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Guest Post: Bill Isaac Vs. Hank Paulson’s Bailout Machine — How The Former FDIC Chairman ALMOST Stopped TARP »

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By Dr. Pitchfork, an iconoclast who writes at Daily Bail.

The little-known story behind the House’s initial rejection of TARP from Bill Isaac’s new book Senseless Panic.

Bill Isaac was Chairman of the FDIC from 1981-1985 during one of the most tumultuous decades in American banking. He oversaw the banking system during the Latin American debt crisis and the severe recessions of the early 1980′s, and tried — against enormous political pressure — to head off the looming S&L crisis before it got worse. As many know, the S&L clean-up cost taxpayers hundreds of billions of dollars, but had Congress taken Isaac’s prescient advice earlier in the decade, the ultimate costs would have only been an estimated $2B.

Fast forward to 2008. On September 18, Paulson and Bernanke had convinced the Congressional leadership that a bank bailout plan had to be passed immediately or else the entire global economy would collapse. In his new book, Senseless Panic: How Washington Failed America, Isaac writes:

“Having served as chairman of the Federal Deposit Insurance Corporation (FDIC) during the banking and S&L crises of the 1980′s, I was disturbed, even angry, about the events that led up to the bailout plan itself. I was so upset that I wrote an opinion piece opposing the bailout plan that ran in the Washington Post of Saturday, September 27.

In his op-ed, Isaac pointed out that several of the ostensible reasons for why we had to pass the TARP bill just didn’t make sense. For instance, the claim that TARP had to be passed because there was a run on money market funds was completely specious as the U.S. Treasury had announced their blanket guarantee on September 19. Similarly, if the proponents of TARP wanted to claim that ordinary depositors were scared of bank failures, then why not be more clear about “the fact that the FDIC fund is backed by the full faith and credit of the government”? (This is more or less what the FDIC did anyway, when it raised the deposit insurance limit to $250,000.) Besides, Isaac wrote, “[t]his is how the FDIC handled Washington Mutual. It would be easy to announce this as a temporary program if needed to calm depositors.” As with so many of the government’s excuses for TARP, actions that had already been taken disproved the claims for why TARP was necessary.

And TARP, as sold to Congress, was a blatantly stupid idea anyway. As we’ve pointed out so many times here at The Daily Bail, “[h]aving financial institutions sell the loans to the government at inflated prices so the government can turn around and sell the loans to well-heeled investors at lower prices strikes me as a very good deal for everyone but U.S. taxpayers. Surely we can do better.”

Based on his long experience, Isaac recommended the following in his September 27 op-ed:

* “[R]eimpose on short sellers the Depression-era regulations on speculative abuses the SEC had removed in 2007.”

* The FDIC should “declare a financial emergency and proclaim that all depositors and other creditors of banks would be protected in bank failures during the period of emergency.”

* Suspend mark-to-market accounting, thereby restoring around $500B of capital in the system.

* Use the FDIC’s existing “emergency power to restore capital in the banks along the lines of a program we used successfully in the 1980′s” (i.e. the Net Worth Certificate program).

As he later wrote in Senseless Panic,

I believed then and continue to believe strongly that these actions would have been much more effective in dampening the financial crisis than Paulson’s ill-conceived plan to purchase toxic assets, would have cost taxpayers little, if any, money, and would not have politicized the crisis and scared the public the way the Paulson plan did.

But it was on that Saturday, the 27th of September back in 2008, that Isaac started getting phone call after phone call from members of Congress who had read his op-ed in the Washington Post. He received calls that afternoon from Democrats — Marcy Kaptur of Ohio, Brad Sherman of California, and John Hall of New York, as well as from Republicans — Darrell Issa of California and Isaac’s own congressman, Vern Buchanan of Florida. They were all skeptical of Paulson’s plan, Isaac remembers, and they were equally pissed off that the leadership had decided to ram the TARP bill through without hearings, without debate, and with zero accountability.

Each of the representatives urged Isaac to come to Washington and join the fight against TARP, but he put them off.

“Congress is going to approve the bailout bill on Monday,” I explained, “and my presence in Washington is not going to change anything. We are taking the kids to see the Buccaneers play the Packers tomorrow and that’s a much better way for me to spend my weekend.”

Still, they persisted. Brad Sherman offered to pay all of Isaac’s expenses. Darrell Issa offered the use of his office. Finally, Isaac relented and said he would talk to his wife. Isaac wasn’t convinced and felt like he would just be wasting his time, but his wife told him: “You have to go. You feel so strongly about these things, you will always regret it if you don’t.”

“I could not have guessed how much my life would change,” Isaac says. “I have devoted at least half of my time since September 28, 2008, to trying to help us out of this crisis and make sure we do not ever experience another one.” Early that Sunday, September 28, Isaac flew to Washington.

Darrell Issa’s office in D.C. became the “staging area” for the fight against TARP. His staff put out the word that Isaac would be available to meet with any member of Congress, Democrat or Republican, to discuss the crisis and the proposed bailout. Throughout the day, Isaac met with various groups of congressmen, not calling it quits until around 1:00AM Monday morning. For part of the day, he met with the Democratic Caucus alongside economists Jamie “Fed Killer” Galbraith and Dean Baker. In the end, he met with over 200 members of Congress, from both parties, of all political persuasions from left to right. He says he will never forget one meeting he had during which Jesse Jackson of Illinois and Maxine Waters of California sat together with several conservative Republicans, all united in their efforts to stop the bailout.

The next day, Monday, September 29, was the day set for the vote on TARP. The leadership had already decided that TARP would pass and “viewed the skeptics as an annoyance,” but many of the rank and file, thanks in large part to Isaac’s efforts, were not falling into line. As Ryan Grim reported at the time, when members of the leadership wrote to lower-ranking members to urge them to vote for TARP, those emails were often returned, not by the members themselves, but by Bill Isaac.

At lunch-time that Monday, there had still been no vote on TARP. Clearly there was trouble with the rank and file and the leadership couldn’t be sure they had the votes. Otherwise, the vote would have already happened that morning. Finally, early in the afternoon, word went around that the vote would take place — apparently enough arms had been twisted (Isaac says that Pelosi and others threatened to revoke members’ committee assignments and withold support for their campaigns). One way or another, the leadership had gotten the votes.

I camped out in Darrell Issa’s office to watch the vote on C-SPAN. It was every bit as exciting as a football game. The vote seesawed back and forth, the yeas and nays never more than a few votes apart. As the end drew near, the nays took a decisive lead and the billl was defeated — 228 opposed and 205 in favor.

In the wake of the defeat, “[c]heers erupted throughout Darrell’s office. We turned up the volume on the news channels to see how the news was being received. The world was as flabbergasted as we were!” That night, Isaac, along with Rep. Buchanan and his wife, headed to Dulles to catch a flight back home to Florida. “We were thrilled with the vote but knew the leadership was not going to let the vote stand.”

We all know the rest of the story. The bankers, it seems, always get what they want, but Bill Isaac nearly stopped them. As Grim reported two years ago, “supporters and opponents of [TARP] agree on one thing: an obscure Carter administration policymaker named Bill Isaac helped kill the bill on Monday.” Grim cites “a frustrated House GOP leadership aide” who said at the time: “That guy [Isaac] is more responsible for bringing this thing down than anybody else. He whipped them up into a frenzy.”

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34 comments

  1. giggity

    …and then shortly thereafter, the bill passed after it was delcared to certain, problematic congresspeople that martial law would be implemented. The End.

    1. Indigenous Centurion


      nays took a decisive lead and the billl was defeated — 228 opposed and 205 in favor.

      I jotted down the closing Dow that day after the nays won out. The day of the re-vote as I remember it was the following Friday. After the bill passed into law the Dow closed 40 points lower than the close on Monday. I multiplied the capitalization of the World’s Stocks times 40 then divided by the closing price of the Dow that Monday. I figured that the World’s inhabitants had a aggregate loss of 158 billion by that weekend. Of the 170 billion threat that Congress had put on Fort Knox less than 7% of the 170B remained recoverable within the eyes of traders that week, within the eyes of the all-seeing-market. Traders of that week were giving up on 158 billion dollars from Congress’ lack of back-bone that fatal week. The 158 billion lost became the nucleus of a snow-ball that then began to roll, that rolled until it had sopped up 40% of equity as the market fell off a cliff.

      Why the expensive effort from Congress? Was it a cover-up for something they had done? Something illegal? Immoral? Politically incorrect? You can bet it was a dooozy.

  2. i on the ball patriot

    This is a heart warming story … Profit Driven Vanilla Greed almost stopped Control Driven Pernicious Greed … my eyes well up …

    Deception is the strongest political force on the planet.

    1. Cindy Elmwood

      “Extremism is so easy. You’ve got your position, and that’s it. It doesn’t take much thought. And when you go far enough to the right you meet the same idiots coming around from the left.”
      — Clint Eastwood

      1. i on the ball patriot

        No Cindy. Staying in the middle of the school where left and right are illusions is thoughtless and real easy.

        As for Clit Eastwood … Clit is plugged right into the main vein of the middle of the school, you could even say he’s a middle school head master kind of guy … as in … you are what you’ve been through, but now and the future are up to you … your a good student Cindy …

        Deception is the strongest political force on the planet.

  3. Terry

    Good article. One correction, “Bill Isaac was Chairman of the FDIC from 1981-1985″; that would make him a Reagan administration official. It was positive to see real bi-partisan work on opposing TARP, however.

  4. PR

    Can you explain the purpose of this one:

    * Suspend mark-to-market accounting, thereby restoring around $500B of capital in the system.

    How exactly would this “restore” capital except in fantasyland, where mark-to-model and mark-to-makebelieve had brought us?

    1. Dr. Pitchfork

      I’m with you there, PR. Of course, insolvency is a state of mind when it comes to banks. Almost all banks are in some sense insolvent, but insolvency doesn’t always mean you can fund day-to-day operations.

      Isaac’s problem with M2Market is that it is “pro-cyclical” — you get the banks all wacked out during the boom times, and then their capital, for regulatory purposes, contracts severely in a recession or a panic like we saw in 2008. Isaac is fin with cash-flow analysis, however; i.e. where you mark an asset down to where its projected cash flow values it.

    2. Dr. Pitchfork

      Readers might be interested in this latest op-ed from Isaac. A Daily Bail reader pointed us this morning to “Geithner’s TARP Myths.”
      http://www.cnbc.com/id/39720768

      Money quote:
      “Thanks to TARP and an ineffectual financial reform bill, we are left with a financial system in which the five largest banks control over 50 percent of our banking system and remain too big to fail. No major cause of the crisis has been remedied, and a fragmented and highly politicized regulatory system remains in place cobbled together with bailing wire. Those are facts, not myths.”

    1. Dr. Pitchfork

      Yeah, nothing would have happened without those. Remember, some kind of TARP was announced a week before Isaac’s Sept. 27 op-ed, so people like Issa and Sherman and Kaptur were already “bucked up” by all the phone calls. Isaac’s timely op-ed just reassured them to some extent that they weren’t idiots. Then, of course, there was all the work he did on the Hilll before the vote.

    2. za

      I called my Congresscritters. They had to ramp up temporary staff to answer the phones.

      I asked, and they told me opinion on TARP was running “hundreds to one” against it. They asked me what I thought should be done. I replied “Swedish solution. History shows us it’s cheapest and most effective.” I went to her website and emailed a reference to the IMFs 2005 review of historical banking crises.

      I did what I could. She voted against, both times, FWIW.

  5. Francois T

    “We all know the rest of the story. The bankers, it seems, always get what they want…”

    Let’s remember how the bankers got what they wanted. The leadership merely bought the votes of the recalcitrants; a mere 150 billions in goodies of all sorts added to the bill, despite objections from people all across the country.

  6. killben

    Why could he not stop the second vote?

    “Suspend mark-to-market accounting, thereby restoring around $500B of capital in the system”

    This is what they did anyway and this is why the system exists even today. Remove this and you have quite a few banks.

    Except for the holiday part most of it was implemented and is still under implementation.

    Except for the fact that he did not support bailout he would have done what these clowns are doing now. So if not supporting bailout is the reason why he is to be revered then what should we say of bloggers??

    He does not talk of pulling the rotten system down (meaning let it fall) and building a better system.

    Moral hazard is a perilous to a capitalist system. The rot in the system stinks and has to be cleansed and that can happen only if institutions that failed are put to rest and not propped up.

    1. micr line

      he actually has ‘been there’.

      “. . . There is a far greater danger if we bail out all the banks and institutions. The long-range detriment to the banking system would far outweigh the short-range disruptions. . .”

      “I got this knot in my stomach at that point . . . all the doubts overtook me for a minute and I started thinking what hae I done, . . . what if the financial system can’t stand it? what if we do have chaos?. . . ”

      “what we’ve just done, what we’re doing now, what we’re embarking on is going to be very good for the system over the long haul, if we survive the short run’

      – Bill Issac, on closing down Penn Square Bank, 1982, (from Belly Up, by Phillip Zweig, 1985, Crown p402)

    2. Dr. Pitchfork

      killben, bill isaac is not a pitchfork-wielding populist who wants to pull down the whole rotten system. this shouldn’t be shocking. but because of that, his criticism of geithner, bernanke and paulson is all the more credible.

      he isn’t anti-bankster the way most of us are, but his anger comes from the shitty, 3rd-rate job performance we’ve gotten from the aforementioned three stooges. remember, geithner especially, wants the world to think he’s a friggin’ hero. he’s not, and bill isaac has shown that amply in some of the things he’s said and written since the crisis. he’s not to be “revered” at all.

      but he tells us things that others would not be able to. as the founder of The Daily Bail likes to point out, bailout politics makes for strange bedfellows. let’s take allies and ammunition from wherever we can get them.

  7. The Daily Bail

    Here’s the link to that ORIGINAL Wash Po editorial from Isaac…

    http://www.washingtonpost.com/wp-dyn/content/article/2008/09/26/AR2008092602200.html

    And here’s a link to an editorial from Bill Isaac published just this morning on Turbo Timothy’s TARP Lies…

    http://www.cnbc.com/id/39720768

    Great story Pitchfork…I was completely unaware of this effort by isaac…i remember his op-ed in the washington post though because it was one of the few bits of truth out there at the time…as i’ve written, the MSM is so stupid about finance that they were buying the paulson line hook, link and bailout……i called probably 25 senators in those next 2 days…trying to talk to ones on the fence..pointing them to isaac’s piece…letting them know there were alternatives…

    i can’t remember who…maybe dean baker…somebody had a paper out there at the time pushing for the creation of 7 new banks each to be capitalized with $100 billion…

    would have been a much better use of the cash vs. keeping failed banks in the business of paying outsized, criminal bonuses…which is essentially what we did with tarp…

    great story from Isaac…very shitty ending for taxpayers…

  8. Nathan Aschbacher

    Except in the end it turns out that Isaac was right. He would have had his time better spent at the football game, because for all the effort the Senate resurrected the abomination, shoved it back to the House attached to their previously passed appropriations bill, and everyone held hands voting for it as they threw Main St. over the cliff.

    TARP should be the quintessential shining example of just how completely impotent the People are in influencing their government. If you’re donating time or money to politicians, you’re wasting your time. They’re not accountable to you, and their incentives for performance might overlap marginally with your best-interests purely out of random coincidence.

    1. Dr. Pitchfork

      “TARP should be the quintessential shining example of just how completely impotent the People are in influencing their government.”

      Hear, hear! TARP definitely radicalized my thinking — and in a way that not even the Iraq war could.

    2. Dave of Maryland

      I don’t mind that Congress is venal & self-serving. Cheap whores & relatives on the payroll go with the job. I’m frankly suspicious of anyone not obviously on the take & even more suspicious of those who hold others to account.

      But knowing how the country actually works, knowing how the economy works, having nerves of steel, not panicking in a crisis, those are prerequisite to having the job. Even mobsters are expected to know how the mob works. Petty graft on the side, sure, but get your job done. I agree that Isaac was wasting his time, except to give a shinning example to all of us that our government is lost. Hopelessly, helplessly, utterly lost. It’s up to us to fix it, and it won’t be easy.

  9. beowulf

    A pity the crossparty anti-bailout group couldn’t agree on and demand a vote for an alternative “net worth certificate” bill along the lines Isaacs proposed.

    Of course, a House floor vote is usually preceded by the minority party leadership filing a Motion to Recommit that can be used to hijack the bill on the floor by amending it on the spot. I imagine that opportunity was lost because the Republican House leadership (who could offer the Motion to Recommmit) was in bed with the Democratic leadership on passing the bailout bill.

    1. Dr. Pitchfork

      Yes, the GOP leadership was on board. McCain was out to lunch, but he was on board. John Boehner was as pro-TARP as Obama and Barney Frank. To hear Boehner complain now about TARP and “bailouts” makes me want to puke. On Boehner.

  10. ECON

    I now believe that it is essential to have a Great Recession (or Depression) for us the people to really witness how stupid (and corrupt) our very smart people in the legislature really are. Go beyond the ideological differences and see how we the people are deceived by our rulers. Dems and GOPers are alike and your donations to them leaves you powerless. Maybe we the people should abstain from voting.

  11. Entirely

    I will always remember the week or so leading up to the first TARP vote. Never before, and likely never again, did I throw myself so completely into our political process. I emailed and I faxed and I called… over and over again. And the grass roots nature of the crusade was an absolutely amazing thing to be a part of. It was the only time in my entire life that I was actually dumb enough to believe that the American people actually controlled their own government.

    My two most striking memories were the night before and morning of the vote… that you could call any member of congress and their voicemail was so full that it couldn’t accept any more message. And then sitting on my couch watching the vote. When the final tally flashed and the inevitability of the Powers That Be to push the thing through had somehow failed. Wow!! On one level I felt so personally and privately proud. On another, I felt a kinship with hundreds of thousands of people I’d never meet but had struggled against such odds with shoulder to shoulder.

    Of course none of it matters now. We live in the land of the bankster. They steal our money and live like kings. Its all so depressing… but this is one memory they’ll never be able to steal from me.

  12. Dr. Pitchfork

    That’s a beautiful story, Entirely. I’ve been hearing similar stories from other folks who read the Bill Isaac story and were brought back to those unreal days in 2008.

    I wasn’t active in this stuff back then — I had so much going on in my day job and family life. I didn’t call or fax, but I knew that thousands of others were and that the point was being made. Kudos to all of you who did help out.

    But I remember being elated that day, too. Our mutual funds (don’t ask, don’t ask…) lost a ton of money that day, but I was just so happy to think that Congress had been forced to listen to us for once. I remember it was a warm, sunny afternoon. The bailout was voted down. We took the kids out for pizza.

  13. Jim

    Senseless Panic? Not quite. Entirely intentional. Paulson had 700 million dollars at stake in Goldman Sachs.

  14. surferdude

    all bill isaac offered was a more opaque way to keep the tbtf institutions alive. at least with tarp, there was some transparency. what s wrong with market prices bill? guess you do not like them as proper marks would explode the myth there is any real capital in the banking system; even at the bank — fifththird you went to work for. btw, the net worth certificate program was hardly a success; just look up how the fdic was raped on its handling of bowry savings and other northeast savings banks.

    1. Dr. Pitchfork

      surferdude, a lot of those “toxic” securities trading at 10c on the dollar in oct 2008 are trading at several multiples of that. isaac’s beef with mark-to-market is that it is ideologically “free-market,” ignoring the practical implications of the flawed theory behind it. mark-to-market is also “pro-cyclical”, i.e. it provides for inflated valuations in the boom times and severely impaired valuations during the times when banks are most in danger.

      fwiw, isaac has said favorable things about marking assets down to their true value, e.g. if a group of assets, based on expected cash flows, are likely to be worth 30c ont he dollar, then mark them down to 30c on the dollar, but not to the 10c on the dollar that only a few skittish traders are willing to pay.

      that doesn’t mean i favored the change to fas 157, either before or after TARP, but that’s his position as a former bank regulator. it’s respectable, even if you disagree. marking assets to fantasy is not isaac’s position. that’s Timothy Geithner’s position.

      1. surferdude

        despite a recover in price in soem toxic assets, market prices are still well below carrying book values, which if recognized would render many institutions insolvent. so you and bill prefer mark to model, guess what it still hides reality of the fact that an institution is insolvent. insolvent is insolvent; all we are disagreeing on is the size of the hole.

        since the liquidity crisis is long over and there is an abundance of capital looking to acquire high yield assets, how come a higher bid has not come under these assets? perhaps the market prices are more accurate than mark to model.

        bill started tbtf and he is not the voice of reason of how large banks should be resolved as he just wants to keep the banksters in place.

  15. John

    Darrell Issa was my congressman in 2008. I emailed him and both our California senators to express my disgust with the TARP plan. The senators’ replies were “Even though you and many others are upset – we did not like it, but we voted for it for the good of California and the country”. Darrell Issa sent a thoughtful reply:
    Thank you for contacting me to express your opposition to the $700 billion Bush-Paulson-Pelosi bailout plan. I share your opposition and voted NO both times the bill was brought before the House of Representatives.
    It is an outrage to stick taxpayers with the bill for the failed decisions of Wall Street financiers. When investors put their money into the marketplace, they reap a benefit when they make the right choices, they have to face the consequences when they make bad ones. The Paulson-Bush-Pelosi scheme allows investors to realize the benefits while shifting all the risk to taxpayers. It is the wrong plan, and a bad idea.
    Furthermore, in their rush to act, the Bush Administration and Congressional leaders spread panic, shattered American’s confidence in the banking system, ignored the American people and shut out debate on alternatives that would more effectively address the problem without shifting the cost and trillions of dollars of additional risk to taxpayers.
    Our financial markets are struggling, and we do need to act to insure that creditworthy individuals and businesses have access to the capital they need to conduct legitimate business transactions. But we don’t owe Wall Street a bailout, and we can do it without putting taxpayers on the hook.
    In opposing the Bush-Paulson-Pelosi scheme, I offered several alternatives, including the use of Guaranteed Recovery Bonds, suspension of mark-to-market accounting rules, and restoring the net-worth certificate program which the Federal Deposit Insurance Corporation (FDIC) has used successfully to help banks recover during previous economic downturns. To view my statements or to read my alternative proposals, please visit my website at http://www.house.gov/issa.
    I will continue to work on your behalf in Congress to advance common sense solutions to restore stability to the financial markets and promote economic growth. The American economy has time and again weathered political shocks and financial hardships and proven itself resilient. I am confident that we will get through the current turmoil, overcome the losses incurred, and return to financial prosperity.
    Again, thank you for contacting me to share your concerns on current conditions in the financial markets and the bailout scheme. I appreciate hearing your views.

    Sincerely,
    Darrell Issa
    Member of Congress

  16. LeeAnne

    I don’t know how the story of the TARP sellout can be told without the detail of voiding the constitution and manipulating the public by the manipulating the stock market:

    “After the House rejected the TARP proposal on September 29, Paulson, Bernanke, and the rest of the Plunge Protection Team had to make their predictions of dire consequences look correct. They allowed the Dow to crash 777 points – a new record – while gold soared. …”

    Nor is the story relevant without the small detail that the US Congress led by Nancy Pelosi voided the constitution to give Paulson on his bended knee and everyone he secretly chose to anoint with TARP funds an exception to the rule of law: no questions asked to this day.

    It was at that moment that Bernanke became DICTATOR of the USA.

    As in his answer to Alan Grayson’s question at a congressional hearing: Grayson: “Will you tell us what you did with the $2 Trillion.”

    Bernanke: “NO”

    Does anyone know what the expiration date is on this license to all BIS central bank members and counterparties unknown to be above US law and beyond the reach of US taxpayers?

    When are these people going to jail?

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