SPEAKERS: TOM KEENE, BLOOMBERG SURVEILLANCE HOST

KEN PREWITT, BLOOMBERG SURVEILLANCE CO-HOST

WILLIAM ISAAC, SENIOR MANAGING DIRECTOR, FTI CONSULTING

8:31

TOM KEENE, BLOOMBERG SURVEILLANCE HOST: William Isaac with us of Bryan, Ohio, former chairman of the FDIC. Bill Isaac, good morning.

WILLIAM ISAAC, SENIOR MANAGING DIRECTOR, FTI CONSULTING: It’s good to be with you.

KEENE: We have been talking and talking and talking about clearing the housing market. Have we cleared it? Are we making any progress at all?

ISAAC: We’re making progress, but it is pretty slow. And it varies by market. I was just reading an article this week, and I live in Sarasota, Florida. And the Sarasota, Florida market has cleared pretty well. But much of Florida hasn’t, so it really depends on where you are.

KEN PREWITT, BLOOMBERG SURVEILLANCE CO-HOST: I thought I remembered seeing a Fifth Third branch in Sarasota a couple years ago. I wondered about that.

ISAAC: You do see Fifth Third branches there.

PREWITT: Yes, we were looking at your bio here. Just in case you think things are bad today, back when you joined the government in the early eighties, the collapse of Continental Illinois, the seventh largest bank in the U.S., third world debt crisis, the pricing in the agriculture sector, a collapse of the bubble in the energy sector, a severe nationwide collapse of the real estate sector, 3,000 banks and thrifts failed, including nine of the ten largest banks in Texas. It just kind of puts things into perspective, doesn’t it?

ISAAC: That pretty well sums it up, although I didn’t – in that list, I didn’t hear you say that there was a depression in the agricultural sector because there was that as well.

PREWITT: Yes, that was in the list.

ISAAC: Okay, okay.

PREWITT: So okay, so we got out it – we got out of that almost 30 years ago. Can we get out of what we are in now?

ISAAC: Of course, we can, but it is going to require a lot of political will that I haven’t seen much evidence of thus far. There is not much wrong with this economy that we couldn’t fix if we put our fiscal house in order at the federal level.

We have a real crisis of confidence in this country. There is a lot of capital in the bankingsystem right now. There is a lot of liquidity in the banking system. But it is very difficult for people to make investment decisions when you are facing the kinds of fiscal problems, the potential for inflation, and the potential for substantial tax increases. It is very difficult to get people to invest in that kind of climate.

KEENE: Right.

 

Part of the problem we have is that there have been so many impediments placed in the way of working out the foreclosure process that it is very – it has been very difficult for the banks to clear out the troubles they have, the problems they have and work them out. I mean there is litigation everywhere, and it is very, very difficult for the banks to move forward in the midst of all of that.

KEENE: Bill, let’s come back. Bill Isaac with us with the FDIC, and we’ll continue our discussion with Mr. Isaac, really centering here again on housing and touching upon the banking industry as well.

8:34

(BREAK)

8:38

KEENE: William Isaac, former chairman of the FDIC, global head of financial institutions for FTI Consulting. Bill Isaac, Cornelis Hurley, Washington Times, “Too Safe to Fail.” What is the distinction between too big to fail and to safe to fail?

ISAAC: What Corn Hurley, who is with Boston University, and I were trying to do is promote the concept of creating a fund that the large banks would have to contribute to.

Because they are perceived as too big to fail, they get their funding much cheaper in the marketplace than they would – than smaller banks do. So we were promising that they set aside some of that into a fund that they couldn’t touch to sort of equalize the playing field and build their capital up.

KEENE: And let me guess, they are pushing back.

ISAAC: Well, it is not something that I would expect them to embrace warmly. But we need to do something about this too big to fail concept, and the Dodd-Frank bill clearly hasn’t done it.

PREWITT: Bill, let me ask you about the latest trend in banking. If I opened a savings account at Fifth Third, how much are you going to charge me?

ISAAC: I think you are referring to –

PREWITT: Bank of New York Mellon.

ISAAC: Bank of New York Mellon is charging a fee for very large depositors. That was just for some institutional funds that I think were taking advantage of an arbitrage and I don’t think it affects – it doesn’t affect you and me.

PREWITT: Should we say so far? I mean –

ISAAC: No.

PREWITT: – it’s been a week now and it hasn’t spread throughout the industry and spread on down to the likes of us.

ISAAC: No, I don’t think it is going to affect depositors generally. I think that was a unique situation.

KEENE: Bill, we’re pushing on into the fifth year of this financial crisis. It is tangible. It is real.

primary importance is that during the 1980s, the Federal Reserve and the FDIC were both two strong and independent agencies and they were allowed to go about their work without political interference.

KEENE: They can’t do that now? Is that what you are suggesting?

ISAAC: They can’t do that now. The White House and the Treasury are running everything. And the fed and the FDIC have been hamstrung in clearing the market.

KEENE: We have seen bank stocks plummet here. What does it signal to William Isaac to see any number of too big to fails under $10.00 a share? Does that mean they have to go raise capital?

ISAAC: That really depends on the future of the economy and how bad things get. But right now, I would say no. I think the banks have raised a lot of capital. They have a lot of liquidity.

What they don’t have is loan demand, and it is very tough for them to make a buck these days because they cannot find high quality loans. I do believe the banks would like to be making a lot more loans than they are, but credit standards have raised – have been raised, and people who really need credit are having trouble getting it because they don’t meet the new standards.

KEENE: Let’s leave it there. William Isaac, thank you so much, with FTI Consulting, and, of course, the former chairman of the FDIC. Look for his op-eds, always thoughtful.

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