Tags: FSOC | OFR | SIFI | Berner

FSOC Holds Bizarre 'Public Meeting'

By    |   Wednesday, 08 Oct 2014 08:07 AM

The Financial Stability Oversight Board (FSOC) on Oct. 6 held the latest of its so-called "public" meetings at the Treasury for barely more than half an hour. As with the others, it was obvious to any observer that this was not truly a public meeting but rather a staged dog-and-pony show.

This does not mean, however, that the event was wholly without significance, because it treated, however lightly, two important issues. They were the status of the FSOC's program to designate some of the largest nonbank financial institutions as systemically important financial institutions (SIFIs) subject to heightened supervision by the Federal Reserve and efforts by the FSOC and Office of Financial Research (OFR), the research arm of the FSOC, to close gaps in financial data that the FSOC has found could contribute to the risk of another financial meltdown.

The event was presided over by Treasury Secretary Jack Lew, in line with the prescribed role of the Treasury Secretary. As everyone interested in the course of the ongoing, permanent financial crisis knows and is constantly reminded by financial regulators whenever they appear in public, the FSOC was created by Dodd-Frank to coordinate the work of the regulators in identifying and responding to threats to the stability of the financial system so that another crisis episode similar to the one that occurred in 2008 will never happen again or when it does, it would be managed more competently, a low bar indeed.

Just as the George W. Bush administration contended that the 9/11 attacks occurred because there was no Department of Homeland Security, the official narrative of the financial crisis holds that it occurred because the regulators lacked the powers and the machinery created by Dodd-Frank, including the FSOC and OFR.

Starring in this little skit was Richard Berner, a former Treasury official who now heads the OFR, which was also created under Dodd-Frank. Coincidentally this writer tangled several years ago in separate public meetings with both Berner and Tim Massad, another Treasury official who is the newly installed chairman of the Commodity Futures Trading Commission (CFTC).

In both cases the gentlemen had previously made presentations touting the new powers conferred by Dodd-Frank, and during Q&A this writer argued that the crisis occurred because Treasury and other authorities failed to use the authority they already had to contain the crisis by limiting the ability of "too big to fail" banks to expand their risky activities on a foundation of thin capital.

Berner is now attempting to do this in the face of stiff industry opposition. In Massad's case, when this writer challenged him by pulling the number $15 trillion out of the air as an estimate of the nation's exposure to embedded losses, Massad agreed. More recently, Dennis Kelleher, CEO of Better Markets, estimated the exposure at three times as much, or the equivalent of three times GDP, but no one really knows.

With regard to SIFI designation, Lew alluded to the fact that another insurance company, which the financial press has identified as MetLife ("Snoopy"), is being proposed for designation and has requested a hearing before the FSOC. He added that the FSOC is requesting suggestions as to how the designation process can be made more transparent. The plan is to consider these ideas sometime next year.

Lew then called on Berner for a presentation on efforts by the FSOC and OFR to close gaps in the financial data available for regulators to contain financial crises. The official line is that the lack of such data contributed to the sudden and disruptive failure of Lehman Brothers back in 2008.

Berner mentioned data on swaps transactions being collected in collaboration with Massad's CFTC, the implementation of legal entity identifiers in order to facilitate the collection of timely data on transactions among financial institutions and improved collection of data on risky short-term funding activities of the largest financial institutions.

Readers can expect to hear more about these issues as regulators and their critics attempt to get a better fix on the risk and likely magnitude of another episode of the financial crisis.

(Additional information can be found here.)

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Robert-Feinberg
The Financial Stability Oversight Board (FSOC) on Oct. 6 held the latest of its so-called "public" meetings at the Treasury for barely more than half an hour. As with the others, it was obvious to any observer that this was not truly a public meeting but rather a staged dog-and-pony show.
FSOC, OFR, SIFI, Berner
687
2014-07-08
Wednesday, 08 Oct 2014 08:07 AM
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