FDIC's ex-chief weighs in on bailout

His pitch sounds pretty simple: The country can recover from the current financial turmoil without spending a single penny.

The problem with the government's $700 billion bailout plan, according to Isaac, is that it is so small.

"In a $15 trillion banking system, what good does $700 billion do?" Isaac said. "It's just a drop in the bucket."

Isaac, 64, said the U.S. economy is not as weak as it was in the 1980s and the troubles affecting banks are not as severe as during the savings and loan crisis
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A satellite truck for the Fox Business Network was parked in front of William Isaac's waterfront home here Wednesday afternoon.

William Isaac consulted with several members of Congress regarding the bailout bill before the House vote Monday, including Rep. Susan Davis, D-Calif., right. Isaac was FDIC chairman from 1981 to 1985.
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The former head of the Federal Deposit Insurance Corp. had already been on CNN that morning. He was scheduled for Lou Dobbs and Bloomberg in the evening. The Houston Chronicle was e-mailing him questions. And CNBC wanted to know if he could be at its Washington, D.C., studios for an interview at 2:20 p.m. today.
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"Thumbs up or thumbs down?" Isaac's wife, Christine, who currently doubles as his secretary, asked after he returned from the Fox interview in their guest house.
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"Thumbs down," Isaac said. "If they have a crew out on Capitol Hill, I can do it."
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Isaac's fierce opposition to the $700 billion financial rescue bill provided fuel for members of Congress against the measure and, by his own admission, was instrumental in the House's voting down the legislation this week.
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Now it seems just about everybody wants to know what he thinks.
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Isaac, who oversaw the country's banking crisis in the 1980s, is offering an alternative plan, which has been embraced by some House members who oppose the bailout proposed by the Bush administration and congressional leaders.
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But the financial crisis could be exponentially larger, primarily because of the "mark to market" accounting rules imposed by the Securities and Exchange Commission in 2002.
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Under those rules, banks must reappraise homes, condos and other real estate underlying mortgage securities they hold in their investment portfolios every year.
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With the rapid decline in those values since the height of the real estate boom, banks have had to write off $500 billion in value in the past year. That means they have $500 billion less in capital than they had a year ago, and an increasing number have been forced to shut down.
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"The result of the accounting rule is that it destroyed Merrill Lynch. It destroyed AIG. It destroyed Wachovia and WaMu," Isaac said. "Finally, 228 members of the House said 'no' to the bailout bill and finally the SEC suspended fair value accounting. It is something they should have done a long time ago."
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Critics of Isaac's proposal, however, say that the SEC's mark-to-market accounting rules were set up so that investors would always know the value of the assets on a bank's books.
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Isaac's suggestion "is like an ostrich hiding from its problems," said Peter Schiff, an investment adviser and author of "Crash Proof: How to Profit from the Coming Economic Collapse." "You need to know what assets are worth. You have to expose which institutions are insolvent and prevent them from taking more deposits."
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The reason that Japan took a decade to emerge from its economic crisis in the 1990s is that it obfuscated its financial problems with accounting rules that allowed its banks to hide their problems, Schiff and others said. Clarity is what investors want and they will not invest money in any company they feel is hiding its problems.
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"Suspending mark-to-market seems to muddy the waters, which does nothing to bring in equity investors," said Paul Kasriel, chief economist for Northern Trust. "If you want to make believe, go ahead. But it doesn't seem to be the most productive measure going forward."
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Isaac bristled at the notion that suspending mark-to-market rules makes the financial system less transparent.
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"I'm not saying cover anything up," Isaac said.
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He explained that "in the good old days, before the SEC started monkeying around with the financial system," banks provided investors with all the information they could have possibly wanted about assets in their investment portfolios. The difference was that if an asset lost 60 percent of its value, banks did not have to reduce their earnings by a similar amount and they did not have to scramble to come up with additional capital to assure investors that they were safe and sound.
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Isaac served as FDIC chairman from 1981 to 1985. Lawmakers under fire from constituents who are against spending $700 billion to rescue the financial markets turned to Isaac because of his success in handling the nation's previous banking crisis during his tenure.
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Isaac caught their attention after writing a guest column in the Washington Post last Saturday in which he said the legislation was "a very good deal for everyone but U.S. taxpayers."
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The phone calls started coming. Most notably U.S. Reps. Darrell Issa, a California Republican, and Marcy Kaptur, a Democrat from Ohio, urged him to come to Washington to help.
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Isaac had tickets to the Tampa Bay Buccaneers' Sunday game against Green Bay. His wife told him to go to Washington. She went to the game with their children, Lennon, 7, and Quinn, almost 6.
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Isaac spent Sunday meeting with scores of disgruntled lawmakers from both parties until midnight. He spoke with a few dozen more of them on Monday morning before lunching with Congressman Vern Buchanan and his wife, Sandy, at the legendary Capitol Hill Club.
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Isaac and Sandy Buchanan watched the House vote from a television in Issa's office.
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"It was as exciting as the Buccaneers game," he said. "There was momentum one way, then momentum another way."
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Asked how much influence he thinks he has had on the process, Isaac laughs.
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"A lot," he says "The House defeated the bill the other night. I think I helped them come to that conclusion."
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Isaac has kept his hand in the financial business since leaving his FDIC post. He is chairman of the Secura Group, a Washington consulting firm that advises banks and other financial institutions on dealing with regulators.
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Isaac is also behind the $200 million Pineapple Square project in downtown Sarasota. He thought the city needed some quality retail. He and his brother Butch's project has brought Brooks Brothers and Sur La Table downtown, although plans for 276 residences are on hold in the current market.
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"Pineapple Square is waiting for us to clean up the economic mess, then we're going to finish," Isaac said.
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Since returning to Sarasota on Monday night, Isaac has held court in his home office overlooking an in-ground swimming pool, and beyond that, New Pass.
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His wife answers the phone "Bill Isaac's office" and dusts powder over his face before his television appearances in their guest house.
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The backdrop includes a thank-you letter from President Ronald Reagan, an 8-by-10 photograph of Isaac shaking hands with President Jimmy Carter and a fresh bouquet of hydrangeas.
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The calls are endless.

Wednesday morning the Bush administration reached out to him. (Isaac refused to say if it was the president himself.)
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Isaac is scheduled to be on a 9 a.m. flight to Washington today out of Tampa. Then he said he would be camped out in Issa's office making his pitch until the House votes on a bill, which he expects to happen on Friday.
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But first he has an appearance on Fox & Friends this morning.
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