Tags: FSOC | SIFI | Garrett | insurance

AEI Launches Offensive Against FSOC — Part III

By    |   Wednesday, 14 May 2014 08:01 AM

This is the third article in a series on the rally the American Enterprise Institute (AEI) held on Capitol Hill on May 6 to brief congressional staff on the case against the designation by the Financial Stability Oversight Council (FSOC) of some of the largest insurance companies and asset managers as systemically important financial institutions (SIFIs).

The two public officials who spoke, Rep. Scott Garrett, R-N.J., and Securities and Exchange Commission (SEC) Commissioner Dan Gallagher, represented, with great passion, the views of the affected industries, and in Gallagher's case, the institutional stake the SEC has in this matter. Garrett is chairman of the Subcommittee on Capital Markets and Government Sponsored Enterprises of the House Financial Services Committee (HFSC), and Prudential, the most aggrieved of the insurance companies, is from his state.

Garrett employed what may be a unique version of the Socratic method in which he asks leading questions of himself and the audience in an effort to dismantle the rationale for the actions of the FSOC in designating the largest financial companies as SIFIs.

First, he challenged the rationale of the FSOC as a means of achieving a holistic form of regulation through what he considers to be a "black box" process. He further complained that he attempted to attend an FSOC meeting but was unable to do so. FSOC officials countered that they are considering proprietary, potentially market-moving information that must not be aired in public.

Second, Garrett charged that the structure of the FSOC, with the Treasury in charge of a table dominated by administration appointees, gives the president undue power over regulators. Soon the audience was responding with whatever answer they knew Garrett expected them to give.

Third, Republicans have charged that the FSOC is following the lead of the G-20's Financial Stability Board in choosing which financial institutions to designate as SIFIs. Garrett asked whether this is right, and the audience agreed that it isn't. He went on a long time about the unfairness of the process before he asked, fourth, whether the regulator with the greatest expertise should have the most weight, missing the point that an insurance regulator may be captured by that industry and not be objective.

The fifth question seemed to be a repeat of the first, as he complained that the FSOC has not provided clear criteria to companies as to how and why they were designated as SIFIs. This implies that industry giants don't know that they are large, complex and interdependent enough to threaten the global economy.

Sixth, which is similar to the fifth question, Garrett complained about the lack of certainty as to which firms are in or out of the safety net, and he ended up repeating the point that the FSOC should be more transparent and less political. What this all adds up to is that the financial lobby wants to be seen as complaining and resisting the implementation of Dodd-Frank.

Gallagher also complained that he has been shut out of the process at the FSOC and that the only information he gets is an incomplete report from SEC Chairman Mary Jo White. What was most remarkable was his explicit statement that given the history of regulatory failures at the SEC, SIFI designation is an "existential" issue for the agency. He lamented that the SEC under White is lying on its back and not fighting back against was he calls a "false narrative" of the financial crisis that blames regulatory failure and Wall Street greed.

Warming to his message, he labeled the proposal to require money market funds to hold capital to support a fixed net asset value (NAV) "insane" and he protested that the industry is unsure about the willingness of the Fed to support it in a crisis, requiring firms to hold more capital.

It looks like the bailout psychology is as entrenched as ever, but this is the issue now at stake at the FSOC.

(Archived video can be found here.)

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Robert-Feinberg
This is the third article in a series on the rally the American Enterprise Institute held to brief congressional staff on the case against the designation by the Financial Stability Oversight Council of some of the largest insurance companies as systemically important financial institutions.
FSOC, SIFI, Garrett, insurance
660
2014-01-14
Wednesday, 14 May 2014 08:01 AM
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