Banking on Reform

By Molly McCartney August 31, 2010

All is quiet in Bill and Christine Isaac’s waterfront mansion. The kids aren’t home yet from their afternoon activities. The housekeeper is busy in the kitchen. The family’s small dog, Paco, a Havanese with curly dark-brown hair, is napping. Bill is in his home office, where he has a view of the turquoise waters of New Pass. But he’s not looking at the view. He’s at his computer reading one of his 200 daily e-mails, talking on the telephone, monitoring a television news station (it’s on mute) and thinking about the financial, development and community issues that have consumed him for most of his 66 years.

The chair of the FDIC during the financial crisis of the 1980s, Isaac remains a leading national financial authority and gets high marks for his knowledge from such experts as former Federal Reserve Chair Paul A. Volcker, political activist Ralph Nader and CNBC host Lawrence Kudlow.

For the past two years, Isaac has focused on the 2008 financial crisis and the need for meaningful regulatory financial reform. Now he has put his ideas into a book, Senseless Panic: How Washington Failed America. He doesn’t mince words: “The financial panic of 2008 and the ensuing deep recession did not have to happen, and I am appalled by the enormous financial, human, and political cost of it all,” he writes.

He’s just as opinionated about the “weak and ineffective” regulatory reform that Congress approved in July. “It would not have prevented the recent crisis and will not prevent the next one,” he says. “The Administration and Congress have missed an opportunity to make meaningful reforms in the way we regulate banks. Hopefully there will be some major turnover in Congress, as voters reject incumbents who voted for the 2008 bailout bill and this disappointing reform package. If so, I hope we can revisit financial reform next year with a new Congress in place.”

You can read Isaac’s opinions in Forbes, the American Banker and other major publications, including The Wall Street Journal and the Washington Post. You can see him on television being interviewed by financial journalist Maria Bartiromo. And you can check out the blog he writes for CNBC.

It’s hard to overstate Isaac’s passion. He spends 60 hours or more a week working, and he typically travels to out-of-town appointments two days a week to make speeches, conduct television interviews, consult with clients and chair meetings. There’s nothing new about his work ethic. “My career started 41 years ago, as a lawyer in Milwaukee, and I would say I have been working for 41 years the same way I work now,” he says.

Christine Isaac has gotten used to him waking up in the middle of the night with an idea and heading to his computer to write it down. “I don’t know any other Bill Isaac,” she says. “Nobody does.”

Isaac is probably best known in Sarasota for his role as a developer of the troubled Pineapple Square, a $200-million project that still hopes to link retailing, residences and parking in downtown Sarasota. Isaac and his older brother, Charles Isaac, began buying up commercial property in Sarasota during the boom days, but along with the rest of the Southwest Florida real estate market, the project has stalled.

Isaac remains optimistic. The real estate market here “got overheated and a correction was much needed,” he says. “Sarasota is coming back and is a good place to invest. Pineapple Square is beginning to see more activity on the leasing front, and we remain committed to making it a crown jewel in downtown Sarasota.” This month, women’s fashion retailer Eileen Fisher is set to open in one of Pineapple Square’s spaces.

Isaac is also deeply involved in the community as a board member of the school that his children attend, and with the Ringling College of Art and Design. He is a former board chair of Goodwill Industries-Manasota.

Beyond his Sarasota activities, he has national and international commitments.

He is the chairman of LECG Global Financial Services, a consulting firm that provides risk management services, regulatory counseling and management consulting, among other things. “The office is in Washington, D.C., but I am never there,” he says. Instead, he does his consulting jobs from home, using the computer and the telephone, and then travels to see the client in person when necessary.

One client is Fifth Third Bancorp, the Cincinnati-based banking behemoth that has more than $115 billion in banking assets and more than 1,300 branches in 12 states, making it the nation’s 11th largest banking group. It has several local branches.

After reviewing the management structure at Fifth Third, which had one man serving as CEO and board chairman, Isaac recommended that the job be split. “Having a separate chairman is a best practice, and more institutions are moving toward that,” Isaac says. He suggested six possible candidates for board chair. Fifth Third also appointed a search committee. After reviewing the candidates, Fifth Third appointed a candidate he had not suggested—Isaac himself—as chair last May. “They thought I was the right person,” Isaac says.

Another measure of Isaac’s importance in the financial world is his membership in the prestigious Bretton Woods Committee, a group of international experts who try to improve public understanding of international financial and development issues and the role of the Bretton Woods institutions, which include the World Bank and the International Monetary Fund.

William M. Isaac’s roots as an enterprising entrepreneur and hard-working businessman go back more than a century to his grandfather, George Isaac Sr., who founded a scrap metal business, The Isaac Company, in Bryan, Ohio, in 1899. The company added commercial real estate development in the 1980s and today owns and manages shopping centers, office buildings and industrial properties in northwest Ohio.

Bill grew up in Bryan surrounded by a large extended family. His older brother, Charles, known as Butch, went to work in the family business after graduating from Miami University in 1961. Bill expected to join his brother after finishing college in 1966. But “there was no slot for me,” Bill says, so he enrolled in law school at Ohio State University. He practiced corporate law with a specialty in banking from 1969 to 1974 in Milwaukee. From there he went to Louisville to become vice president and general counsel of the First Kentucky National Corporation, where his responsibilities included regulatory reporting.

President Jimmy Carter appointed Isaac, then 34, to serve on the FDIC (Federal Deposit Insurance Corporation) in 1978. Isaac was named chairman of FDIC in 1980. “The entire banking and thrift sector were in dire straits,” Isaac says. Some 3,000 banks and thrifts failed from 1980 through 1991 and cost the FDIC fund more than $100 billion and taxpayers nearly $150 billion, he says.

In his book, Isaac describes that time as “extremely difficult…but the public’s confidence in the banking system held, and financial panic was avoided…Contrast this result in the 1980s with the worldwide financial panic that hit in the fall of 2008 and threatened to push the world into an economic depression. The economy was actually quite strong in pre-financial crisis 2007, unlike 1980-1982, so why did we experience such different outcomes in the financial markets?”

The answer, Isaac believes, is that political leaders built in reforms in the 1990s that relied too heavily on mathematical models and markets to regulate banking and not enough on examiner judgment, so banks failed to build capital or reserves. The SEC and FASB also adopted mark to market accounting (see note on page 23), “which prolongs boom years and exaggerates downturns,” he says. As a result, the “wrong fixes [were put into place] during the 1990s and those actions led directly into the banking crisis of 2008,” he says.

Then in 2008, the “government careened from crisis to crisis with no clear plan and no consistency in approach,” he maintains. “The markets could not figure out which firms would fail next or how the government would handle them. They simply melted down.”

In the foreword to Isaac’s book, Paul Volcker says his first impression of Bill as FDIC chair “was of a rather brash young man, certainly vigorous and self-assured, but perhaps lacking the seasoning that one might expect of an agency head. He was certainly not deferential. But as we got into the trenches together, I came to realize the importance of his character, of the personal strength desperately needed in perilous times.”

Isaac left the FDIC in 1985 to go into private practice in Washington, D.C. Within a year, he had founded the Secura Group, a consulting firm specializing in regulatory counseling and other financial services.

In 1987, Isaac made his first trip to Sarasota. “In the beginning, it was a respite,” he says. “I was coming every other weekend and then every other week, and then I got totally hooked.” He became a full-time resident in 1994.

At some point Isaac developed a back problem. He located a Sarasota chiropractor and found her not only capable but also charming and clever. That chiropractor was his future wife, Christine; they were married in 1998.

“Behind every successful husband is an exhausted wife, and you are looking at her,” Christine says when asked how she keeps up with her busy husband. But that is the “corny answer,” she says. “The not-so-corny answer is that we are both very independent people. I don’t need him to hold my hand all the time, and he doesn’t need me to hold his.”

The Isaacs expanded a home in Lido Shores to accommodate their growing family and to provide Bill with a home office. The office is uncluttered, but its walls are filled with photos of Bill with former presidents, including Presidents Carter, Reagan and George H.W. Bush.

Isaac is the father of four children, including two from an earlier marriage. They are David Isaac, 38, who works in a Venice restaurant, and Stephanie Neal, 36, a photographer who lives near Park City, Utah. He has two grandsons.

“I think I have been a really good family guy. That’s what I am most proud of,” he says. “I have an extended family, not just a nuclear family. I have one brother, two sisters, cousins, aunts and uncles, my parents, Christine. When I look back at my life that is what I am most happy about.”

He is also satisfied with his professional contributions. “I have gotten an awful lot out of my life, and for the most part it has been directed at public service and public policy issues and trying to push public debate in the right direction,” he says.

*Note: With mark to market accounting, a bank sets the value of (or “marks”) the assets on its balance sheet to reflect market sale prices. “We had this during the Great Depression,” Isaac says, “and we couldn’t get out of the Depression in large part because of it, so President Roosevelt in 1933 ordered regulations to end it and to go to historic cost accounting, which we used from 1938 through 1992 when FASB reinstated mark to marketing accounting. FASB thinks it creates more purity in accounting, but it is highly destructive when you get into a period like we were in in 2007-2008.” Isaac says MTM accounting destroyed more than $500 billion of capital and panicked the markets as banks reported massive paper losses while still producing large cash-basis profits.


Financial Fix

Isaac’s five steps to security.

Former FDIC chair and financial regulatory guru Bill Isaac hopes his new book and his crusade for reform eventually will lead to a better regulated financial system “because you can’t have a strong economy and job creation if you don’t have a strong financial system.” He says Congress has been “doing a lot of small things and trying to pretend they are doing something because they have a very important election coming up in the fall. But they aren’t fixing the problem.” Here’s what Isaac says is needed to improve the financial regulatory system:

 1  Establish a new Financial Institutions Regulatory Authority, as originally proposed by Sen. Chris Dodd (D-Conn.), to consolidate regulation into a new and independent agency. This proposal was dropped from the bill.

 2  Set up an independent Systemic Risk Council to oversee the financial system and monitor developing systemic risks. The new legislation creates a Systemic Risk Council, “but it is not independent,” Isaac says. “It is going to be run by the Treasury and the Federal Reserve, the very agencies that it is supposed to oversee. It is a farce. It will not be effective.”

 3  Reform the Securities and Exchange Commission, “one of the principal culprits in the financial panic of 2008. It conspired with the Financial Accounting Standards Board (FASB) to implement mark to market accounting despite objections from the FDIC, the Federal Reserve and the Treasury, which said it would lead to severe credit contractions.”

 4  Bring FASB (Financial Accounting Standards Board) under effective government oversight. “FASB is a private group controlled by the accounting profession, which dictates accounting standards. We don’t have effective oversight over FASB in this country, and we really need it. We shouldn’t let this group of self-anointed accountants determine the future of our financial system.”

 5  Fix Fannie May and Freddie Mac. “Is there anybody in the country who believes that Fannie and Freddie were not an important part of the problem? And this bill has nothing to fix Fannie and Freddie.”

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