Former FDIC Chairman Isaac to Moneynews: Dodd-Frank Is 'Worst Financial Legislation I've Ever Seen'

Sunday, 14 Apr 2013 12:50 PM

By Michael Kling

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The Dodd-Frank Act is "the worst financial legislation I have ever seen in my life," and the law won't prevent another financial crisis, asserts former FDIC Chairman William Isaac.

"If it had been around 15 years ago, it would not have prevented the last
crisis and it's not going to prevent the next crisis," Isaac told Newsmax TV in an exclusive interview.

Plus, the law doesn't address concerns about financial institutions that are too big to fail, it is far too complex, and it is hurting growth, said Isaac, now chairman of Cincinnati-based Fifth Third Bank Corp. and a senior managing director of FTI Consulting.

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Editor's Note: A full, unedited version of this interview is available exclusively to Financial Braintrust Alliance subscribers. Visit www.fbtalliance.com for more information and to sign up.

"It's way too complex, and it didn't get at the root causes of the crisis. It really didn't. It doesn't improve the supervision of banks," Isaac said. The law's complexity makes supervision more difficult and inefficient, and its restrictions are a drag on the economy, he said.

Editor’s Note: Put the World’s Top Financial Minds to Work for You

There were 13,000 banks in the country when Isaac was FDIC chairman (1981-85, during President Ronald Reagan's first term). Now there are about 7,000, and Dodd-Frank will cut that number in half as small banks struggle to meet its compliance costs, he predicted. Some will fail; larger banks will purchase others.

The shrinking number of banks will mean fewer options for consumers and businesses, especially those in small towns.

"I'm from a small town in Ohio," Isaac said, "and I know small towns and I know the Midwest, and banks are really central to a lot of communities. They make the loans to the small businesses and the farmers in these communities. They support the little league or the Y and, you know, we're going to miss a lot if we don't support our community banking system."

Regulators – both in the U.S. and Europe – are hurting their economic recoveries by being too restrictive on bank reserves and lending standards, Isaac argued, saying that's a major reason why the global recovery has been so slow.

"Bank regulations should be counter-cyclical and not procyclical," he said. "The time to be asking banks to raise their capital and their reserves, increase their capital and reserves to tighten their credit standards and slow their growth is when everything is booming."

Regulators and legislators are repeating the mistakes of the past, Isaac said, noting that he seen three major banking crisis in his long career. During the first, the real estate debacle of 1972 to 1974,  banks collapsed in droves and the economy teetered.

Then came the crisis in the 1980s. "I was chairman of the FDIC then, and I know first-hand what that was like," Isaac recalled. "We lost 3,000 banks and thrifts in the decade of the 1980s, including many of the largest banks in the country."

And then, of course, came the crisis in 2008.

Each crisis repeats the same old story, he said. "Our reaction to each crisis is the regulators go to the Hill and they are criticized for not doing their job right," he noted. "And they say if only we had more authority, more laws and so they respond with FREA, FDICIA and
Dodd-Frank and give them more and more laws and regulations that don't
address the problems."

Editor’s Note: Put the World’s Top Financial Minds to Work for You

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