The U.S. Chamber of Commerce Center for Capital Markets Competitiveness released its 2015 agenda yesterday that was more of the same industry attacks on financial reform by crippling the Financial Stability Oversight Council (FSOC). Their agenda would gut essential financial reforms that were enacted – with bipartisan and industry support – after the recklessness of the world’s largest insurance company, American International Group (AIG), threatened to take down the entire global financial system, required $182 billion in bailouts and contributed to the worst economy since the Great Depression. Instead of protecting American jobs, homes and savings, the Chamber proposes gutting FSOC, which will make future AIGs, bailouts and economic wreckage more likely.
In the run up to the 2008 financial crisis, a division of AIG called AIG Financial Products (AIG FP) accumulated hundreds of billions of dollars of liabilities by “insuring” financial bets, mostly high risk derivatives of many of the other large financial firms through credit default swaps. This was gambling on an unimaginable scale pure and simple. However, the law at the time prohibited regulating the swaps market in which AIG FP traded and AIG’s activities were unregulated as well, meaning no cops were on the beat.
As a result, when the mortgage-backed securities AIG FP was “insuring” failed, the federal government was forced to prop up AIG with $182 billion, take on AIG’s obligations, and bail out its counterparties including many foreign banks. To the understandable outrage of millions of Americans, once AIG received the government bailout money, AIG then paid $218 million in bonuses to AIG FP’s staff, including some of the same people who engaged in the reckless trading that caused AIG to collapse and need the bailout in the first place.
FSOC was created as part of the Dodd-Frank Wall Street Reform Act to prevent this situation from ever happening again. Indeed, FSOC’s motto could be “no more AIGs; no more bailouts.” FSOC is a council of federal and state financial regulators chaired by the Secretary of the Treasury with the mission of identifying and responding to risks to the financial stability of the United States, which is precisely what the unregulated AIG was.
By advocating for so-called “reforms” that are little more than attempts to weaken FSOC, industry allies are pushing a dangerous de-regulation agenda that puts our financial stability and the American people at risk. They’re also standing against the many political leaders and financial industry participants who advocated for creating a systemic risk regulator like FSOC:
· “We must create a systemic risk regulator to monitor the stability of the markets and to restrain or end any activity at any financial firm that threatens the broader market.”
– Henry Paulson, former Secretary of the Treasury
· “One of the reasons this crisis could take place is that while many agencies and regulators were responsible for overseeing individual financial firms and their subsidiaries, no one was responsible for protecting the whole system from the kinds of risks that tied these firms to one another.”
– Robert S. Nichols, President and Chief Operating Officer, Financial Services Forum
· “I believe an interagency council with a strong authority in a focused area, in this case monitoring and directing the response to risks that threaten overall financial stability, could, like the [National Security Council], serve the Nation well in addressing complex and multifaceted risks.”
– Paul Schott Stevens, President and CEO, Investment Company Institute
· “A systemic risk regulator that has access to information about any systemically important financial institution – whether a bank, broker-dealer, insurance company, hedge fund or private equity fund – could have the necessary perspective to ensure firms are not exploiting the gaps between functional regulators, or posing a risk to the larger system.”
– Randolph C. Snook, Executive Vice President, Securities Industry and Financial Markets Association (SIFMA)
· “The ABA strongly supports the creation of a systemic regulator. In retrospect, it is inexplicable that we have not had a regulator that has the explicit mandate and the needed authority to anticipate, identify, and correct, where appropriate, systemic problems. To use a simple analogy, think of the systemic regulator as sitting on top of Mount Olympus looking out over all the land. From that highest point the regulator is charged with surveying the land, looking for fires. Instead, we have had a number of regulators, each of which sits on top of a smaller mountain and only sees its part of the land. Even worse, no one is effectively looking over some areas. This needs to be addressed.”
– Edward L. Yingling, then President and Chief Executive Officer, American Bankers Association
In particular, the Chamber’s efforts to change the FSOC voting process, force burdensome regulatory requirements on the Council, and amend the designation process would only weaken FSOC’s ability to fill the gaps in the regulatory system that were the reasons AIG was unregulated and failed. These proposals would make it even harder for FSOC to carry out their mission.
So when Wall Street’s allies talk about FSOC, don’t be fooled. They’re not actually trying to protect Americans or our economy. They’re just attempting to gut key financial reforms that are helping build a stronger financial system, one that protects all Americans and the real economy from Wall Street’s reckless gambling.