| New York Times | - |
Michael S. Barr, a law professor at the University of Michigan who was an assistant Treasury secretary when the financial crisis was at its worst, is working on a book titled “Five Ways the Financial System Will Fail Next Time.” The first of them, he ...
Michael S. Barr, a law professor at the University of Michigan who was an assistant Treasury
secretary when the financial crisis was at its worst, is working on a
book titled “Five Ways the Financial System Will Fail Next Time.”
The first of them, he says, is “amnesia, willful and otherwise,” regarding the causes and consequences of the crisis.
Let’s hope the others are not here yet. Amnesia was on full view this week when the House Financial Services Committee held a hearing on “the dangers” of financial regulation.
Mr. Barr, who helped write the Dodd-Frank financial overhaul law, was
the sole witness who thought it made sense for regulators to study the
asset management and insurance industries.
In his opening statement,
the chairman of the committee, Representative Jeb Hensarling, a Texas
Republican, proclaimed “it is almost inconceivable that an asset
manager’s failure could cause systemic risk.” He also saw no danger to
the system from insurance companies, which are “heavily regulated at the
state level.”
My
request for an interview with Mr. Hensarling was turned down. I would
have asked him about Long-Term Capital Management and the American
International Group. The first, a money manager, caused a crisis when it
failed in 1998; the other, an insurance company, had to be bailed out
in 2008.
That hearing was part of an attack on the Financial Stability Oversight Council,
known as FSOC (pronounced “F-sock”). That group, established by the
Dodd-Frank law, is headed by the Treasury secretary and includes the
heads of eight financial regulatory agencies, and is supposed to
coordinate the work of all of them. The council has the authority to
designate large nonbank financial institutions as “systemically
important,” and thus allow the Federal Reserve to require them to have
more capital.
So
far the council has identified three such institutions, A.I.G., GE
Capital and Prudential. The Fed has yet to actually impose regulations
on them, so we really don’t know much about the effect of such
designations, but that has not kept both the mutual fund industry and the insurance industry from lobbying heavily.
They
do their best to leave us with the impression that the only asset
managers around are plain-vanilla mutual fund companies. Hedge funds,
like Long-Term Capital, are studiously ignored.
FSOC
also has the authority to suggest that one of its regulatory members
act on an issue it sees as systemically important. It has done so on
money market mutual funds, but so far the Securities and Exchange
Commission has not acted.
It
is far from clear that FSOC is going to try to impose any regulation on
large mutual fund companies, but the council is gathering information
on them and asking questions of them. That seems to have outraged the
industry and its friends in Congress.
The
campaign against FSOC has been innovative in its arguments. The mutual
fund industry says that designating a fund manager as systemically
important could raise its costs. Those costs could be passed on to fund
investors, who are taxpayers, and so would amount to a taxpayer bailout.
At a conference this week, Mary Miller, an under secretary of the Treasury, tried to be reassuring, emphasizing that no decision had been made on new designations.
“We have a responsibility to understand the risks that may arise from
all corners of the market and how those risks might be transmitted to
the broader financial system,” she said. “And we have a responsibility
to develop tools to mitigate those risks.”
At
the committee hearing the next day, Mr. Hensarling made it clear he was
not reassured. He said FSOC should “cease and desist” any consideration
of further designations “until Congress can review the entire matter.”
Sheila
C. Bair, the former chairwoman of the Federal Deposit Insurance
Corporation who now heads the Systemic Risk Council, a group that pushes
for effective financial regulation, says she has seen this show before.
“It’s
just like Brooksley Born and the derivatives industry,” she told me.
Ms. Born, as chairwoman of the Commodities Futures Trading Commission in
the Clinton administration, had the temerity to suggest that the
C.F.T.C. should look into regulating over-the-counter derivatives. The
industry went crazy, and she received no support from the White House or
from fellow regulators at the Treasury, the Fed or the S.E.C. Congress
responded by passing legislation to bar the C.F.T.C. — or any other
regulator — from doing anything about derivatives.
At
the time, the argument was that there was no need to regulate the
derivatives markets because the main players in them — banks and
brokerage firms — were already regulated.
Had
a regulator been paying attention to the derivatives markets, would we
have gotten such amazing financial instruments as synthetic collateralized debt obligations, which put together the worst parts of bad mortgage derivatives? Would someone have noticed the gambling in credit-default swaps that almost destroyed A.I.G.?
We
don’t know, of course, but what we do know is that Wall Street felt
free to invent and exploit any product it wished. If financial engineers
called a product a swap, that made it a derivative and exempted it from
regulation.
Ms.
Bair says she thinks the attacks on FSOC are intended to intimidate it,
both from designating any more firms as systemically important and from
acting again on money market funds if the S.E.C., as expected, fails to
pass any meaningful regulation. She sees the very existence of such
funds as a regulatory failure, arguing that they should either have
floating net asset values, as normal mutual funds do, or be required to
maintain reserves, as banks are.
Money
market funds often lend money to financial institutions, and a number
of them were damaged when Lehman Brothers failed in 2008. Some fund
sponsors stepped in to bail out their funds, fearing damage to
reputations, but one did not.
The
Reserve Fund “broke the buck,” meaning investors could not withdraw
their money without losses. The money market fund industry was saved
from a run by the prompt action of the Treasury Department, which
guaranteed its assets.
Congress later barred regulators from ever mounting a similar bailout.
Now,
amnesia, or perhaps we should call it, as Ms. Bair does, “revisionist
history,” has persuaded some people that there is no threat of anything
similar happening.
The
hearing this week was on a bill proposed by Representative Scott
Garrett, a New Jersey Republican and chairman of the capital markets
subcommittee, that would change the way FSOC operates. No longer would
the heads of the agencies be voting based on what they thought was wise,
as the law now requires.
Instead,
they would be voting as representatives of their agencies, and no vote
at FSOC could be taken until the issue was debated and voted on at each
agency, including the S.E.C., the C.F.T.C. and the Fed’s Board of
Governors. Each agency head would have to vote as his or her members
directed.
In
addition, at any FSOC meeting, members of all of the agencies could
take part in the discussion. Even if the meeting was being held in
private, it could be attended by up to 83 legislators — the 61 members
of the House Financial Services Committee and the 22 members of the
Senate Banking Committee. If staff members from the FSOC member agencies
assembled for a meeting, the Financial Services and Banking Committee
staffs would also have to be invited.
That
would seem to be a recipe to hamstring FSOC, but members of the
committee see it as a matter of openness and fairness. “I’m discouraged
by the council’s lack of bipartisan voices and think that FSOC would be
well served by a more inclusionary and collaborative operating model,”
Representative Ed Royce, a California Republican, said after the
hearing.
Mr.
Hensarling has other concerns. He fears we have “ceded U.S. sovereignty
over financial regulatory matters to a secretive, unaccountable
coalition of European bureaucrats.”
That is a reference to the Financial Stability Board,
an international agency with representatives from every continent save
Antarctica, which seeks to coordinate international financial
regulation. Some of its members think the insurance industry needs more
regulation than it now receives in the United States.
One
part of the campaign against FSOC has been the contention that
designating financial companies as systemically important would, in the
words of Mr. Hensarling, “move institutions from the nonbailout economy
to the bailout economy.”
In
his testimony, Mr. Barr argued that the reverse was true. “Regulating
systemically important firms reduces the risk that failure of such a
firm could destabilize the financial system and harm the real economy,”
he said. “It provides for robust supervision and capital requirements in
advance, to reduce the risks of failure. And it provides for a
mechanism to wind down such a firm in the event of crisis, without
exposing taxpayers or the real economy to the risks of their failure.”
Correction: May 22, 2014
An earlier version of this column omitted one institution among those that the Financial Stability Oversight Council has designated “systemically important.” GE Capital, in addition to A.I.G. and Prudential, has been so designated.
An earlier version of this column omitted one institution among those that the Financial Stability Oversight Council has designated “systemically important.” GE Capital, in addition to A.I.G. and Prudential, has been so designated.
Financial Crisis, Over and Already Forgotten
Once again without "Something like the Glass Steagle Act:
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Glass–Steagall Legislation - Wikipedia, the free encyclopedia
en.wikipedia.org/wiki/Glass–Steagall_LegislationThe term Glass–Steagall Act usually refers to four provisions of the U.S. Banking Act of 1933 that limited commercial bank securities activities and affiliations ...
Wikipedia
Glass-Steagall Act Definition | Investopedia
www.investopedia.com/terms/g/glass_steagall_act.aspThe Glass-Steagall Act was sponsored by Senator Carter Glass, a former Treasury secretary, and Senator Henry Steagall, a member of the House of ...
InvestopediaWhat Was The Glass-Steagall Act? - Investopedia
www.investopedia.com/articles/03/071603.aspFeb 26, 2009 - Established in 1933 and repealed in 1999, the Glass-Steagall Act had good intentions but mixed results.
InvestopediaThe Glass-Steagall Act Explained - NerdWallet
www.nerdwallet.com/.../glass-steagall-act-explai...The Glass-Steagall Act of 1933, passed during the Great Depression, prevented commercial banks from trading securities with their clients' deposits and created ...
NerdWallet.comRepeal of Glass-Steagall Caused the Financial Crisis - US ...
www.usnews.com/.../repeal-of-glass-steagall-...Aug 27, 2012 - The big bank boosters and analysts who should know better are repeating the falsehood that repeal of Glass-Steagall had nothing to do with ...
U.S. News & World ReportAs well as disassembling "Too Big to Fail" banking systems around the world into smaller more manageable units, another Great Recession (or many of them every 5 to 10 years or less) or a World Wide Great Depression worse than the world has ever seen is an inevitable occurrence.In other words without a world wide Glass Steagle kind of act in place another Great Recession (worldwide) or another Great Depression (world wide) is not if but only WHEN?
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