To avoid virtual anarchy, we must move cautiously and fix things by Thomas P. Vartanian published by The Hill

To avoid virtual anarchy, we must move cautiously and fix things by Thomas P. Vartanian published by The Hill

My long-time friend, Tom Vartanian, has written another thoughtful article on the challenges and potential dangers involved in the rapidly developing growth in technology impacting our lives in so many ways, including our financial privacy. It seems clear that Congress needs to consider whether and how these firms and activities should be regulated. Developments in technology have and will continue to improve our lives, but substantial risks could well cause substantial damage to our well being if not addressed properly. It is past time for Congress, the states, and state and federal regulators to examine where we are and where we are headed and put sensible protections in place for all of us. I recommend that you read Tom’s latest article and get involved in the debate. Bill Isaac, former Chairman, FDIC.

Meta CEO Mark Zuckerberg’s oft-quoted mantra “move fast and break things” has turned out to be a dangerous strategy when it comes to the evolution of virtuality. It takes advantage of the propensity of people to leap off virtual cliffs in return for the transitory high delivered by the next hit of technology.

Zuckerberg wants to usher us into the metaverse — the next virtual chamber of pleasures and horrors. Proceed with caution, as the stakes are increasing as each new wave of technology subsumes more and more of our lives with no apparent sense of order or user control.

That is ironic since people work mightily to ensure the safety and stability of their analogue worlds through the establishment of rules, police, borders and armies. No one willingly invites strangers into their home and shares personal, medical, financial and other sensitive information with them. But there are vast numbers of us who do that every day online, often willingly, encouraging a virtual wild west of insecurity, unwanted surveillance and anonymous anarchy.

Meta CEO Mark Zuckerberg’s oft-quoted mantra “move fast and break things” has turned out to be a dangerous strategy when it comes to the evolution of virtuality. It takes advantage of the propensity of people to leap off virtual cliffs in return for the transitory high delivered by the next hit of technology.

Zuckerberg wants to usher us into the metaverse — the next virtual chamber of pleasures and horrors. Proceed with caution, as the stakes are increasing as each new wave of technology subsumes more and more of our lives with no apparent sense of order or user control.

That is ironic since people work mightily to ensure the safety and stability of their analogue worlds through the establishment of rules, police, borders and armies. No one willingly invites strangers into their home and shares personal, medical, financial and other sensitive information with them. But there are vast numbers of us who do that every day online, often willingly, encouraging a virtual wild west of insecurity, unwanted surveillance and anonymous anarchy.

Each day it becomes more apparent that the dark underbelly of technology creates parallel universes where crime is often undetectable, and supremacy belongs to whomever possesses the most advanced computers and skills. Indeed, hackers are collecting sensitive, encrypted data now in the hope that they’ll be able to unlock it using quantum computing in a decade.

A report issued by the United States Cyberspace Solarium Commission in March 2020, all but cries out for leaders to step forward and secure or reconstruct cyberspace.

Unfortunately, cyberattacks continue to be explained away as the downside of progress that we simply must deal with. This sense of “breach inevitability” shields companies and governments from the harsh criticisms and economic penalties that might otherwise compel them to require more strongly coded software, more resilient hardware and less vendor or employee-triggered cyberattacks. The “apologize, rinse, and repeat” approach should not excuse inferior products or processes.

I have come to believe that the internet is broken, and that we need a new one. Today’s internet has evolved into a form of virtual chaos where data is up for grabs, innovation is rewarded and insecurity rarely punished. Unlike the analogue world, every person and company in cyberspace has essentially been deputized to be responsible for their own defense. It is as if the secretary of defense has ordered 7-Eleven to purchase ballistic missiles to defend every one of its stores from attacks by nation states. It is no wonder that vulnerabilities are increasing at an exponential rate like cyber canaries gasping for air in virtual coal mines.

The metaverse is billed as the next generation of the internet — a virtual quilt of interconnected online video games, the world wide web, social media, online shopping and cryptocurrencies. The rules there will again be made by innovators driven by “progress” and the billions of dollars that can be made from selling technological snake oil and collecting even more data about us. How can it make sense to dive headlong into that world and cede even more personal space to progress when we have hardly figured out how to manage our security and safety in the virtual world we already have?

We have failed at making virtual spaces safe and educating users about the risks. And no one has confronted the fundamental question virtual reality raises: Who should be making decisions about what virtual governance should look like and how it should function? We all want to believe that the government is all over this problem and that we are somehow protected. It is not, and we are not.

The challenge is complex. Nation states, criminal cartels and terrorists are working overtime to achieve the functional equivalence of geopolitical superiority that they could never have attained in the analogue world. If a government assumes the job of regulating virtual reality, bureaucracies will grind progress to a halt in that country while others continue to sprint forward. If we ignore governance or leave it to technologists, we will continue to have increasing virtual anarchy. Society is faced with two bad choices, which means we will have to find the best worst option, a daunting challenge indeed.

Global partnerships between the public and private sectors must begin to orchestrate the future of technology and the security of virtuality to ensure that order prevails in cyberspace, the metaverse or whatever technological nirvana follows them. That should include stronger authentication, increased governance, consumer transparency, the imposition of security standards and rating systems, more secure software, more resilient hardware and the establishment of enforcement mechanisms.

Identifying the problem is the easy part. Finding and balancing the potential solutions is perhaps in the greatest existential challenge that humanity faces. But given the alternative, solutions must be found. Governments can’t do it alone, and the private sector won’t do it. We are in a pickle that requires global leadership, if that is possible.

With apologies to Zuckerberg, it is time to move cautiously and hope we don’t break any more of the worlds we live in.

Uncommon Bravery and Statesmanship in Perilous Times By William M. Isaac

Uncommon Bravery and Statesmanship in Perilous Times By William M. Isaac

Like many, if not most, people I have been very concerned lately about the condition and future of our nation. We face a badly divided and highly partisan Congress; a stubborn global pandemic; violent crimes and general lawlessness throughout many of our cities; spiraling inflation; widespread homelessness; rampant drug abuse; unimaginable wealth held by a handful of super-rich while the fortunes of the middle and lower classes are flagging; U.S. jobs deported throughout the world while millions of unvetted illegal aliens flood through porous U.S. borders; Medicare and Social Security seriously under funded; and the Federal deficit nearing $30 trillion, up from $5.6 trillion in just the past two decades.

The last four Presidents from both parties — Presidents Bush, Obama, Trump and Biden have run up nearly six times the deficits as the previous 42 Presidents combined. Yet, the majority in the current House and Senate, with strong encouragement from the White House is seriously considering somewhere around $5-6 trillion of additional deficit spending to stimulate the economy and rebuild our nation’s infrastructure.

Suddenly, a lone U.S. Senator from West Virginia has displayed both courage and integrity reminiscent of political leaders from our nation’s past. In an op-ed on September 1 in the Wall Street Journal, Senator Joe Manchin (D.WV), steps forward and proclaims that he will cast his vote against the $3.5 trillion infrastructure bill, which is part of an overall $5-6 trillion spending package pending before Congress.

In his op-ed (see link below), Senator Manchin declares “[S]ome in Congress have a strange belief there is an infinite supply of money to deal with any current or future crisis, and that spending trillions upon trillions will have no negative consequence for the future. I disagree. . . . Now Democratic congressional leaders propose to pass the largest single spending bill in history with no regard to rising inflation, crippling debt or the inevitability of future crises. Ignoring the fiscal consequences of our policy choices will create a disastrous future for the next generation of Americans.”

Senator Manchin’s bravery and intellectual honesty means that massive spending bills pending in this Congress, which the Democrats control with the Vice President’s vote as a tie-breaker, will likely come to a screeching halt, and hopefully the Congress will end a twenty-year dreadful run of lavish and irresponsible spending under four Presidents, two from each party. I am a Republican appointed to the FDIC board of directors by President Carter and named Chairman by President Reagan to help control and resolve a massive breakdown in banks and S&Ls from 1978 through 1992. I can only hope that Senator Manchin stands his ground for fiscal sanity this year and decides to run for President in 2024.

Read WSJ Article by Sen. Manchin

Comment by David Scudder on Vartanian/Isaac OP-ED

Comment by David Scudder on Vartanian/Isaac OP-ED

Tom Vartanian and I have received many comments on our recent American Banker article (“Financial Crisis is Edging Closer. There’s Still Time to Fix it.”). It has clearly struck a chord with a lot of thoughtful and respected people worried about the future of our nation and its economy. The letter below from David Scudder is particularly thoughtful so with his permission I am posting it on my website and my LinkedIn site. David is a well respected investment manager who has spent over 50 years in high-level management of several large and successful investment funds. I could not agree more with the conclusion that it is past time for mainstream Democrats, Republicans and Independents, alike, to come together to fix what is terribly wrong with US monetary and fiscal policies.

Bill, I like your paper very much but I do have some questions.

First, I am very much in agreement with the following statements:

  1. “What we have been doing over the past half century is creating an endless continuum of booms and bigger and bigger busts”.
  2. “Financial crises are built brick by brick through a collision of government policies and private sector actions and reactions, often in periods where the velocity of innovation and pace of economic growth are the greatest”.
  3. We are “creating too much money, too little market discipline, and too many misplaced expectations”.

As for the twelve points, I could quibble about some and want to add others. But let’s leave those quibbles aside.

I do agree with “the regulation of institutions and markets must become smarter… and the government must begin deploying technology…to provide regulators with mountains of real-time information”. And “the country must be serious about reimagining job education”.

I think you leave out some other points:

  1. Banks must be subject to much stricter rules of transparency, especially for opaque instruments like derivatives, and any asset backed security that is not immediately understandable by regulators and other observers of a bank’s balance sheet.
  2. Regulation must become not just smarter but also tougher and earlier in the business cycle.
  3. If it is too late to go back to Glass-Steagall, then at the very least make too-big-to-fail institutions hold even more capital than the Dodd/Frank regulations require, and enforce transparency rules more strictly, despite the howls that sophisticated bankers will utter.

I am a believer that finance—which is both one of the greatest innovations of an economy of all time, and also one of the most dangerous—must be carefully tamed by a recognition that bankers’ self-interest will drive the most venturous towards too much leverage, too much gambling on brand new financial instruments which are comparatively untested, and eventually too much risk. Actually, this has been the story of finance for at least two centuries, although clearly the pace of speculative innovation has picked up in the last 50 years.

I am also a believer, in order to make real progress towards federal budget discipline, that it will take significant sacrifices from each major political party. That is a tall order. Let me make what I consider to be a radical suggestion, sufficiently radical that at least 95% of your readers (both Republicans and Democrats) will immediately disagree with it. Only after some careful thought might some of them see its worth.

Remember that before the 2017 tax cut was passed, we had nearly full employment and still a deficit of about 2 to 2 ¼% of GDP. After the tax cut, the deficit went to 3 3/4 to 4% of GDP. Let’s set the goal of getting back to a budget deficit of no higher than 2 ½% of GDP. To get there, I propose two things:

  1. The Republicans agree support a bill for higher taxes amounting to about the same percentage of GDP that was removed by the tax bill passed in 2017.
  2. The Democrats agree that no further big spending initiatives, after the $500 billion already agreed on infrastructure bill, will be enacted (i.e., withdraw in totality the $3.6 trillion plan).

Then, both parties also agree that no new spending initiatives will be undertaken without added revenues being raised to support them. No sane Republican or Democrat is going to agree to this compromise right off the bat. Which is exactly why I like it. It exposes the politicians for what many of them are: not at all interested in the betterment of the country’s fiscal picture but only in their own priorities.

To accomplish what I think your paper is really after will take such a compromise.

David W. Scudder,
Boston, MA

BankThink The next financial crisis is edging closer. There’s time to stop it. By Thomas P. Vartanian, William M. Isaac published by American Banker

BankThink The next financial crisis is edging closer. There’s time to stop it. By Thomas P. Vartanian, William M. Isaac published by American Banker

My friend Tom Vartanian and I are very troubled by the condition of the U.S. and global economy in the wake of the recent pandemic and the incredibly loose fiscal and monetary policies over the past decade with even more on the drawing board. Feeling we needed to do something to help unleash a public debate about these dangerous policies, Tom and I co-wrote an article published today by the American Banker. I hope you will read the article and join the debate.

The next financial crisis is on its way.

Over the last two centuries, the United States has averaged a financial panic every twenty years, the second-highest incidence of economic disaster of any country on the planet.

Sure, many expect a post-COVID period of accelerated financial growth. Financial ups and downs are a natural part of any economy. But what we have been doing over the last half century is creating an endless continuum of booms and bigger and bigger busts that is increasingly difficult to break.

Financial crises are built brick by brick through a collision of government policies and private sector actions and reactions, often in periods where the velocity of innovation and pace of economic growth are the greatest. It all climaxes when a loss of public confidence converts the energy of economic euphoria into a race from risk. Nomura Bank’s Cassandra model recently warned that the U.S appears vulnerable to a financial crisis over the next twelve quarters.

Read Full Article

How Congress can prevent a post-pandemic financial crisis, by Blaine Luetkemeyer and William M. Isaac

How Congress can prevent a post-pandemic financial crisis, by Blaine Luetkemeyer and William M. Isaac

“Everyone is convinced that accounting standards are simply too boring and too intricate for anyone to pay attention to.”

Those were the opening remarks of Rep. Brad Sherman, D-Calif., during a House Financial Services subcommittee hearing earlier this year with accounting standards officials. Sherman, a CPA and the chairman of the subcommittee, is absolutely right. To most Americans, accounting is boring and appears too menial to spend time reviewing.

However, when looking at the astonishing impacts accounting standards have on the U.S. and world economy, everyone would be well served to resist glazing over the rules, and pay close attention to what’s brewing in Norwalk, Conn., where the Financial Accounting Standards Board is headquartered.

Paying close attention, however, is not sufficient. FASB is a self-appointed private entity operating with impunity and virtually no supervision from Congress or the federal financial regulators. Congress must act soon to ensure the Securities and Exchange Commission and other financial regulators have proper oversight of this powerful, private-sector organization.

Lack of oversight of FASB has resulted in devastating impacts on the nation’s economy in the past and will continue to do so in the future if safeguards are not enacted soon.

Read Full Article

BankThink Strip FASB of its powers by William M. Isaac, Howard P. Milstein published by American Banker

BankThink Strip FASB of its powers by William M. Isaac, Howard P. Milstein published by American Banker

The latest Financial Accounting Standards Board debacle may finally cause the government to step in and end its monopoly power to dictate accounting standards on banks and financial regulators.

The most recent step in that direction was a June 4 letter from a bipartisan group of four U.S. senators to Treasury Secretary Steven Mnuchin, in his role as chairman of the Financial Stability Oversight Council.

The letter requests that the oversight council conduct a study on lending and the economic consequences of FASB’s new requirement that insured depository institutions adopt (a senseless) form of mark-to-market accounting rules called the current expected credit losses, or CECL.

The CECL requires banks to estimate credit losses over the life of a loan, and to book those losses upfront. Thus, a bank that makes 30-year mortgage loans would have to estimate and book its losses on that portfolio on day one.

How the U.S. Fought the 1957 Flu Pandemic by Emily Moon published by Smithsonian Magazine, June 2020

How the U.S. Fought the 1957 Flu Pandemic by Emily Moon published by Smithsonian Magazine, June 2020

[Everyone knows that the COVID-19 virus the world has been suffering through is the first global pandemic since the Spanish Flu in 1918.  So we’re talking about an event that perhaps occurs only once every century, right?  Everybody knows this is a once per century event, Right?  What if I told you that is not right?  What if I told you we had another pandemic that no one seems to remember a little more than 50 years ago?  I was 14 years old in 1957, so surely I would remember such an event.  Who could not?  Well, the answer seems to be that nearly all of us don’t remember it.  Pause for a moment from the daily grind and read this article from the Smithsonian Magazine of June 2020.]

The story of the medical researcher whose quick action protected millions of Americans from a new contagion

In April 1957, a new strain of lethal respiratory virus emerged in East Asia, caught local health authorities by surprise and eventually killed masses of people worldwide. Today, in the age of Covid-19, that scenario sounds frighteningly familiar – with one key difference. Maurice Hilleman, an American microbiologist then running influenza monitoring efforts at the Walter Reed Army Institute of Research, saw the problem coming and prepared the Unites States ahead of time.  “This is the pandemic,” he recalled. “It’s here.”

Hilleman arranged for the U.S. military to ship samples of the pathogen, believed to be a novel influenza virus. From Hong Kong to his lab in Washington D.C.  For five days and nights, his team tested it against blood from thousands of Americans. They found that this strain, H2N2, was unlike any flu that humans were knows to have encountered.  When it reached the United Stated, no one would be immune.

Read Full Article >

Isaac | Milstein Letter to Congress, May 5, 2020

Isaac | Milstein Letter to Congress, May 5, 2020

 

 

As our nation’s banking institutions, and particularly small banks, face unprecedented strain in the midst of the COVID-19 pandemic, we thought you might be interested in an article we recently wrote for American Banker on Congress’s recent decision to freeze the implementation of a new accounting standard on small banks – the Current Expected Credit Losses standard, or CECL.

This counterproductive mark-to-market accounting standard that was put forth by FASB (a private entity) required banks to estimate credit losses over the life of its loan (including 30-year mortgages) and book those supposed losses immediately. Congress wisely delayed implementation of CECL for small banks (the biggest banks have already been required to do it during the current year), but we argue more is needed. CECL has the perverse impact of freezing banks’ ability to lend just as our economy needs it most. It should be repealed, and no private entity like FASB should have the ability to force new accounting standards on our nation’s financial institutions without proper oversight of Congress, the Federal banking agencies, and the SEC.

Our full article follows. We are happy to discuss in further detail as appropriate.

Best regards, and hope you are safe and healthy in these challenging times,

William M. Isaac
Co-Chairman
Howard P. Milstein
Co-Chairman
 

Congress was right to freeze CECL
by Willam M. Isaac and Howard P. Milstein

The Financial Accounting Standards Board is at it again.

The counterproductive and harmful mark-to-market accounting rules imposed by FASB led to the near-collapse of the global economy during the financial crisis, and to the $700 billion Troubled Asset Relief Program.

Now, FASB wants to require banks to adopt another form of mark-to-market accounting rules known as the Current Expected Credit Losses standard, or CECL.

CECL requires banks to estimate their credit losses over the life the loans, and book the losses upfront. Thus, a bank that makes 30-year mortgage loans would have to estimate and book its losses on that portfolio on day one.

This policy is terribly wrongheaded. And we fervently disagree with a recent op-ed in American Banker that urged Congress to impose CECL on the entire banking industry as soon as possible.

Lawmakers recently delayed the CECL standard for certain banks as part of its response to the coronavirus pandemic and concerns about the financial constraints that implementation would create amid a crisis.

It is essential that all bank regulation be countercyclical. CECL is the opposite.

In good times, banks will be unrestrained in their lending because their models will underestimate probable losses. In bad times — like we are in right now — the models will demand excessive capital and reserves, causing banks to withdraw from lending at the worst possible time, when it’s needed most.

The larger banks have already implemented CECL, while the smaller banks received a little more time to comply. The delay granted by Congress for the smaller banks speaks volumes about what is wrong with CECL.

If CECL were not hurtful to bank lending in troubled times, lawmakers would not have further delayed small-bank compliance. Not only was Congress spot-on correct in delaying implementation of the CECL for small banks, it should immediately take whatever steps necessary to repeal CECL’s application to larger banks.

Tom Brown, a veteran bank stock analyst and hedge fund manager, recently pointed out CECL’s impact on two of the nation’s largest banks, JPMorgan Chase and Bank of America.

At the end of 2019, Chase’s loan loss reserve was $14.3 billion, “and not a single analyst or investor questioned its adequacy,” Brown said in his April 17 newsletter.

Chase then adopted the CECL standard Jan. 1, resulting in a 30% increase in its loan-loss reserve, by $4.3 billion.

“Then in March, the global economy stopped in its tracks, and JPMorgan had to estimate the lifetime losses in its loan portfolio using an entirely different set of economic assumptions, based on what it thinks will happen in an environment that no one has ever experienced,” Brown said.

The combination of the coronavirus pandemic and CECL standard caused a 37% jump in Chase’s loan loss reserves, by $6.8 billion.

Bank of America, however, was “the best at avoiding” analysts’ questions about economic assumptions used in its forecasting, Brown noted.

The bank refused to disclose line-item forecasts, such as the assumed peak unemployment rate, because there are so many variables in its model and comparisons to other large banks would be misleading.

Home Bancshares Inc. CEO John Allison also expressed frustrations that the CECL standard was being implemented during a crisis.

“In the midst of a pandemic, with thousands of people dying and hundreds of thousand people infected, and Americans locked in their homes, the accounting clowns show up with a new circus called CECL,” Allison said during his company’s latest earning call. “Total disregard for the mess they created and [it will] create an uncertainty in the market. The circus genie should have never been allowed to get out of the bottle.”

It is past time for Congress to intervene and strip FASB of its self-anointed authority to dictate generally accepted accounting principles without any meaningful oversight from the government.

The FASB is a private entity, created by the accounting firms in 1973. It obtains its funding from the accounting industry. Its seven-member board is selected by the accounting industry, and it is not subject to meaningful government regulation.

This system cannot stay in place any longer. The Securities and Exchange Commission should set the accounting standards for the banking industry. There should also be a requirement that the SEC formally seek and consider the views of the public. This includes input from the accounting industry, the Federal Reserve, the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency before adopting or amending any rules.

William M. Isaac, a former chairman of the Federal Deposit Insurance Corp. and Fifth Third Bancorp, is co-chairman of the Isaac-Milstein Group. 

Howard P. Milstein is chairman of Emigrant Bank and New York Private Bank & Trust. He is also co-chairman of the Isaac-Milstein Group.

Source: https://www.americanbanker.com/opinion/congress-was-right-to-freeze-cecl

BankThink Congress was right to freeze CECL by William M. Isaac, Howard P. Milstein

BankThink Congress was right to freeze CECL by William M. Isaac, Howard P. Milstein

The Financial Accounting Standards Board is at it again.

The counterproductive and harmful mark-to-market accounting rules imposed by FASB led to the near collapse of the global economy during the financial crisis, and to the $700 billion Troubled Asset Relief Program.

Now, FASB wants to require banks to adopt another form of mark-to-market accounting rules known as the Current Expected Credit Losses standard, or CECL.

CECL requires banks to estimate their credit losses over the life the loans, and book the losses upfront. Thus, a bank that makes 30-year mortgage loans would have to estimate and book its losses on that portfolio on day one.

This policy is terribly wrongheaded. And we fervently disagree with a recent op-ed in the American Banker that urged Congress to impose CECL on the entire banking industry as soon as possible.

Lawmakers recently delayed the CECL standard for certain banks as part of its response to the coronavirus pandemic and concerns about the financial constraints that implementation would create amid a crisis.

It is essential that all bank regulation be countercyclical. CECL is the opposite.

Read Full Article