The Dangerous Deregulation of AIG: Incentivizing a Bailout Culture and Cycle
Hope you saw our Special Newsletter on FSOC’s deregulation of AIG on Monday, which you can read here. Bloomberg’s Matt Levine again concisely captured the problem of incentivizing a bailout culture that will lead to a bailout cycle:
“[G]iven AIG’s centrality to the last crisis — and its plans to start growing again — it does seem a little ominous. What if the entire cycle plays out entirely within AIG? Regulations were loosened [in the years before the 2008 crash], AIG grew big and reckless, it crashed the economy [in 2008], regulations were tightened , AIG got small and cautious , everyone forgave it, regulations were loosened , and now AIG can grow again. What comes next?”
Er, reckless risk taking, big bonuses, failure and more bailouts is “what comes next.” That is all the more so because, as detailed by the members of FSOC who dissented from the vote, there’s a very good case to be made that AIG is actually still a systemically significant nonbank that does not qualify to be de-designated on the merits. “Ominous” indeed!
The odds of AIG and other financial firms repeating their reckless ways is almost certain given the perverse incentives created by the bailouts, lack of accountability and irresistible riches recklessness generates for executives. This will likely create a culture that will inevitably lead to more crashes and more bailouts. Why? Because “the entire cycle [will not] play out entirely within AIG,” but will infect all of Wall Street and finance as it did before.
That is the unsettling truth behind former Citigroup CEO Chuck Prince’s infamous quote: “As long as the music is playing, you’ve gotta get up and dance….”
Misinforming the Public: “News” Story Conceals SIFMA Role in Purchased Deloitte Study Bashing the DOL Fiduciary Rule
A news story in the Financial Times published early on September 27th reported on what appeared to be an independent study by Deloitte, confirming some of the harshest industry criticism of the Department of Labor’s (DOL) “best interest” fiduciary duty rule. But what the story failed to disclose was that the study was purchased and directed by Securities Industry and Financial Markets Association (SIFMA), one of Wall Street’s biggest lobby groups and a leading critic of the DOL rule.
It is no surprise – much less news — that a study purchased and directed by a leading critic of the DOL rule would be critical of the DOL rule. All too often, such biased propaganda masquerading as objective, independent, reliable and credible information and analysis pollutes the policy making process. Here’s how the story misled the public:
- It failed to disclose that Deloitte expressly, clearly and fully disclaimed on page two any independence regarding the information used in the study which formed the basis of its conclusions:
“Deloitte has analyzed, aggregated and summarized the information provided, but was not asked to and did not independently verify, validate or audit the information provided during the course of the engagement.”
- It also failed to disclose that Deloitte on pages 3-4 also expressly stated that Deloitte’s work was purchased and directed by SIFMA:
“SIFMA engaged Deloitte to facilitate a study with 21 SIFMA member firms (referred to as the ‘study participants’ …) …. Through the analysis of information gathered via facilitated interviews of study participants….”
- It never even mentioned SIFMA or its role in dictating the study. In fact, the study was presented in that early story as if it was the independent analysis and conclusions of Deloitte rather than the presentation of hand-picked data-for-hire by a biased critic. Moreover, some of the language in the story was almost verbatim from the Deloitte study, but with edits that concealed SIFMA’s role.
- For example, the story states: “The 21 companies surveyed by Deloitte represent more than 130,000 advisers, or 43% of all US advisers, and serve around 35m retail retirement accounts that have $4.6tn in assets.”
- Compare that to what the Deloitte study says on page 4: “The 21 member firms invited by SIFMA and choosing to participate in the study account for more than 132,000 advisors, representing 43% of US financial advisors ….”
This was a SIFMA purchased, directed and controlled survey of handpicked participants and interviews of biased SIFMA members designed to reach a pre-determined conclusion. After all, SIFMA has been lining up against the DOL rule for years.
But the reader would know none of that if s/he read the first version of the FT’s piece on the 27th.
When we read the story, we immediately brought this information to the attention of the FT, which, to its credit, agreed to amend the story and ultimately did so late on September 27th. It added a line to the third paragraph that ”[t]he survey was commissioned by the Securities Industry and Financial Markets Association and those surveyed were all members of the trade body,” plus a note at the end of the story that ”[t]he article has been updated to clarify that the survey was commissioned by SIFMA.’”
However, one still has to wonder why a purchased, directed study that was entirely predictable before it was undertaken was considered newsworthy at all. The point of the purchase was to disguise SIFMA’s role and bias behind Deloitte’s apparent but misleading independence and credibility and to then try to use it in the policy making process. That simply is not news or newsworthy. The article simply never should have been written.
While there is nothing that we can do about industry groups paying for studies that support the bottom line financial interests of their members, what Better Markets can do is call attention to articles that misleadingly report those studies and set the record straight.
Misreading the Election: Voters in November 2016 Voted for the Anti-Wall Street Candidate
President Trump’s de facto merger of the White House with Wall Street continues apace. First, the President appointed numerous Wall Street executives to the most senior positions in his administration, including from Goldman Sachs in particular, and he has welcomed the leading financiers of Wall Street to the White House with open arms, including the CEO of JP Morgan Chase who the President said he takes advice from regarding financial reform. Unsurprisingly, the Trump Administration has pursued policies favorable to and advocated by Wall Street, by appointing opponents of essential financial reform rules to key posts; assaulting the DOL’s “best interests” fiduciary rule; initiating a rulemaking process to weaken the ban on proprietary trading in the Volcker Rule; launching numerous “studies” at Treasury to roll back financial protections broadly; and, of course, ignoring and unleashing nonbank systemic risks.
None of that could have been expected based on what candidate Trump said repeatedly during the campaign. He was the most anti-Wall Street Presidential candidate since FDR, but has turned out to be one of the most pro-Wall Street Presidents. The transformation from candidate Trump to President Trump is a flip-flop of historic proportion.
This is relevant because a recent story in The Washington Post’s Finance 202 discussed an admission by Hillary Clinton in her new book that she underestimated how her Wall Street speeches would be perceived. The discussion ended with the observation that
“the election arguably taught the Democrats an uncomfortable fact about demagogic politicking. Clinton ran against Donald Trump on a platform that called for ramping up the scrutiny of the financial world…None of it mattered in the face of Trump’s gale-force accusations about her cronyism.”
That is exactly backwards. The “demagogic politicking” was by Trump, not Clinton (or Democrats more broadly). Candidate Trump frequently cast himself as the scourge of Wall Street and compared himself to Hillary Clinton who he painted as Wall Street’s candidate: Wall Street had “total control over Hillary Clinton,” candidate Trump bellowed, and he said that “Hillary will never reform Wall Street. She is owned by Wall Street!”
Trump didn’t limit his attacks on Wall Street to Hillary Clinton; he also often blasted the industry directly, claiming, “I know Wall Street. I know the people on Wall Street. … I’m not going to let Wall Street get away with murder. Wall Street has caused tremendous problems for us.” He also said “I don’t care about the Wall Street guys. … I’m not taking any of their money.”
While Clinton did issue a lengthy plan regarding finance, she didn’t campaign on it; in fact, she hardly ever even mentioned it. We know. We pushed hard for her to do so. She didn’t. It was Trump who campaigned on and framed the election as a choice between Hillary Clinton representing Wall Street and him who would stand up to Wall Street. Even Trump’s closing argument in the campaign focused on the evils of Wall Street in a dark two-minute-long commercial identifying the greatest threats to America and American families, which prominently included Goldman Sachs and its CEO Lloyd Blankfein. As the narrator ominously cited the threat posed by “those who control the levers of power” and “the global special interests,” a picture of Blankfein filled the screen.
Thus, if “the election arguably taught the Democrats an uncomfortable fact about demagogic politicking,” it should have been that it worked, for Donald Trump, particularly when it came to Wall Street. While it may be true that nothing would have “mattered in the face of Trump’s gale-force accusations about her cronyism,” it certainly didn’t happen because Hillary Clinton wanted to and campaigned on getting tough on Wall Street.
It is critically important to remember that more than 60 million Americans voted in November 2016 for the most vocal anti-Wall Street presidential candidate America has seen since FDR. They did not vote for the reckless and mindless deregulation of Wall Street that President Trump is now pursuing. Just the opposite.
Enact an “Equifax Rule” Requiring Hack Disclosures to Prevent Americans From Being Doubly Victimized: First By the Crooks, Then By Corporate America
In an age where hacking and computer theft is reaching epidemic proportions, consumers, investors and all Americans need strong protections imposed by regulators and policymakers. They have been, however, indefensibly slow to act, even in the face of one scandal after another. That is why, following the latest disgraceful hack at Equifax, Better Markets has called on the SEC to create what we call the “Equifax Rule:” require companies to promptly disclose any significant computer hack.
The American people are rightfully outraged: a ‘hack’ is the theft of their personal information by criminals seeking to rip them off with the stolen data. That’s what crooks just did to almost 150 million Americans at Equifax and previously at Target, Yahoo, and numerous other companies. Seeking to avoid or minimize reputational harm and maybe liability, virtually every company that has been hacked has been way too slow to disclose it to the public. Without knowing about the hacks, people have no ability to protect themselves or their personal information. Bizarrely, the crooks know about the information they stole and presumably are putting it to quick use, but the victims have no idea, are left in the dark and cannot protect themselves until they are told. That’s why we need an Equifax Rule.
As we discuss further in an op-ed published on FoxBusiness.com, an Equifax Rule would stop Americans from being victimized twice: first by the criminals and then by the corporation. Such a requirement would also further the SEC’s core mission to protect investors, markets and all Americans. It is time for action.