Recipe for Recovery
Part-time Sarasotan Bill Isaac, former Federal Deposit Insurance Corp. chairman, remains a leading national financial expert as chairman of the Washington, D.C., financial services consulting firm Secura Group LLC. Despite today’s struggles, Isaac, a developer of downtown’s Pineapple Square project, still believes in Sarasota as a growing market and in the solidity of the U.S. financial system. But there are hurdles to overcome before either one stabilizes and begins to grow again. Here’s how Isaac, who has recently discussed the crisis on CNN and in the Wall Street Journal, would set the economic ship right.
Q You have said the FDIC has taken steps and proposed actions that could haunt the banking industry for years. Should all failing banks be treated the same at this time, or does size really matter? Small banks are among the many victims of a crisis that was brought to us by Wall Street. I wish the FDIC had simply announced that it would protect all depositors and other general creditors of all banks instead of coming up with a complex and confusing plan that does not afford smaller banks as much protection.
Bank failures would be reduced, because funding would be more stable, and marginal banks that might recover would not be pushed over the edge. The rules would be easy to understand—there would be no confusion about which banks, instruments and accounts are guaranteed.
Q How much blame for the sub-prime crisis and foreclosures should be laid at the feet of lenders relaxing loan standards too much? Much of the blame was due to lousy underwriting on loans, mostly by non-bank lenders. The government deserves a fair amount of the blame, particularly the Securities and Exchange Commission. Among the SEC’s major blunders, it reduced capital requirements for investment banking firms and adopted incredibly bad market value accounting standards over the objection of the Secretary of the Treasury, the chairman of the Federal Reserve, and the chairman of the Federal Deposit Insurance Corp. The SEC played a large role in turning what should have been a manageable problem into a crisis. Its accounting rules have destroyed more than $500 billion of bank capital, which reduced bank lending capacity by nearly $5 trillion. And the Bush administration and leaders in Congress have stirred up fears rather than being calming.
Q What should be done to stabilize the banking industry? We are throwing everything at the problems, and I believe things will calm down once these measures have time to work their way through the system. One thing we haven’t done yet is demand that the SEC get on the same page as the Fed, Treasury, and FDIC. It is unconscionable that we are taking taxpayer money to recapitalize the banking system without ordering the SEC to stop its senseless destruction of bank capital. Also, we have a host of pro-cyclical bank regulatory policies in place that we must change as quickly as possible.
Q Has the federal government already made mistakes with irreversible consequences? I don’t know about calling them mistakes, but the bailouts of large companies such as AIG, CitiGroup, FreddieMac and FannieMae are likely to have adverse consequen-ces for many years to come. It is difficult to make the case that we are a capitalist, free-market economy when the government is forced to make these kinds of massive interventions in the economy. I worry that only two major Wall Street firms, Goldman and Morgan Stanley, are left. Wall Street has historically provided the capital needed to fuel the American economic engine. What will we do without it? Will our free-enterprise system be smothered by new layers of government regulation in reaction to the bailouts taxpayers have been forced to fund? If so, how will we be able to keep pace with future powerhouses such as China and India?
Q When does a company become too big to fail or be allowed to fail? We cannot afford to let our largest financial companies go down. Nothing works when the banking system isn’t working. The financial companies that have been helped will be required to repay every penny, and I do not believe taxpayers will ultimately lose any money.
I am not a fan of bailing out non-financial companies. If the auto companies, for example, want to get taxpayer money, they should go through a pre-packaged bankruptcy to clean up their problems. If we don’t make them do that, it will be a bottomless pit.
Q Is your Pineapple Square mixed- use retail project in downtown Sarasota still viable? We believe very much in Pineapple Square. We are continuing to work on getting Phase One filled with retail. We have great stores such as Brooks Brothers, Sur la Table, Hyde Park Steak House and Pastry Art. It’s difficult to get retailers in this economic climate, but we are in serious discussions with a couple of good ones.
We will not be able to build the condo towers until we get enough pre-sales. When condo sales turn around, which they will, Pineapple Square will be the first project to come out of the ground. We have all the necessary approvals, and we have all of the construction drawings done. We’re ready to go.
Q What is your view of investing in downtown Sarasota in light of today’s economy? I am a very strong proponent of downtown Sarasota. Every city worth its name needs a center, a core. We intend to do our part to give Sarasota a downtown to be proud of.