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Treasury Department’s Regulatory Overreach Expands

Insurance companies and investment firms now in their crosshairs.

by
Louise C. Bennetts

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November 29, 2013 - 11:51 pm
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The Treasury Department’s Financial Stability Oversight Council (FSOC), having cast its regulatory shadow over the insurance industry, is now turning its sights on investment advisors.

At a time when we are trying to avoid creating the perception that certain large financial organizations are underwritten by the U.S. taxpayer, it seems foolhardy to label even more firms “systemic,” a euphemism for “too big to fail” (TBTF). Especially when there is no evidence that they operate in industries that are even remotely likely to create widespread problems for the financial system.

First, it is helpful to outline what makes banks “systemic,” and why other types of financial companies are different. In other words, why are banks prone to creating problems in the real economy if they fail en masse? The answer is: Banks borrow short and lend long, making them vulnerable to liquidity problems. Even a solvent bank can run into trouble if its depositors or other short-term creditors panic. This phenomenon is true of both traditional commercial and investment banks.

Commercial banks are largely deposit-funded and therefore prone to runs by retail depositors. Similarly, investment banks — which in the U.S. are not eligible to take or use insured deposits — fund themselves, using short-term sources such as overnight commercial paper or repurchase agreements.

Banks are the mechanism by which money flows through the economy, meaning that the failure of a large number of banks is likely to result in a sudden contraction in the money supply. Indeed, the problems in 2008 manifested initially through a run on the short-term funding used by investment banks and some commercial banks.

For this reason, banks are subject to special treatment by regulators. While it is not clear that this treatment has yielded better results, there is at least some logic to it.

But there is no logic in applying this regulatory attention to industries and firms that do not operate with a “maturity mismatch,” that is, borrowing short and lending long. Indeed, one of the most worrisome aspects of the Dodd-Frank Act has been the extension of bank-like supervision to other types of financial institutions.

As noted, Dodd-Frank gave the FSOC, an arm of the Treasury, the power to label nonbank financial companies — any company predominantly involved in finance — as “systemic.” But determining what makes a company a “systemically important financial institution” has turned out to be rather difficult.

Dodd-Frank defines it as a company whose “failure would threaten the financial stability of the United States.” That description is deliberately terror-inducing, and also highly subjective. As we saw in 2008, one person’s systemic event is another’s market correction.

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Top Rated Comments   
Your points about AIG are somewhat valid and one should not welcome government assistance in anything at all, and yet the lessons of 2008 are that just because an institution is managing *trillions* of dollars, does not mean they will not be massively irresponsible (and even massively stupid and massively dishonest) and cause a huge wave of secondary and tertiary etc disasters if they go splat. There was this bipartisan belief that yes, size did infer some level of maturity and responsibility and reliability. That was TOTALLY LOST as of 2008. AIG was the flag-bearer for irresponsibility, stupidity, and size with their CDS products (which I will grant are not traditional insurance). If you ask me (and even if you don't) AIG should never have offered a dime's worth of CDS, nor should it have been legal, nor should any responsible financial institution have ever *bought* any. After the fact, any bankster involved in any way with CDS sale or purchase should have been put through the wood chipper, yet this never happened.

The problem with Dodd-Frank is that it pretends that any of these activities should be *regulated*. This is like putting an oversight and rules-making committee on bank robbers, "we want to make sure this bank robbery business is run responsibly". Yeah right. What it is is a nice extortion plan by which Washington politicians and regulators can get a taste of the ongoing scams. That's the real problem here.
19 weeks ago
19 weeks ago Link To Comment
All Comments   (8)
All Comments   (8)
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19 weeks ago
19 weeks ago Link To Comment
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19 weeks ago
19 weeks ago Link To Comment
Banks are the mechanism by which money flows through the economy.

In reality, banks are the State granted monopoly on _controlling_ the
flow of money, and indirectly controlling the economy.

Given modern computerized data handling capabilities, is there any
function of a bank which cannot be performed directly between the
parties involved ?
19 weeks ago
19 weeks ago Link To Comment
Dodd-Frank was a law enacted to make people think that Congress was doing something to prevent another 2007-2008 debacle. The fact of the matter is that it doesn't do anything to alleviate the problem because, as usual, the people who created it had no understanding of what they were attempting to regulate. In addition the government is still mandating that banks provide mortgages to people who can't afford them which is what helped create the housing bubble to begin with.
19 weeks ago
19 weeks ago Link To Comment
Everything is in 'their' crosshairs.
19 weeks ago
19 weeks ago Link To Comment
"by 1990 ... $10,000 was required to buy what took only $1,000 in 1914" thanks to the banking cartel known as the Federal Reserve. (source: The Creature from Jekyll Island by G. Edward Griffin. Think of that $1,000 value being diluted 10 times and 9 tenths of that value taken from you without physical force to keep men and women, who are already rich handling our money, immune from their own bad decisions; let the taxpayer take the loss. The fed was created by the richest bankers in the country to protect themselves from competition and failure by convincing the government to take on the risk for failure that rightfully belongs to them as well as to shutdown or bring under their control all other banking sources in the country. Note that the bankers in 2008 not only continued to be employed and paid obscene salaries, they actually got bonuses at taxpayer expense. Note that the Fed spends $1 Trillion in money, that has no intrinsic value, not tied to GDP, just printed out of thin air, each year now just to keep the markets afloat. Note that your own savings earn Zero percent interest while inflation eats away at your principal. Still the government and the Feds can't keep it together. They are taking over any source of liquidity (i.e. now our pension funds and investments, think insurance companies like Prudential or MetLife, or mutual funds) now trying to keep it from going bust. It''s a hopeless endeavor. This PONZI scheme is going down and taking everyone's business, everyone's job, everyone's economy with it. Just ask Bernie Madoff or Margaret Thatcher: "eventually you run out of other peoples money." It no longer a matter of if, only when and what triggers the final collapse. We are witnessing the most massive theft of wealth in the history of the world on the unproven and unwise premise that certain super rich politically influential men and women are too big, too important to fail. I don't know how it will all go down. No one really does. However, I'd follow those crazy preppers at least as far as making sure I have essential supplies to survive for awhile, a means to barter, and a few weapons to defend my family from the chaos, anger, and panic that will surely follow. Of course our government might focus that anger outward away from them by getting us to focus our fear and anger on the Jews or old white guys or tea party folks, etc. And when we run out of internal foes just start another World War like Hitler did. And we all know how well that turned out for everyone.

19 weeks ago
19 weeks ago Link To Comment
Not ONE bank, insurance company or wall street financial firm should be given 1 red CENT! Let 'em all fail. It is the only way these fools will learn. If not, they will keep gambling w/ the casino's money, namely ours!
19 weeks ago
19 weeks ago Link To Comment
Your points about AIG are somewhat valid and one should not welcome government assistance in anything at all, and yet the lessons of 2008 are that just because an institution is managing *trillions* of dollars, does not mean they will not be massively irresponsible (and even massively stupid and massively dishonest) and cause a huge wave of secondary and tertiary etc disasters if they go splat. There was this bipartisan belief that yes, size did infer some level of maturity and responsibility and reliability. That was TOTALLY LOST as of 2008. AIG was the flag-bearer for irresponsibility, stupidity, and size with their CDS products (which I will grant are not traditional insurance). If you ask me (and even if you don't) AIG should never have offered a dime's worth of CDS, nor should it have been legal, nor should any responsible financial institution have ever *bought* any. After the fact, any bankster involved in any way with CDS sale or purchase should have been put through the wood chipper, yet this never happened.

The problem with Dodd-Frank is that it pretends that any of these activities should be *regulated*. This is like putting an oversight and rules-making committee on bank robbers, "we want to make sure this bank robbery business is run responsibly". Yeah right. What it is is a nice extortion plan by which Washington politicians and regulators can get a taste of the ongoing scams. That's the real problem here.
19 weeks ago
19 weeks ago Link To Comment
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