By Mark Williams for The Columbus Dispatch

The $700 billion financial bail-out: Unnecessary.

Political leadership: Lacking.

Financial regulatory reform: Worthless.

Two years after the collapse of investment banking firm Lehman Brothers nearly brought down the U.S. financial system and helped push the economy into a deep recession, former Federal Deposit Insurance Corp. Chairman William Isaac has plenty of harsh words for regulators and politicians these days on how they handled the crisis.

“When are we going to learn?” Isaac, chairman of Cincinnati-based Fifth Third Bancorp and LEGG Global Financial Services, said recently while speaking at Ohio State University’s Moritz College of Law. “When are we going to fix the system?”

Isaac, who graduated from the law school in 1969, ran the FDIC during part of the banking and savings and loan crisis. From 1980 to 1991, about 3,000 banks and thrifts failed, including some of the nation’s biggest, compared with 265 bank failures in the past two years.

Early that decade, when Isaac was in charge of the FDIC, the country was in a severe recession that pushed unemployment to nearly 11 percent, the prime interest rate soared to 21.5 percent and the oil and agriculture industries collapsed.

He said the problem was so critical that the FDIC developed a plan to nationalize all of the major banks.

Yet, public confidence in the banking system held up, he said.

This time, the economy was strong in 2007 and 2008, but the failure of a handful of large institutions was enough to create a panic and nearly shut down the global financial system, he said.

Isaac’s new book, Senseless Panic: How Washington Failed America, details the financial collapse and credits a string of bad policies and decisions by politicians and regulators over the past 20 years for the collapse. The problems were compounded by a lack of strategy and planning — saving investment bank Bear Stearns, for example, while letting Lehman Brothers go down — that rattled markets.

The result: Millions of homeowners have lost their homes, unemployment is near 10 percent and the economy continues to struggle with consumers and businesses reluctant to spend, he said.

“One mistake after another was made,” he told students and faculty, citing everything from accounting rules governing valuations of loans to regulations for stock trading to Federal Reserve actions leading up to the crisis.

He said the $700 billion bailout, known as the Troubled Asset Relief Program, “panicked the public and deepened the crisis” when then-Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke said it was needed to save the financial system and the U.S. economy.

The money was not used as originally intended to buy banks’ sour loans. Instead, it was injected into the banks and used to save Chrysler, General Motors and their finance arms and insurance giant AIG.

Government officials have credited TARP with stabilizing the banking system. The Congressional Budget Office recently estimated that TARP will cost taxpayers $66 billion, and the American Bankers Association said that money injected into banks actually will produce a profit for the government.

But that hasn’t kept the program from coming under scathing criticism as a Wall Street bailout being paid for by struggling consumers. Isaac said the FDIC already had authority to issue broad guarantees to depositors and provide money for banks, he said.

Isaac talked about the rescue package put together in 1984 for Continental Illinois, the country’s seventh-largest bank and a bank considered too big to fail. He said in his book that, had the bank been liquidated, it would have triggered a panic and put numerous other banks in danger of failing.

“We didn’t allow it to spook the financial system,” he said.

At the same time, shareholders and the bank’s managers were punished, he said.

Isaac also was critical of the financial regulatory overhaul approved by Congress this year.

“They spent a year and a half on a financial regulatory bill that’s worthless,” he said.

He said the bill doesn’t bring together and strengthen regulatory agencies and would not have stopped the crisis two years ago if it had been in place.

Failure to take critical steps to address the problems leading up to the crisis, a weak economic recovery and huge federal spending and the health-care overhaul have done nothing to instill confidence, he said.

Businesses and consumers are hoarding cash, and Isaac said he has pulled the bulk of his investments out of the stock market.

“Nobody wants to spend,” he said. “Nobody wants to invest.”