The little-known story behind the House's initial rejection of TARP from Bill Isaac's new book
Senseless Panic.
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Bill Isaac was Chairman of the FDIC from 1981-1985 during one of the most tumultuous decades in American banking. He oversaw the banking system during the
Latin American debt crisis and the severe recessions of the early 1980's, and tried -- against enormous political pressure -- to head off the looming S&L crisis before it got worse. As many know, the
S&L clean-up cost taxpayers hundreds of billions of dollars, but had Congress taken Isaac's prescient advice earlier in the decade, the ultimate costs would have only been an estimated $2B.
Fast forward to 2008. On September 18, Paulson and Bernanke had convinced the Congressional leadership that a bank bailout plan had to be passed immediately or else the entire global economy would collapse. In his new book,
Senseless Panic: How Washington Failed America, Isaac writes:
- "Having served as chairman of the Federal Deposit Insurance Corporation (FDIC) during the banking and S&L crises of the 1980's, I was disturbed, even angry, about the events that led up to the bailout plan itself. I was so upset that I wrote an opinion piece opposing the bailout plan that ran in the Washington Post of Saturday, September 27."
In his op-ed, Isaac pointed out that several of the ostensible reasons for why we had to pass the TARP bill just didn't make sense. For instance, the claim that TARP had to be passed because there was a run on money market funds was completely specious as the U.S. Treasury had announced their blanket guarantee on September 19. Similarly, if the proponents of TARP wanted to claim that ordinary depositors were scared of bank failures, then why not be more clear about "the fact that the FDIC fund is backed by the full faith and credit of the government"? (This is more or less what the FDIC did anyway, when it raised the deposit insurance limit to $250,000.) Besides,
Isaac wrote, "[t]his is how the FDIC handled Washington Mutual. It would be easy to announce this as a temporary program if needed to calm depositors." As with so many of the government's excuses for TARP, actions that had
already been taken disproved the claims for why TARP was necessary.
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