Former FDIC Chairman Slams Handling of Financial Crisis (And Predictably Blames the Accounting)

We've seen Bill Isaac before. He's the former FDIC chair who taught me that the "fund" is little more than a Treasury cookie jar for things like tanks and big shiny guns. See also my December 12, 2008 The Fictional Accounting of the FDIC for more on that particular point.

Anyway. Greenspan has thrown a few poison-tipped darts at Bernanke's Federal Reserve so this is sort of protocol. But some of his points are dead on. *coughSheilacough*

Atlanta Business Chronicle:

A former chairman of the FDIC blasted federal regulators Monday for their handling of the nation’s banking collapse, and turning what could have been a much less severe situation into a financial maelstrom.

Bill Isaac, the chairman of the Federal Deposit Insurance Corp. during the Savings & Loan crisis, said the S&L Crisis and the real estate collapse of the 1970s were each worse than the current banking mess, which has helped plunge the U.S. into a deep recession.

But “wrongheaded” policy, including the implementation of mark-to-market accounting rules, and inconsistent actions toward failing financial institutions contributed to the collapse and continuing woes of the nation’s banks, Isaac told members of the Atlanta Rotary Club.

Mark-to-market wiped out value and eroded bank capital, while regulators being inconsistent with their implementation of policy allowed fear to shake consumers, Isaac said.

“You can’t keep going back and forth on policy, you have to have a clear view,” said Isaac, who was appointed to the FDIC board by President Carter and made chairman under President Reagan.

Fair Value Accounting and mark-to-market have ignited a firestorm of debate among bankers, developers, business leaders, CPAs and auditors, about the impact of these rules on companies and financial institutions left reeling from the fallout of the real estate sector and the collapse of the capital market.

The rule changes, developed over 30 years to protect investors from malfeasance, were designed to promote transparency for investors and to bring the U.S. standards in line with the international community. Some charge that the rule changes, which require companies and banks to use current market factors to assign value to real assets and financial instruments, such as securities, if they were sold or resolved as a liability, have tied an anchor to a sinking economy.

“We destroyed, by mark-to-market accounting, $500 billion in capital,” Isaac said. Considering banks leverage each dollar of capital into $10 worth of lending, Isaac said the full effect was a $5 trillion reduction in lending capacity.

WTF, Bill, I like you but what's this shit about M2M destroying capital? Either capital is or it isn't, if there is no market (because, oh I don't know, THE BANKS IMPLODED IT with greed, perhaps?!) then there is no capital vein to tap. What is so complicated about that? I'm not sure what sort of practical experience Isaac has with matters of accounting but I don't tend to take my accounting rule advice from guys who let the Treasury leave IOUs where their money should be.

Maybe I am the only one who feels that way.

Bonus points for use of one of my favorite words: malfeasance. It is a common media misconception that mark to market (as the accounting nerds know it: FAS 157) was instituted to bring additional "transparency" to financial statements. Actual accounting nerds know that M2M was just an IFRS test run meant to check the United States' ability to adopt International accounting standards. Ooops, I think we fucked that one up.

Fair value was around long before this crisis and will be around long after. Why? Because "fair value" - when you remove the accounting - is a pretty reliable concept; the intrinsic value of something for sale is generally derived from what someone else would pay for it, right? It is the universal "what if" of financial reporting, and though the banks might like you to believe this simple concept ruined their balance sheets, it was really off balance sheet entities like greed and ignorance that got them here. So stop already. Even you, Bill.

The FDIC is still in denial. And should stick to what it knows: selling crap properties no one wants, shuttering banks after the line of regulators before it missed the disease, and making my Fridays a whole lot more interesting.

Jr Deputy Accountant

Some say he’s half man half fish, others say he’s more of a seventy/thirty split. Either way he’s a fishy bastard.