On Wednesday March 25, President and CEO Dennis Kelleher will testify before the Senate Committee on Banking, Housing, and Urban Affairs at a hearing entitled “FSOC Accountability: Nonbank Designation.” In his testimony, Mr. Kelleher will discuss why the Financial Stability and Oversight Council (FSOC) was created, the importance of its mission, and how the motto of FSOC should be “no more AIGs.” Mr. Kelleher will also outline how the U.S. should never again have to suffer the consequences of future AIGs, including the devastating economic wreckage inflicted on Americans from coast to coast who lost jobs, homes, savings, retirements, educations and so much more.
You can read Dennis Kelleher’s full testimony here. Below are his remarks during the hearing, as prepared for delivery.
Dennis M. Kelleher
President and CEO
Better Markets, Inc.
United States Senate Committee on Banking, Housing, and Urban Affairs
“FSOC Accountability: Nonbank Designations”
March 25, 2015
Good morning Chairman Shelby, Ranking Member Brown and members of the Committee. Thank you for the invitation to Better Markets to testify today.
Better Markets is an independent, nonprofit, nonpartisan organization that promotes the public interest in the domestic and global financial markets.
I have detailed my background and what Better Markets does in my written testimony and it is also available on our website (www.bettermarkets.com ) and I will not repeat that here.
But, I would like to say that it is a privilege and honor to return to the Senate to testify after having been a staffer for three Senators over eight years and having worked with many of you during that time.
Let me make just a few quick points:
First, too often when talking about financial reform, too many focus on the trees (a particular regulation or industry or firm) and ignore the forest — why we have the law and regulation in the first place.
That context is essential to understand where we are and what, if anything, we need to do.
Here, we have a Stability Council to prevent destabilizing surprises and massive bailouts.
When we talk about surprises, everyone thinks of AIG, which I’ll get to in a minute, but what about Goldman Sachs and Morgan Stanley almost collapsing and bankrupt within days.
That was a totally unexpectedly surprise, but that’s what happened in 2008.
On Friday night, September 19, Morgan Stanley called the President of the New York Fed, Tim Geithner, and “indicated they can not open on Monday” September 22, 2008.
Adding to that shocking surprise, Morgan Stanley also told Mr. Geithner that Goldman Sachs was “panicked because it felt that if Morgan Stanley does not open, then Goldman Sachs is toast.”
The possibility of Morgan Stanley and Goldman Sachs being bankrupt and collapsing into failure on Monday September 22, 2008 was a very big surprise.
The result: they were bailed out by the US government and taxpayers.
But, that wasn’t the only surprise. Also in early September 2008, AIG came to the federal government asking for a huge – indeed, unlimited — bailout.
To everyone’s surprise, AIG had gambled with hundreds of billions of dollars of derivatives, had lost big and was bankrupt because it didn’t have the money to cover its gambling losses.
So it came to the US government and US taxpayer with its hand out.
It and its counterparties – all the biggest banks on Wall Street including Goldman Sachs – said you have to bail out AIG or the entire financial system will collapse.
No one knew it, but AIG was so interconnected with the system that its failure could bring down everything and potentially cause a second Great Depression.
So the US government repeatedly bailed out AIG, ultimately amounting to almost $185 billion.
There were other, even bigger surprises.
The $3.7 trillion money market industry also was on the verge of collapse at about the same time as AIG, Morgan Stanley and Goldman Sachs.
That too surprised everyone.
The result was the same: the US Treasury bailed out the money market fund industry by putting the full faith and credit of the United States behind the $3.7 trillion industry.
Those are only 3 examples of many, many surprises and too many bailouts in 2008 and 2009 that no one anticipated.
The Stability Council was created to prevent similar future surprises and bailouts.
And, that is incredibly important. Why?
Because the crash and bailouts that started with Lehman Brothers, AIG and money market funds that lead to Morgan Stanley and Goldman Sachs and all the other too big to fail firms exploded into the worst financial collapse since the Great Crash of 1929, and caused the worst economy since the Great Depression of the 1930s.
Indeed, only massive taxpayer and government bailouts prevented a second Great Depression.
Ultimately, that crash and economic wreckage are going to cost the US more than $10 trillion, as detailed in a study on the cost of the crisis Better Markets did.
Those tens of trillions of dollars reflect massive suffering across our country.
Just one example: in late 2009, unemployment and underemployment reached 17%.
That means that almost 27 million Americans were either out of work or working part time because they couldn’t find full time work.
Then there were the lost savings, homes, retirements, small businesses and so much more.
Preventing that from ever happening again is why there is the Dodd Frank financial reform law:
Why there are regulations
Why there is a Stability Council, and
Why its mission is so very important.
In closing, that’s why, when we think about FSCO and accountability, we think of accountability to the American people:
Accountability to those 27 million Americans thrown out of work
To the tens of millions who lost their savings, their retirements, their homes and much more.
We ask, is FSOC doing enough, fast enough to protect the American people from known or potential threats to the financial stability of the US?
Yes, deliberatively, thoroughly, and carefully.
But the focus has to be on identifying those threats and responding to them and protecting the American people.
Thank you and I look forward to your questions.