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Senseless Panic: How Washington Failed America

ISBN: 978-0-470-64036-4
190 pages
June 2010
Senseless Panic: How Washington Failed America (0470640367) cover image
The 1980s opened with the prime interest rate at an astonishing 21.5 percent, leading to a severe recession with unemployment reaching nearly 11 percent. Depression-like conditions befell the agricultural sector, a bubble burst in the energy sector, a rolling real estate recession swept the country, the entire thrift industry was badly insolvent and the major money center banks were loaded with third world debt. Some 3,000 bank and thrifts failed, including nine of Texas’ 10 largest, and Continental Illinois, which, at the time, was the 7thlargest bank in the nation. These severe conditions were not only handled without creating a panic, the economy actually embarked on the longest peacetime expansion in history.

In Senseless Panic: How Washington Failed America, William M. Isaac, Chairman of the Federal Deposit Insurance Corporation (FDIC) during the banking and S&L crises of the 1980s, details what was different about 2008’s meltdown that allowed the failure of a comparative handful of institutions to nearly shut down the world’s financial system. The book also tells the rousing story of Isaac’s time at the FDIC. With accessible and engaging prose, Isaac:

  • Details the mistakes that led to the panic of 2008 and 2009
  • Demystifies the conditions America faced in 2008, and
  • Provides a roadmap for avoiding similar shutdowns and panics in the future

Senseless Panicis a provocative, quick-paced, and thoughtful analysis of what went wrong with the nation's banking system and a blunt indictment of United States policy.

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Foreword.

Acknowledgments.

Introduction.

Part One: No Calm Before the Storm.

Chapter 1 Home Alone.

Chapter 2 The Early Years (1978 –1981).

Chapter 3 The Savings Bank and S&L Crises.

Chapter 4 Penn Square Fails.

Chapter 5 The Butcher Empire Collapses.

Chapter 6 Deposit Insurance Reform/Tackling Wall Street.

Chapter 7 Continental Illinois Topples.

Chapter 8 Preparing to Leave.

Chapter 9 Lessons Learned.

Part Two: Here We Go Again.

Chapter 10 Policy Mistakes—1989 through 2007.

Chapter 11 The Subprime Mortgage Problem.

Chapter 12 SEC and FASB Blunders.

Chapter 13 Schizophrenic Failure Resolution.

Chapter 14 The $700 Billion Bailout.

Chapter 15 Never Again.

Afterword.

Authors' Notes on Sources.

About the Authors.

Index.

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William M. Isaac is Chairman of LECG Global Financial Services and one of the world's foremost authorities on bank regulation. He served as chairman of the Federal Deposit Insurance Corpor-ation (FDIC) during the banking and S&L crises of the 1980s, when some 3,000 banks and thrifts failed, including nine of the ten largest Texas banks as well as Continental Illinois, the nation's seventh largest bank. Isaac writes frequently for the Wall Street Journal, the New York Times, Forbes, the Washington Post, American Banker, and other leading publications; testifies before Congress; makes regular appearances on leading television and radio programs; and is a contributor to CNBC.
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June 01, 2010
Senseless Panic

From 1980 through 1991, some 3,000 banks and thrifts with today’s equivalent of $3.5 trillion of assets failed, including many of the largest in the country. Yet, the public's confidence in the banking system held and financial panic was averted. Contrast this result with the global financial panic that hit in the fall of 2008 and threatened to push the world into an economic depression.

In SENSELESS PANIC: How Washington Failed America (Wiley; June 2010; $24.95; 978-0-470-64036-4; Hardcover), author William Isaac, who headed The Federal Deposit Insurance Corporation (FDIC) during the financial crisis of the 1980s, describes what was different about the 2008 crisis that allowed the failure of a comparative handful of institutions to nearly shut down the worldwide financial system and proposes sweeping reforms to prevent future crises. He also challenges Congress to get it right this time instead of rushing to enact meaningless election-year reforms designed to placate an angry public still reeling from the massive taxpayer bailout of Wall Street.

Isaac, one of the foremost authorities on banking regulation, provides a riveting inside account of how regulators were able to navigate the treacherous economic and banking waters in the 1980s without creating a financial panic, identifies the misguided policy “fixes” put into place during the 1990s that directly led to the banking crisis of 2008, and then examines the reasons why this crisis developed into what he calls the “Senseless Panic of 2008.” Isaac, who strongly opposed enactment of the TARP bailout program and helped defeat it during its first vote in Congress, also discusses how TARP was poorly conceived and administered and how it did far more harm than good.

Isaac notes that the U.S. economy was in relatively good shape when the subprime mortgage crisis erupted in 2007. Consumer spending, GDP growth, consumer confidence, job creation, and other vital signs of the economic health were all positive and inflation and unemployment were low. So why did the economy falter so rapidly? It was the federal government’s actions that let a manageable situation deteriorate into a full-blown disaster, Isaac explains.

“The panic of 2008 was not created by resolving firms like Bear Stearns in a non-disruptive manner,” Isaac says. “The panic was caused by the schizophrenic manner in which the government handled various troubled firms, bailing out creditors and even shareholders and then giving big haircuts in the next transaction and back and forth. This behavior confused and rattled the markets.” 

For example:

  • Why didn’t the government issue a temporary guarantee of Fannie Mae and Freddie Mac’s liability in order to restore confidence in them during the crisis? Until the government takeover of Fannie and Freddie, their preferred stock was considered to have almost as little risk as U.S. government securities. But the government wiped out preferred stock, which sent shock waves throughout the world and added fuel to the conflagration in the financial system.
  • Why was Lehman Brothers allowed to go into bankruptcy in the middle of a worldwide financial crisis? The Lehman failure reinforced the perception that there was no coherent and consistent plan in place to keep things from spinning out of control.
  • Why couldn’t existing bank creditors be persuaded to join in a rescue plan for AIG, particularly if the government had agreed to limit the risks? Why were the existing bank creditors of AIG bailed out and not required to give something in return?Isaac also offers critical policy measures for preventing the next financial crisis, such as reinstituting some of the Glass-Steagall Act provisions; consolidating and improving bank and thrift supervision; increasing capital, reserve, and liquidity requirements; eliminating procyclical rules; strengthening the SEC and the FDIC; and creating a FDIC-style resolution process could be used to address the failures of non-bank financial behemoths.

SENSELESS PANIC is an insightful analysis of what went wrong with the nation's banking system and a blunt indictment of United States fiscal and regulatory policies. 

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