Isaac: Dodd-Frank Is Killing Small Banks, Lending to Small Business, and Creating More Big Banks

Former FDIC Chairman Bill Isaac is interviewed on CNBC's Squawk Box September 12, 2012:


The following transcript has not been checked for accuracy.

all week long we've been looking at the future of the banking industry of another industry leader joining us now, bill isaac, a global head of financial institutions for fdi consulting and the former chairman of fdic. you didn't have to move to cincinnati to be chairman, did you? no, i didn't. it doesn't matter. you are anyway. they can say, you know who our chairman is? and they'll say bill isaac, and that gives them a lot of credit. have you been able to hear what mr. kovacevich has been saying today? i've heard some of it. do you guys agree? what do you agree on? and what do you disagree on with what he said? or is it shades of gray? oh, there i go. not fifty shades. how many shades of gray? we'll take any opportunity to take this right in the toilet. but -- what are you reading? no, i'm not. but i do know someone who is. and i'm not going to mention who. but seriously, what -- dick and i have been the best of friends since about 1982 or '83. we do disagree on some things, but i would say that i agree on 98% of what dick kovacevich says. no kidding. that's amazing. particularly his assessment of what went wrong. the safety nets that failed us, the safety valves that all gave out. i was going to talk to dick later because he has -- we've looked into the past, but you've referenced sort of the -- how we react to these things. and a lot of times we shoot ourselves in the foot. and everybody knows you go through something like this and you start regulating. and the biggest fear is we're going to overregulate, do something that's counterproductive. you've intimated you think we're there. really? dodd/frank? again,he question i asked was what regulatory authority does the federal reserve not have to rein in the rk of citi? so they already had it? they already had it. boy, he's hard to -- you weren't going to be able to make but your point is there's a perception that small business is not hiring and really can't get the credit it needs from the financial system to hire for some reason. you think it has to do with overregulation? or is it just the hangover from the crisis? bill, you weigh in. i think there was a time when credit was not available, just after. but i don't think that's the -- it's available. what's the problem now? well, the lack -- the companies who need the money, banks don't want to lend to. and the people who don't need the money are not investing because they have no confidence. no confidence in what? in the economy and the future. let's just look, again, small business has been the engine of growth in this country forever. and we have more small business customers, i talk to them all the time. here's what they say. i am so scared of the future. and let's just compare the impact of various administration policies on small business versus big business. let's take health care. most small businesses don't give health care. and now they know that not only are they going to be forced to do health care, it's going to be a large expense for them relative to what they have. they don't even know how large it is. health care companies have been giving health care forever. no impact. second, taxes. what people don't understand is that most successful small businesses are subchapter s. their capital -- we're told only only 2% of businesses are subchapter s. right, but they only -- you don't mention that when you tell me that. i said the successful ones. right. so they're getting double whammied. and remember, they have to earn enough money to have capital to expand. they're getting hit with their personal tax rate -- do all businesses tell you this? oh, yeah, that's what i'm saying. because there are people will tell you that's not what it is. it's not the -- go talk to them. it's the hangover from the biggest credit, right? wrong. wrong. now, let me say, big businesses, only the executives get hit with their personal taxes. the corporate tax rates stay the same. right. the third is regulation. now, let me just say this, i can't imagine being a small bank today under dodd/frank. it would be impossible to comply with the regulations of dodd/frank and make any money. they won't comply with everything because they can't afford it. now, would you agree that people -- the purpose of dodd/frank was to cause large banks not to get bigger? i'm telling you because of dodd/frank, there's going to be industry consolidation and the big are getting bigger. they already are. and so on because small banks have their -- they can't even breathe with all the regulation. agree with 98% of this? i probably agree 100%, but i would say that the -- the one thing dick hasn't mentioned is the capital cords, which are highly procyclical. what do you mean? well, they -- in good times they're backward looking models, and they don't require capital reserves to be built up the way they should. banks pay big dividends and salaries and they're fat and happen and not building up their capital reserves in good times. then when the bad times hit, which we're in right now, you can't have enough capital in reserves to satisfy those. and so what a lot of banks are doing -- and i think the bigger ones in particular -- they are shedding assets, not adding assets. and we have exactly the wrong regulatory policies in place. it's upside down. we should be requiring banks to add capital and reserves like crazy when they're making money, when times are good. not a capital issue so much. really it's about -- it is in some of the big banks. that would actually -- not wells fargo, but in some of the other big banks, they do not have enough capital to satisfy. and in europe, of course -- europe doesn't have any. they don't have any and they're selling them to us. what about these small business owners, though? do you think they're telling him these things because they just don't li? no, i believe that they've -- no, you don't. i believe they believe this stuff. you believe they believe it, but that's not -- but if demand were to go up in the -- if question to me it's a different question. it's the scale of what the small businesses can do and what the tax implications are all you have to do is try to measure it. can i say something? the proof of this is we're in the t of one of the worst recessions ever, right? right. there is more liquidity on corporate balance sheets than there has ever been even in good times. but if demand -- just a minute. at the highest opportunity cost. zero interest rates. if you -- the only reason you don't do this because you're paying the high prices is you don't have any confidence. right. i am telling you -- i am 100% sure that most business people out there do not have confidence in the future and therefore they're not -- bill clinton saying nobody, no president in history could've done better in recovering from the depth of this financial crisis. i'll tell you that ronald reagan did a lot better. we were in a severe crisis in the early '80s. interest rates at 21.5%. we had -- not -- we had a collapse in -- not even close. not even close. we had a depression in the agriculture sector, we had the ldc debt problems, we had 3,000 bank and thrift failures in the 1980s. and yet, we went -- we underwent the longest and strongest economic boom in history. because we followed the proper policies. i went through both, and the '80s were much tougher. how do you solve 12% unemployment? i mean 12% inflation? we have the lowest inflation we've ever had, we have the lowest interest rates we've ever had, and we can't get the engine going. look, i w 7 years old at the time. let me say, we've had lots of different economists and historians on, looked at the period who say that the financial crisis because it was a credit crisis was tougher. it was a crisis on all fronts. and it's one thing to be an economist and go back and read a book about it. it's another thing to live through it, which he did, as the head of a bank and i did as the head of the fdic. we were in the middle of it. we had the right -- i was head of citi bank's retail business. we had the right to our customers to say, remember those lines of credit you have? they're gone. you cannot borrow from us. that's how big this crisis was. now we're trying to beg people to borrow. i think we should have a bill -- let me add something about that. the national federation of independent business just came out with a survey. they -- of -- i don't know 30,000 or 40,000 small businesses. and uncertainty was -- amounted to 14 of the 20 reasons why small businesses are not investing right now. and not adding employment. 14 of the top reasons they are not -- theare not investing, they are not looking to grow is uncertainty about the economy, about the government, about tax policy, about monetary policy, about regulatory policy. there's no doubt that we are -- and add dysfunctional by both parties. one more thing. let's say the president gets reelected and we become certain taxes are going up, regulations are going up. all these things are going to happen. once they have the certainty, will they then be able to plan for it? all these things happen, will then we be able to rebound since we at least have certainty that we're going to have all this? i honestly believe that if the president is reelected, we are in for a long, dark period. because i don't believe he is going to be able to work across if we can't get together democrats and republicans get together and come up with solutions, and i think mitt romney showed he could do that in massachusetts and did do it. sure. we're going to continue this
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