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April 3, 2012

Financial Stability Council Fails to Protect Taxpayers, Makes Bailouts More Likely

Dennis Kelleher, president and CEO of Better Markets, made the following statement today on the Financial Stability Oversight Council’s approval of a final rule that was supposed to regulate systemically important non-bank institutions:

“Today’s meeting of the Financial Stability Oversight Council lasted less than 10 minutes and makes the Kremlin’s Politburo at the height of the Soviet Union look open and democratic by comparison.  It is a gross disservice to the public and the Council itself to conduct such skimpy, pro forma ‘public’ meetings with always unanimous votes.  Contrary to what happened at the meeting, this is no laughing matter.

“In adopting the final rule today, FSOC failed to protect the American economy and taxpayers from too big to fail institutions and more bailouts.  The rule adopted today was supposed to begin the regulation of the shadow banking system, which played a key role in causing and intensifying the 2008 financial crisis. Lehman Brothers, Bear, Stearns and AIG were all part of the unregulated shadow banking system.  To prevent more Wall Street bailouts like 2008, the Dodd-Frank financial reform law was clear that the shadow banking system – which as much as $18 trillion is larger than the banking sector – must face oversight and accountability. Taxpayers should not be on the hook for bailing out financial firms that are so large, dangerous, complex or interconnected that they threaten the entire financial system and our economy.

“But under the rule adopted by FSOC, much if not most of the shadow banking system may well continue to be unregulated and pose a threat to financial stability of the United States as well as taxpayers.

“For example, the rule sets an arbitrary asset threshold of $50 billion, which is not part of the law, that will exclude important shadow banking entities from consideration.  Also, the rule inexplicably limits the data that will be considered in the early part of the designation process, when it should consider all relevant data and analytical approaches available to come to grips with an opaque and imperfectly understood system.  It then proposes the use of contemporary and static metrics, ignoring historic information and the tendency of shadow bank behavior to vary significantly over time.

“Everyone says they are for ending too-big-to-fail institutions, but that will only happen if they are regulated as required by the Dodd Frank financial reform law.  FSOC failed to do that today.” 


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