As you read “Senseless Panic” you can expect to be caught up in a financial saga. The story of that saga raises critical questions demanding an urgent response for the future of our banking system and more broadly for the capacity of our government to respond to crises. You will also quickly come to understand that Bill Isaac deserves to be listened to. Beyond his deep experience, he is a man of strong convictions, decisive in thought and courageous in action.
Those are not qualities that most Americans these days associate with men or women administering the work of the federal government. They were not qualities that, for many years, loomed large or necessary in choosing the board of the Federal Deposit Insurance Corporation.
The FDIC was created in 1933 in the wake of the banking collapse in the Great Depression. Its purpose was clear: to insure prompt payment in full for small deposits at failed banks. Combined with authority to examine thousands of banks, confidence in a shattered financial system could then be restored.
That was, and remains, an important purpose. For a while, however, the FDIC did not seem needed. The experience of the Depression induced bankers to be ultra-cautious. During and after World War II, the resurgent economy meant clear weather for banks. For decades, there were practically no bank failures, and the FDIC receded into a kind of bureaucratic backwater. It was not really challenged or influential in policy. When questions of regulatory practice arose, it was the Treasury or the Federal Reserve that held sway.
My first contact with the FDIC in 1963 perfectly reflected both the institutional hierarchy and the absence of challenge. The FDIC had just built a new building placed across 17th Street from the White House. Despite the location and the fine architecture, the opening was not a major Washington event. As a junior Treasury official, I was delegated to represent the department at the dedication ceremony. The speaker was the chairman of the House Banking Committee, one Wright Patman, a man engrained in the strong populist traditions of rural Texas. His theme was clear. There simply were not enough bank failures. The creative instincts of small business were stifled by conservative loan policies. The FDIC was simply doing its job too well.
Chairman Patman had long since left from Washington when his wish was amply fulfilled. A young Bill Isaac was appointed a FDIC board member in 1978, a year or so before the institution had to deal with the potential failure of a large (by the standards of 1970s) Philadelphia bank. The decision was made, with the Federal Reserve in the lead, to provide enough emergency assistance to keep the bank running. Bill Isaac was prescient in his concern that the approach could lead to a policy that some banks were simply "too big to fail."
Soon, Bill became chairman. It wasn't long before he and his agency were thrust into a decade-long succession of really serious threats to the stability of our depository institutions and to the U.S. economy. It started with the savings bank and agricultural bank crises, soon followed by the Latin American debt crisis, embroiling the largest international banks. The debacle of the deregulated savings and loan industry followed. One of the largest commercial banks -Continental Illinois- was rescued by the combined efforts of the FDIC and the Federal Reserve. There was a string of bank failures, and near failures, toward the end of the 1980s. The FDIC, along with the Federal Savings and Loan Insurance Corporation, the Federal Reserve, and the United States Treasury were together faced with unique challenges.
"Senseless Panic" is in part the story of that decade - the actions taken and the lessons learned and the lessons forgotten. The face of banking in the United States changed, with reverberations lasting to this day.
I was the chairman of the Federal Reserve in those days. Like my predecessors, I thought "the Fed" had a special role and broad responsibility for defending and maintaining financial stability. Truth be told, given the pattern over decades, we tended to look to the FDIC as a sort of junior partner. That, I think is fair to say, was not Bill Isaac's view-not when it came to failing banks.
My first impression of Bill 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.
Given all of that, there can be no surprise that Bill Isaac has strong views about the official response to the latest and most serious financial crisis. He sets out his view of the way ahead. There is no mincing of words. Senseless Panic is a clarion call to action by Congress, by the regulatory agencies, by accounting standards setters, by rating agencies, and by banks themselves.
I and others might challenge one or another of the specifics or relative priorities. But there can be no question that his sense of urgency is justified and his proposed policies need a thoughtful response.
There is another lesson to be drawn from this book. It concerns an issue never explicitly stated, but relevant and timely when there is such distrust of government and those who serve it. Bill Isaac was a public servant. In a real sense, he still is, even if not now in formal office. What he demonstrated is that, by force of character and innate ability, he could arouse a rather for- gotten old-line government agency into an active vital force, able to respond to crises with vigor and effectiveness.
Fortunately, that spirit remains in the leadership and staff of the FDIC today. It is dealing effectively with matters of momentous importance.
Bill's book amply reflects the sense of frustration, the exceptional demands emotionally and professionally placed on top officials and staff alike at times of crisis, the rigidity of bureaucracy, and the limitations on resources that are the lot of public servants. But what comes through it all is something else. It is the sense of pride, of having been tested to the maximum, of serving not a personal or a private interest but the American public.
Those are qualities that somehow we as a nation have been losing-not entirely, and I trust not permanently. Of one thing I am sure. We should not and cannot settle for less than a fair share of our country's best talent when manning the ramparts of governments. That is one key lesson of Bill Isaac's life story, a lesson at least as important as the reality of the banking crisis.