Tags: Lew | too big to fail | banks | Warren

Lew Quizzed on the Hill About FSOC and IRS — Part II

By    |   Tuesday, 01 Jul 2014 07:41 AM

After testing his message at the House Financial Services Committee, Treasury Secretary Jack Lew took it to the Senate side of the Capitol on June 25 when he presented the Treasury's annual report on the activities of the Financial Stability Oversight Council to the Senate Banking Committee.

This figured to be an easier chore than the House Committee hearing was, because the Senate is controlled by Democrats. But as was the case the day before, a minority of Democrats asked tough questions even as no fewer than four Republicans took turns trying to impress Lew with the gravity of the IRS scandal and the need for a special prosecutor, or at least some entity independent of the Treasury, to try to find out why there's a gap in the provision of emails House investigators have demanded. It was notable that the questioners represented not only conservative Senators like David Vitter, R-La., and Richard Shelby, R-Ala., but also Jerry Moran, R-Kan., and Dean Heller, R-Nev.

When Lew tried to reassure Heller that the matter is in the capable hands of IRS Commissioner John Koskinen, the normally mild-mannered Heller retorted that he has found Koskinen to be "the most arrogant witness" he has seen in seven years. For this, and because the Senate is inherently vested with more gravitas than the House, the political theater at this event was awarded 2 1/2 gavels.

Sens. Sherrod Brown, D-Ohio, and Elizabeth Warren, D-Mass., both advocates, along with Vitter, of breaking up or at least downsizing the "too big to fail" banks, challenged Lew on the issue of whether the authorities have truly abolished the doctrine of too big to fail, which Lew had previously told the committee could be done "with a straight face" by the end of 2013. Now he admits that the expectation that the largest, weakest banks enjoy a subsidy and the expectation of a bailout on the part of investors would not be known until it is tested in another financial crisis.

Brown referred to recent speeches by Federal Reserve Governor Dan Tarullo and Federal Reserve Bank of New York President William Dudley that led him to pursue questions on the Fed's policy regarding too big to fail. He reminded Lew that a year ago he had said that if he couldn't end too big to fail by the end of 2013, he would "have to look at other options," but instead in December Lew declared "Mission Accomplished," and he is now saying something different. Brown argued that the markets are still saying that the too big to fail banks enjoy a funding advantage. Lew responded that there are different indicators, but "it's definitely dramatically reduced." He also contended that Dodd-Frank changed the law to preclude bailouts in the next crisis.

Warren noted that there are two tools for dealing with too big to fail — risk and size. She observed that Dodd-Frank dealt with risk, but the too big to fail banks have continued to grow since the Act was passed. Remarkably, Lew responded that size doesn't always correlate with risk, and he cited various measures the authorities have taken to raise capital standards and to force banks to internalize costs in order to reduce risk. Warren reminded Lew twice more that the too big to fail banks have gotten larger, and she cited a forthcoming Government Accountability Office study on whether the banks benefit from too big to fail. Lew was unmoved and claimed that "arbitrary size limits can miss real risks."

(Archived video and Lew's testimony can be found here.)

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Robert-Feinberg
After testing his message at the House Financial Services Committee, Treasury Secretary Jack Lew took it to the Senate side of the Capitol on June 25 when he presented the Treasury's annual report on the activities of the Financial Stability Oversight Council to the Senate Banking Committee.
Lew, too big to fail, banks, Warren
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2014-41-01
Tuesday, 01 Jul 2014 07:41 AM
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