Tags: Lew | Shelby | Kelleher | FSOC

Treasury Secretary Lew Struggles Over FSOC at Senate Banking Committee

By    |   Thursday, 26 Mar 2015 07:53 AM

After recent appearances by Treasury Secretary Jack Lew and Securities and Exchange Commission Chair Mary Jo White before the House Financial Services Committee that were marked by repetitious questioning, this writer held out hope that a scheduled appearance by Lew at the Senate Banking Committee would be more productive. Instead it was disappointing. In store was an even more dramatic example of how a hearing can go off track at the beginning and then flounder so badly as to raise concern that Committee Chairman Richard Shelby, R-Ala., who has only two years to fulfill a productive agenda and could get sidetracked on the way.

In his opening remarks, Shelby laid out the industry narrative that the Financial Stability Oversight Council (FSOC) created by the Dodd-Frank Act and chaired by Lew has been given extraordinary powers and is using them to designate the largest nonbank financial firms as systemically important financial institutions (SIFIs) subject to heightened supervision by the Federal Reserve. Under this narrative, the FSOC is itself being unduly influenced by another group called the Financial Stability Board (FSB), which is composed of the leading global financial regulators.

Sen. Sherrod Brown, D-Ohio, followed with a statement suggesting that if anything the FSOC is moving too slowly by only designating a handful of nonbank as SIFIs.

Lew's statement shows that the Treasury itself is mired in a faulty narrative that the 2008 crisis came out of the blue and no one knew what to do because we didn't have an FSOC. This is akin to the Bush administration's fantasy that the reason America was attacked on 9/11 was that we didn't have a Department of Homeland Security. In fact, there was no need to "predict" the financial crisis because by 2008 the country had already been in a financial crisis for about 40 years.

Following Lew a panel of witnesses represented the asset management and insurance business that are protesting the work of FSOC as well as former CBO Director Douglas Holtz-Eakin, who has provided some of the research to back the industry critique, and Dennis Kelleher, head of Better Markets, the Democratic witness who supported Brown's view that the FSOC is too slow.

The most provocative testimony was Kelleher's recounting of the events of Sept. 22, 2008, when Morgan Stanley found it would not be able to open and Goldman Sachs feared it would also be "toast" in that case. The Treasury and the Federal Reserve rescued both, along with AIG and the money fund industry. Kelleher asserted that "No one anticipated this," which was true for AIG, but this observer, without the benefit of staff, predicted the failure of Goldman Sachs the minute its CEO, Henry Paulson, was appointed Treasury Secretary on May 30, 2006.

The defining moment occurred when Shelby asked Lew if the country wouldn't be better off if there were fewer firms with the potential to bring the economy down, and he got an equivocal answer, leaving him perplexed. The unfortunate answer is that the administration has an ambivalent view of the "too big to fail" institutions and still sees them as champions of global commerce.

Lew might be having trouble breaking from a view attributed to his predecessor, Tim Geithner, that "too big to fail and the so-called moral hazard or safety net that it would create can't really ever be fully taken away." ("What Tim Geithner Really Thinks," Andrew Ross Sorkin, New York Times Magazine, May 8, 2014.)

(Archived video and witness testimony can be found here.)

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Robert-Feinberg
After appearances by Treasury Secretary Jack Lew and SEC Chair Mary Jo White before the House Financial Services Committee that were marked by repetitious questioning, this writer held out hope that a scheduled appearance by Lew at the Senate Banking Committee would be more productive.
Lew, Shelby, Kelleher, FSOC
584
2015-53-26
Thursday, 26 Mar 2015 07:53 AM
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