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.


in leading business publications

Public option for banking: solution in search of a problem by Rob Nichols published by San Francisco Chronicle

Public option for banking: solution in search of a problem by Rob Nichols published by San Francisco Chronicle

October 28, 2019

[The governor of California has signed into law legislation to authorize local governments to own banks.  The President & CEO of the American Bankers Association makes a strong case against publicly owned banks, a view I very much share for a lot of good reasons.  Nationalized banks in other countries – Israel and Mexico come immediately to mind – have never worked.  Politicians use them as their playthings to finance whatever the cause du jour may be, leaving it to taxpayers to clean up the resulting mess.  The FDIC and various state governments spent a lot of time and money cleaning up the substantial losses and hardships during the 1980s created by the failure of state-backed deposit insurance funds in Ohio, Maryland and Massachusetts.  The California idea will likely go nowhere unless the FDIC grants deposit insurance to the publicly owned banks, which we all should pray never happens.]

To its credit, California has always been a place of big dreams and experimentation. The Golden State has given us Hollywood, Silicon Valley, McDonald’s hamburgers and even blue jeans. Now some in California think they have discovered the next great innovation when it comes to financial services.

Taxpayers should be wary.

Gov. Gavin Newsom recently signed AB857, which will allow California’s local governments to charter their own banks, and there are already efforts under way. Supporters say the legislation will enable cities and counties to stop relying on regular commercial banks to help manage their own finances, while competing with those banks to provide financial services to the public. They point to other public banks in the U.S. as proof that this big idea can succeed. They should brush up on their history.

The reality is America’s experience with dozens of public banks over the years is littered with painful and costly failure. Nearly all have been closed down — many failing because of political interference that resulted in making risky loans and operating with too little capital (or both), then collapsing when the boom times ended. In fact, Abraham Lincoln’s earliest recorded speech as an Illinois legislator in 1837 criticized just this kind of political interference.

Read the full San Francisco Chronicle Article

FASB’s Latest Action the Last Straw – Your Help is Urgently Needed

FASB’s Latest Action the Last Straw – Your Help is Urgently Needed

July 18, 2019

Informed experts know that the mark-to-market accounting rules issued by the Financial Accounting Standards Board (FASB) in the last decade led directly to the unnecessary charge off of $500 billion of bank capital in the US.  This, in turn, led to an economic collapse, massive taxpayer infusions of capital into banks and other financial institutions, and a very serious recession that we are just finally shaking off. 

FASB is at it again, requiring substantial changes to loan loss reserving by banks that will likely result in a repeat of FASB’s last fiasco, hitting particularly hard community banks and the small cities and towns they serve.  Those of you who know me and my lifetime commitment to a strong and resilient banking industry serving our nation’s economic needs, know that I have never and would never advocate any policies that would diminish the industry’s strength and resiliency. 

FASB is a private organization set up by the accounting industry to impose accounting standards on companies throughout the nation, including financial organizations.  FASB’s rules have the force of law despite the fact that FASB is not subject to any public or government oversight.

Community bankers – already suffering more than enough – will be hit particularly hard by FASB’s latest proposed rules.  FASB’s latest proposal must be stopped in its tracks.  Bills are pending in Congress force FASB to withdraw its proposal to allow an economic impact study to be done.  I hope you will write to your members of Congress and urge them to pass legislation to bring FASB under reasonable public oversight.

The statement below from Rob Nichols, the President of the American Bankers Association, says it very well.  I urge you to read the statement and lend your support.

Best regards, Bill Isaac


ABA Statement on FASB Vote to Delay CECL
By Rob Nichols, ABA president and CEO

“FASB’s vote to delay CECL for certain smaller banks offers further proof that the required efforts to implement this costly standard are far greater than the board has previously led bankers to believe. A partial delay without a requirement for study or reconsideration simply kicks the can down the road – it does not reduce the ongoing data, modeling and auditing requirements facing smaller banks or address the increased pro-cyclicality it will cause. The delay should apply to banks of all sizes, and should be used to conduct a rigorous quantitative impact study to properly assess the effect this new standard will have on their ability to serve their customers and the broader economy, particularly during an economic downturn. We encourage Congress to act quickly to ensure this flawed standard is delayed for all institutions until such a comprehensive analysis can be completed.”

Easy Monetary Policy: A Threat to the Future by William C. Dunkelberg, Chief Economist, National Federation of Independent Business

Easy Monetary Policy: A Threat to the Future by William C. Dunkelberg, Chief Economist, National Federation of Independent Business

April 29, 2019

As the current economic expansion nears record length, observes more frequently publish lists pf “risks” that could precipitate a recession and an end to the expansion: weak global growth, China, the “black swan event” du jour, a Federal Reserve policy error, fiscal insanity, and the old inverted yield curve.  Pick your favorite interest rates (or ones that fit your story) and within 20 months or so (almost 2 years) of an inversion, a recession will allegedly start.  Inverted yield curves don’t “cause” recessions, they simply signal imbalances, however created, in financial markets and consequently in real markets.  Expectations matter: if we expect a recession and adjust our behavior accordingly, we’ll get a recession or slowdown.

Apparently, liquidity is like toothpaste: once you squeeze it out, you can’t put it back.  So out global central banks squeezed the tube and bought every risk-free asset they could find.  The Fed bought $4 trillion of them to provide liquidity, and in the process, interest rates headed toward 0. It was assumed that once the economy started growing, those assets would be returned (sold) to the private sector and the liquidity extinguished.

As the Fed started rising rates and reducing its bond holdings, a funny thing happened on the way to “normal.”  Financial markets ground and politicians, wanting a strong economy (i.e. a strong stock market) in 2020 for the elections, began to complain.  The Fed took cues from the stock market and shifted in neutral.  It abandoned its “plan” to continue to raise rates and move further away from 0, reverting back to “data dependency,” e.g. monthly monetary policy.  The Fed’s “plan” seems to be watch the data, them, are a policy change.  This rate change has no immediate effect on the real economy because according to past research, there are long lags between interest rate changes and changes in real economic activity (e.g. business investment, etc.). Financial markets however respond immediately, looking at the data that it expects the Fed will respond to. This will continue to drive monetary policy choices because there is no other road map for policy that looks to the future, just pressure to maintain asset prices.  Stock markets are at a record high levels, and the Fed appears afraid to do anything that might change that.

This is the position that all central banks in market economics now find themselves in.  They can’t reduce bond holdings because that raises rates becuase, well, that raises rates too, and financial markets don’t like it.  After all, raising short rates invites the much feared “inversion.” The economy is at full employment, and labor is in short supply.  Yet, the real wish-free of interest, a proxy for the return on capital, is well under 1% and saving for retirement is difficult with a 2.5% yield on the 10-year Treasury bond (which is held down by central bank hoarding of risk-free assets).

The Fed has squeezed itself into a corner.  When the economy slows, the Fed will have little room to cut rates (historically cutting 4 to 5 percentage points), but it will start buying bonds (QE again) hoping liquidity and lower rates will help even though they didn’t do much last time (round one excepted).  The Fed will add a few trillion to its balance sheet and, when the recession/slow period ends, it will have $8 trillion in riskless assets instead of $4 trillion.  The private sect demand for these rich free assets will keep rates low as central banks hoard them.  Maintaining that level as bonds mature will require major Fed excursions into bond markets.

Traders win, savers lose.  Interest rates, one of the most important prices in a market economy, allocating capital to highlight values uses, will be crippled as they were starting in 2009, and economic growth will pay a heavy price for this intrusion into private markets.

Why the Universal Use of the 30-Year Mortgage Is Dangerous by Edward Pinto published by the RealClear Markets on April 22, 2019

Why the Universal Use of the 30-Year Mortgage Is Dangerous by Edward Pinto published by the RealClear Markets on April 22, 2019

April 25, 2019

The short answer is that the 30-year mortgage amortizes extremely slowly, making it nearly twice as risky as a similar loan with a 20-year term. And the 30-year loan compounds risk-layering by promoting the use of higher combined loan-to-value and debt-to-income ratios (DTI).

The Housing Lobby unabashedly supports the broad availability of the 30-year mortgage, and even wants it extended to manufactured housing. This is because Housing Lobby sees the slow amortization as a feature that reduces monthly payments, making home “more affordable”. They choose to ignore the bug–the 30-year loan, when combined with other risk factors, drives up home prices when the supply of homes is tight, especially for buyers of entry-level homes. Since 2012, lower priced entry-level homes have risen by about 55%, while move-up homes have risen by about 31%. This means lower priced entry-level homes that cost an average of $103,315 in 2012, cost a whopping $160,138 in late-2018. Thus, rather than making housing more affordable as its supporters claim, 30-year loans make housing less affordable. But more on this entry-level home pricing penalty later.

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BankThink With stress tests, less is more by Thomas P. Vartanian published by the American Banker on April 18, 2019

BankThink With stress tests, less is more by Thomas P. Vartanian published by the American Banker on April 18, 2019

April 19, 2019

Dynamic stress testing — or using econometric models to forecast a financial institution’s income and regulatory capital through hypothetical economic shocks — is a good idea. But the Federal Reserve’s rules need to keep improving to make them less onerous and more reliable.

Fortunately, the Fed seems to agree, having taken several recent steps in that direction, among them the March 28 publication of 80 pages of new data explaining model assumptions and analytics. Vice Chairman Randal Quarles speaks openly about the issues that stress tests raise, which in itself is a breath of fresh air. Still, while the Fed has now disclosed more than it ever has about its stress tests since he was appointed, the information is not as granular as institutions would like, and timing of important assumptions still seems to be an issue. The delivery of this latest data came just one week before banks were scheduled to make their annual Comprehensive Capital Analysis and Review, or CCAR, submissions.

That said, it’s worth giving the Fed credit for signaling that it appreciates the relationship between risk management and profitability, and for taking the first steps to make its stress testing process more transparent and efficient. While some may feel that it is of no consequence if large banks are inconvenienced by cumbersome capital and stress testing requirements, they couldn’t be more misinformed. Stress test requirements directly impact the economy and the wallets of every American.

Capital requirements and stress tests assign risk to each asset on the books of a bank. Those risk weightings determine how much capital an institution must hold, which in turn influences how credit is allocated throughout the country.

In addition, economic and timing uncertainties in the process cause banks to hold capital buffers beyond what the law requires just to avoid being out of compliance when the assumptions of the model shift, as they can each year. Every extra dollar of capital that is locked away in a bank’s vault to pad this surplus directly reduces multiples of that dollar that could otherwise be lent to American consumers and businesses.

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BankThink Fed ‘independence’ is a slippery slope by Alex J. Pollock published by American Banker on March 21, 2019

BankThink Fed ‘independence’ is a slippery slope by Alex J. Pollock published by American Banker on March 21, 2019

March 21, 2019

Many observers, like Captain Renault in “Casablanca,” were “shocked, shocked!” at President Trump’s sharp criticism of the Federal Reserve and his attempt to influence it against raising interest rates, inquiring whether the president can fire the Fed chairman.

Yet many presidents and their administrations have pressured the Fed, going back to its earliest days, when the Woodrow Wilson administration urged it to finance bonds for the American participation in the First World War. The Fed compliantly did so, proving itself very useful to the U.S. Treasury.

That was not surprising, since the original Federal Reserve Act made the secretary of the Treasury automatically the chairman of the Federal Reserve Board, and the board met in the Treasury Department.

In the decades since then, lots of presidents have worked to influence the Fed’s actions. Their purpose was usually to prevent the Fed from raising interest rates, exactly like Trump. It was also often to cause the Fed to finance the U.S. Treasury and to keep down the cost of government debt, just as “quantitative easing” does now.

But has a president ever fired a Federal Reserve Board chairman?

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BankThink A simple fix to brokered-deposit battle by William Isaac published by American Banker on March 12, 2019

BankThink A simple fix to brokered-deposit battle by William Isaac published by American Banker on March 12, 2019

March 12, 2019

The American Bankers Association recently released a report from a major law firm detailing the legislative history of the Federal Deposit Insurance Corp.’s battle against bank purchases of deposits from money brokers, continuing a policy debate that began over 30 years ago when I was chairman of the FDIC. The ABA report suggests that over time the FDIC may well have gone further than necessary in addressing the underlying problems with the practice.

I believe the ABA report is responsible and helps illuminate a possible solution to the issues that have arisen with the FDIC’s rules. That said, I’m concerned that the rhetoric of some bankers paints the FDIC’s restrictions on brokered deposits as antiquated vestiges of a bygone era of no value in today’s rapidly evolving internet era.

Let’s take a quick look at the origins of the restrictions in order to better understand the problem and a possible solution. Deregulation of interest rates in the 1980s gave rise to the practice of money brokers raising vast sums of money and bundling the funds for sale to the banks and thrifts that bid the highest prices, generally those that had the highest risk profile. The then-$100,000 limit on deposit insurance flowed through to each of the thousands of investors in the money broker, allowing hundreds of millions of dollars to be placed by the deposit broker fully insured in each bank.

As the bank and thrift failure rate began its dramatic rise, we found an increasing number of failed banks and thrifts had large amounts of fully insured brokered funds. We concluded we had to take strong actions to stop this massive abuse of the deposit insurance system which was under siege.

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High taxes are driving away the tri-state golden geese, by Stephen Moore and Arthur Laffer published by NY Post on February 13, 2019

High taxes are driving away the tri-state golden geese, by Stephen Moore and Arthur Laffer published by NY Post on February 13, 2019

February 13, 2019

“This is the flip side [of] tax the rich, tax the rich, tax the rich. The rich leave, and now what do you do?” Gov. Andrew Cuomo asked this month, and it’s a vexing question.

When Congress enacted President Trump’s tax reform a little over a year ago, many economists, ourselves included, predicted that the lower tax rates would supercharge the national economy but could cause big financial problems for the tri-state region of New York, New Jersey and Connecticut.

The cap on the state and local tax deductions at $10,000 raised the highest effective state tax rates to 12.7 percent from 7.7 percent in New York City, to more than 10 percent from 6.5 percent in New Jersey, and to 7 percent from 4.2 percent in Connecticut.

The danger was clear: Unless these states cut their taxes sharply, they would witness an exodus of wealthy residents, who would migrate to low-tax states like Florida, Tennessee and Texas, taking their money with them and dramatically diminishing the tax base in their home states.

Cuomo is now calling the SALT change “diabolical.” But Albany sat back and did nothing. Ditto for legislators in Hartford. And in Trenton, they raised taxes.

The exodus may already be underway.

Link to the full story Click here