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Should Obama Pull the TARP from Under Banks?

February 18, 2010 at 12:00 AM EDT
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As part of his continuing series of reports examining bank reform and the future of Wall Street, Paul Solman sits down with bank consultant and former FDIC chair William Isaac for a critical look at the Troubled Asset Relief Program.
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JEFFREY BROWN: And, finally, “NewsHour” economics correspondent Paul Solman continues his conversation series on bank reform and the future of Wall Street.

Last night, we heard from a former-regulator-turned-critic, Bill Black. Tonight, Paul gets a very different view.

It’s all part of his ongoing reporting on Making Sense of financial news.

PAUL SOLMAN: William Isaac, chair of the Federal Deposit Insurance Corporation under President Reagan, now a bank consultant.

A critic from the start of the Treasury’s Troubled Asset Relief Program to strengthen financial institutions during the crisis, he’s also come out against President Obama’s proposal to tax banks that received TARP funds.

I sat down with him recently to hear more.

William Isaac, welcome.

WILLIAM ISAAC, former chair, Federal Deposit Insurance Corporation: Thank you. Good to be here.

PAUL SOLMAN: The administration’s proposal just being floated to get back the TARP money, what do you think of it?

WILLIAM ISAAC: There are some really serious problems with that. One is, the bank portion of the TARP is almost certainly going to be highly profitable. They’re not going to lose any money on the banks that participated in TARP.

They are going to lose money on AIG, in all likelihood. They will probably lose money on General Motors and Chrysler, but they actually are going to make a fair amount of money on the banks that were in TARP. And, whatever the government made, it’s a lot more than the government’s borrowing cost.

PAUL SOLMAN: So, what’s wrong with this idea? That it’s just not fair?

WILLIAM ISAAC: Well, that’s part of it. It’s not fair to tax the banks for money they gave away to the car companies, which Congress never intended that they should do. That’s not fair.

But bringing it home to us citizens, it’s foolish. We have got banks that are undercapitalized, are paying inordinate amounts right now for the cost of deposit insurance. They’re — they just sent a check to the FDIC for $45 billion.

PAUL SOLMAN: Collectively.

WILLIAM ISAAC: Collectively.

And — and, so, they’re having to pay higher increased — you know, higher costs for FDIC premiums. They’re having to raise their capital standards. We have decided they have got to bring all the securitizations back onto their books, which requires even more — higher capital standards. Now we want to tax them and take more money out of the banks. And, yet, at the same time, we say, why aren’t you banks loaning money?

Now, you can’t have all those things happen at the same time. And, right now, I think what’s most important for us as a country is, we need to get the economy going again and get lending going again in the banks.

PAUL SOLMAN: You understand, don’t you, that arguing to the extent you are on the behalf of the banks is kind of like, these days, arguing on behalf of swine flu?

PAUL SOLMAN: I mean, you are defending an extremely unpopular position.

WILLIAM ISAAC: No, I don’t — I don’t think so. I’m arguing for the American people.

Keep in mind, I was adamantly opposed to TARP. I think TARP was a horrible thing that the Congress did. We didn’t need it. And I was upset as any Tea-Party-goer there is about TARP. It was a waste of our money. We shouldn’t have done it. And it frightened the public. And it made our economic system far more shaky than it needed to be.

And, so, I’m not defending the banks. I’m arguing that I want the economy to get going. And we can’t get the economy going if banks aren’t lending. And banks can’t lend if you’re taking the money away from them by taxing them right now.

PAUL SOLMAN: Everybody I talk to, from George Shultz to Paul Krugman, says, too big to fail is a problem; we have to do something about it.

Are they right?

WILLIAM ISAAC: Yes. The top 10 banks control something like 70 percent to 75 percent of the financial assets in the country. I think that’s — that’s really high concentration that makes me uncomfortable. I would like to see our financial system be less consolidated, less concentrated.

PAUL SOLMAN: So, what would you do about it?

WILLIAM ISAAC: There’s a whole lot of things I would do. I would change the regulatory structure. I would — I would consolidate these regulatory agencies and — and have more effective supervision than we — than we have.

As we get out of the recession, and things begin to settle down, we need to aim for much higher capital standards on our major banks. The smaller banks already had a lot of capital, and I don’t think they’re the issue.

We also need to deal with a whole host of highly procyclical regulatory rules and accounting rules that made this crisis much worse than it needed to be.

PAUL SOLMAN: And by procyclical, you mean that the policies exaggerate the good times and exacerbate the bad ones.

WILLIAM ISAAC: Precisely. If you’re in good times, it makes the good time more frothy. And, if you’re in bad times, it makes it really hard to get out of it. You’re in a downward cycle, and you can’t — you can’t pull yourself out.

PAUL SOLMAN: With regard to Wall Street, should we shrink the financial institutions that are there down to a much smaller size?

WILLIAM ISAAC: I would rather let the markets sort that out. If — if they’re not performing a useful function, the market will take care of them in due course.

What I do think that we ought to bring back up is the issue of Glass-Steagall, which was enacted in the 1930s to separate the commercial banks from the investment banks, Wall Street from Main Street. And that was liberalized gradually over time. And then, in 1999, the Congress eliminated it.

I was in favor of its elimination. And my good friend Paul Volcker was opposed to its elimination. And, as I look back on our experiences over the past 10 years or so, I think Paul was right and I was wrong.

I thought we could regulate better than we have. And I thought we could control that. And I don’t think we can.

PAUL SOLMAN: William Isaac, thank you very much.

WILLIAM ISAAC: My pleasure.