all we look at.”

And at that point Citibank was probably as big as its domestic bank, but they didn’t look atthat. “Who looks at that?” I asked.

“The Comptroller looks at that.”

“Do you ever consult?”

“No.”

This is the famous time when they came around and told me quite seriously, “Citibank didn’tneed any capital. Why do we need any capital? We gain profit every year.”

They actually had a memorandum supporting this theory. They believed it.

Metrick: If we make money every year, why would we need any capital? There’s no risk that we won’t make money.

Volcker: Exactly.

Metrick: So, if you look now at the decisions that were made in 1984 around Continental Illinois, and you were advising yourself—so Paul Volcker 2019 is advising Fed Chairman Paul Volcker 1984 (who was still a little green at the job)—would you recommend anything differently? Other than not getting the honorary degree from Columbia, so that you would be there for everything. Was there anything you think you would do differently having seen what then happened 35 years later?

Volcker: Well I’m sorry that we didn’t guarantee the nonbank holding company. They had maybe $400 million or something of obligations to the holding company that they wereselling as the crisis unfolded. The bondholders, they were selling…They had bought back halfof those ventures, bonds, whatever they had. I discovered that just a few days before and Isaid, “Stop it, you can’t…”

Metrick: Buying them back at discount.

Volcker: Yeah, you’re not going to buy your liabilities back with Federal Reserve monies. It’s ridiculous. So that’s why there was still a couple hundred million leftover, which they got guaranteed. It was a little messy.

The Status of “Too-Big-To-Fail” Today
Metrick: Although Continental Illinois happened in 1984, “too-big-to-fail” played asignificant part in the 2008-09 crisis. What’s your assessment of where we stand todayon this issue of “too-big-to- fail,” after all the legislation that you were part of, where doyou think this stands?

Volcker: Well I would like to think, maybe overoptimistically, that with enough cooperation in London and elsewhere, you could try out the authorities that the FDIC has, Title II, the Orderly Liquidation Authority.

People know that it’s there. It deals with the stockholder problem. It permits an effective bailout of the debt holders and effectively kills the stockholders. I think politically that’ssellable. I see that it could work.

Metrick: What you said around the time of Continental Illinois I think is still an issue today, which was something along the lines of, “We could probably handle one $40 billion bank going down, but if it’s multiple $40 billion banks, it’s going to be a real problem.” I think the sense that a lot of people have about the Orderly Liquidation Authority is that it could maybe work in an idiosyncratic special case, but in a real systemic crisis we would need something else.

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