by Aaron Task for Yahoo Finance

The two-year anniversary of Lehman Brothers’ bankruptcy has prompted widespread discussion of the causes of the crisis and its aftermath.

William Isaac, former FDIC chairman and current chairman of Fifth Third Bancorp, believes “20 years of bad policy” and lax risk management on Wall Street laid the groundwork for the crisis of 2008. Most observers would agree with that.

But unlike many experts, Isaac says the panic of 2008 could have been avoided, or severely minimized, as detailed in his book Senseless Panic.

“When the crisis hit the government, specifically the Treasury [Department], just blew it,” Isaac says. “They spooked the markets and turned what should have been a manageable crisis into a full-blown panic.”

Isaac, who chaired the FDIC during the start of the S&L crisis in the 1980s, didn’t utter the name Hank Paulson, but laid much of the blame for the panic at the former Treasury Secretary’s feet.

“They should never had let Lehman go down [but] they were afraid of the political backlash,” he says. “That’s what happens when you have a political agency running crisis management.”

No Plan for Crisis Management

Furthermore, Isaac claims “there was no plan” at Treasury to deal with the situation. “They were jumping from crisis to crisis [and] handled them in highly inconsistent ways,” he says.

Indeed, while Lehman was allowed to go bankrupt, federal bailouts and/or government-engineered takeovers were made for Bear Stearns, AIG, Fannie Mae and Freddie Mac, among others.  “When you’re in the middle of a crisis, stop worrying about moral hazard – fix the system so it doesn’t run out of control,” he says, suggesting Paulson’s Treasury did just the opposite.

The very fact AIG was rescued five days after Lehman’s bankruptcy belies the official rationale there was “no legal authority” to save Lehman, according to Isaac. “The did an even more difficult transaction, legally at least, with AIG. If you can do that transaction you can do any transaction.”

Meanwhile, the $700 billion TARP program Paulson said was absolutely necessary was never used for its intended purpose of buying toxic assets.

Looking forward, Isaac doesn’t have much faith in the policymakers involved in those decisions who are still on the job – namely Ben Bernanke and Tim Geithner – or that the new financial reform law could have prevented the last crisis or will prevent the next one, as discussed further in an upcoming segment.

Original Article Located Here.