Book review: Senseless Panic - How Washington Failed America
It is refreshing to read a book that instead of pointing the finger at Wall Street and bank bonuses, highlights the role played by legislators, politicians and regulators in helping bring about the 2008 financial crisis.The recent financial crisis has spawned a number of books charting the behind-the-scenes machinations and course of the recent financial crisis as it played out on Wall Street and global financial markets.
All of these books pinpoint different causes for the crisis and lay the blame at a whole host of people including banks, the regulators and politicians. However, in Senseless Panic - How Washington Failed America (Wiley), William M. Isaac, former head of the Federal Deposit Insurance Corporation (FDIC) during the US Savings and Loans crises of the 1980s, squarely puts the blame for the 2008 crisis at the hands of inept government decision makers who lacked a consistent policy for dealing with troubled banks, the Securities & Exchange Commission and the mark to market accounting rule, which saw banks write down assets and record substantial losses in earnings.
His to-the-point writing style is refreshing as a lot of books on this subject can get bogged down in boring minutiae and end up presenting a too complex and confusing picture of what really happened. For Isaac, it is fairly straightforward what happened. Regulators and politicians did not heed the lessons learned from the Savings & Loans Crises of the 1980s.
A good example of that he says is how they treated Lehman Brothers, letting it collapse, while deeming other banks "too big to fail". Isaac does not buy the notion that no buyers could be found for Lehman and anyway the government could have funded or recapitalised the investment bank as it did Bear Stearns before arranging for its sale to J.P. Morgan Chase.
"The Lehman failure reinforced the perception that there was no coherent and consistent plan in place to keep things from spinning out of control and that Washington was too focused on making the right political decisions," Isaac writes.
The Bush Government's USD 700 billion Troubled Asset Relief Program (TARP), which instead of buying the troubled assets of banks ended up purchasing capital, also receives criticism from Isaac who says capital was given to banks who didn't even need it and to GM and Chrysler despite Congress rejecting a bailout for the automotive companies.
But Isaac saves his harshest criticism for the SEC and the mark-to-market accounting rule it helped institute alongside the Financial Accounting Standards Board (FASB). Isaac says mark-to-market ended up "spooking" the markets even further by resulting in even further writedowns on banks' earnings and assets and at a time when they were under pressure to lend more.
"The SEC and the FASB were irresponsible to have relentlessly followed a policy that led to the massive and senseless destruction of capital within the US financial system..." Isaac writes.
The Obama administration and new Treasury secretary Timothy Geithner, are not let off the hook either. While Geithner's predecessor Paulson cops a lot of flak in Isaac's book, the current US administration are also lambasted for "sowing new seeds of doubt" by announcing publicly that the 19 largest TARP recipients would undergo stress tests. Imposing new bureaucracies (systemic risk regulator) which are not truly independent of Treasury is not going to help matters either, says Isaac.
Perhaps the book should be titled, How Washington continues to fail America.
Date Posted:18th August 2010