An interview of William Isaac by Susie Gharib for PBS

SUSIE GHARIB:In Washington, another plan is in the works to restore confidence in the nation’s financial system. The White House says Treasury Secretary Henry Paulson is quote, “actively considering” making direct cash injections into American banks. Treasury is authorized to do that under the terms of the $700 billion financial rescue plan that was signed into law last week. Quoting sources at the Treasury, Bloomberg News says the government could begin taking equity stakes in banks within weeks. Treasury is expected to buy preferred shares of participating banks and that participation would be voluntary. These moves are expected to strengthen bank balance sheets, and to persuade financial institutions to resume lending. Joining us now to talk more about this proposal, William Isaac, former chairman of the FDIC and current chairman of the consulting firm The Secura Group. Hi, Bill, how are you doing?

WILLIAM ISAAC, FORMER CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION: I’m doing great. How are you doing, Susie?

GHARIB: All right. Well, I’m doing fine given what has been going on in the markets. What do you think of this plan? And will it restore confidence in the financial system?

ISAAC: I am very happy that the Treasury is going to address the capital shortfall in the banking industry. And I hope that it doesn’t take weeks for the Treasury to announce the specifics of the plan. Because I think that will be very calming. If they do it right, it will be very calming to the markets.

GHARIB: I know are you a big believer in putting cash directly into banks as opposed to that $700 billion rescue plan, which is supposed to buy up troubled assets. What is your thinking on that? Tell us why?

ISAAC: Well, I was opposed to the bailout bill, mostly because I don’t think it will work. The banks — taking $700 billion of bad loans out of the banks doesn’t help get banks lending again. It just solves some problems in some banks. And it doesn’t have any leverage to it. If the Treasury were to put that same $700 billion — and I’m not recommending they go as high as $700 billion, but I’m going to use that number since that is a number that is in the bill. If they took that same $700 billion and used that to invest in bank capital, the banks can loan $10 for every dollar of capital, roughly, which means that the Treasury would be creating $7 trillion of new lending capacity in the banks. And that is vastly superior to buying $700 billion of problem loans. It just — it will really give some punch to the economy. It will get banks back into the lending business. Not instantaneously, because they are going to be cautious about lending until they can make sure that the economy is not headed further south. But we really need to get banks back in the lending business. And to do that we need to get some capital back in there.

GHARIB: Right.

ISAAC: Our SEC with.

GHARIB: But could there be.

ISAAC: Go ahead.

GHARIB: I was going to say, could there be a psychological backlash in the sense that as soon as both depositors and shareholders know that a bank has received a cash injunction from Treasury, they are going to say, whoa, maybe this bank is going to fail, and they will pull away?

ISAAC: No, I don’t think so at all. I think that the public is going to breathe a big sigh of relief. And the financial markets will breathe a big sigh of relief knowing that the government is going to stand behind the banking system and make sure that things don’t get out of hand. And we’re going to get this economy turned around. So I think there is all upside to this. Assuming, assuming that they do it right. I really would hate to see them put money in and be punitive about it to the existing shareholders. I think that will knock the markets right out again. I think that, for example, they went into AIG (AIG) and they put $85 million and now another 38 or whatever. And they took control of the company, 80 percent or whatever. They wiped the shareholders out.

GHARIB: Right.

ISAAC: Bank shareholders have been punished enormously over the past couple of years and they didn’t cause these problems. Most of them are pretty conservative investors who didn’t want to invest in dot-com stocks and they selected banks because it is a pretty conservative dividend-paying stock.

GHARIB: Bill.

ISAAC: . and they have been severely punished.

GHARIB: Bill, we have 30 seconds left. From your experience of turning around savings and loans back in the ’80s, what else needs to be done to restore confidence in the financial system?

ISAAC: Well, the other major thing they really need to do, Secretary Paulson hinted at it yesterday, but I don’t think they’ve done it. They certainly haven’t announced it clearly. They really need to have the FDIC declare that there is a financial emergency. And when the FDIC does that, the FDIC should announce that during this period of crisis, all general creditors, all depositors, insured and uninsured, bondholders in our banking system, will be protected if a bank fails. And that, I think, will get the inter — the financial markets working again and get banks willing to loan to each other again.

GHARIB: All right. Very interesting information. Thank you very much, Bill, for coming on the program.

ISAAC: Thank you.

GHARIB: My guest, William Isaac, former chairman of the FDIC.

Original Interview Located Here.