The Washington Post reports that Treasury will seek the power to take over insurers, hedge funds, and investment firms. Given the Treasury’s reluctance to assume control over clearly insolvent banks (Citi assuredly, probably Bank of America), it seems curious indeed that it is asking to extend authority that it is patently reluctant to exercise.
Moreover, elements of this appear, to put it mildly, misguided. Insurers are regulated by states. Does the Treasury, in supplanting state authority, intend to put in place the needed supervisory apparatus? Does anyone at Treasury have the foggiest grasp of insurance accounting (which separately, is a bit of a mess)?
And AIG, poster child of insufficient regulation, was overseen at the parent level (which is where the black hole creating Financial Products unit sat) by the Office of Thrift Supervision (no joke), which is an agency of the Treasury! So the Treasury is acting like it needs more authority to prevent future AIG’s when its own agency was responsible for the doomsday machine part of AIG.
And the hedge fund supervision bit probably means less than meets the eye. Even if a lot of them have operations in Fairfield County or Manhattan, a lot are domiciled in the Caymans or Luxembourg. You do need to observe certain forms to make sure the designation sticks (have local counsel, have annual meeting there, etc.) but after the Bear Stearns hedge funds screwed up on that front (setting up funds there but not taking other steps consistent with having them domiciled offshore), other funds may have cleaned up their act.
From the Washington Post:
The Obama administration is considering asking Congress to give the Treasury secretary unprecedented powers to initiate the seizure of non-bank financial companies, such as large insurers, investment firms and hedge funds, whose collapse would damage the broader economy, according to an administration document….
Treasury Secretary Timothy F. Geithner is set to argue for the new powers at a hearing today on Capitol Hill about the furor over bonuses paid to executives at American International Group, which the government has propped up with about $180 billion in federal aid. Administration officials have said that the proposed authority would have allowed them to seize AIG last fall and wind down its operations at less cost to taxpayers.
Yves here. Readers can correct me, but that looks to be utter rubbish. The OTS could have yanked AIG’s license and sued it. The problem is not regulatory authority, the problem is the lack of a special resolution regime of the sort the UK has for putting big complex financial firms into receivership. Merely giving Treasury authority is insufficient without putting in place needed bankruptcy type provisions. That takes thought, and I guarantee that given how behind the eight ball and short staffed Geithner has been, the needed thinking hat not taken place. Back to the piece:
The administration’s proposal contains two pieces. First, it would empower a government agency to take on the new role of systemic risk regulator with broad oversight of any and all financial firms whose failure could disrupt the broader economy. The Federal Reserve is widely considered to be the leading candidate for this assignment. But some critics warn that this could conflict with the Fed’s other responsibilities, particularly its control over monetary policy.
The government also would assume the authority to seize such firms if they totter toward failure.
Besides seizing a company outright, the document states, the Treasury Secretary could use a range of tools to prevent its collapse, such as guaranteeing losses, buying assets or taking a partial ownership stake. Such authority also would allow the government to break contracts, such as the agreements to pay $165 million in bonuses to employees of AIG’s most troubled unit.
The Treasury secretary could act only after consulting with the president and getting a recommendation from two-thirds of the Federal Reserve Board, according to the plan.
Yves again. Given the lack of any mention of a special resolution regime, or intent to develop one, the point of this bill is NOT, appearances to the contrary, to be able to put more firms into receivership. It is to get broader authority to bail them out.
Yves, thanks for another gem.
Looking at the insurance companies, especially Allstate, there are some big derivative bets on the books.
“Takeover” = taxpayer bailout money for our friends.
This is getting really disgusting. We taxpayers should be allowed to vote on who we want to give money to.
Hell, how about giving some real money to the taxpayers for a change?
As an environmentalist I’m familiar with the record of Bush and his fellow “federalist” Republicans in seeking to use federal power to override state environemntal regulation (of course the Reps wanting no regs at all).
So when I read this, about how insurance regulation is traditionally a state affair, and I think of Geithner’s record, I can’t help thinking of Bush, and how maybe here as well they’re looking for a way to prevent effective state regulation.
(BTW, if there’s anybody who’s not too sick of reading about AIG, I invite you to check out my essay on the subject. It’s the most extended thing I’ve written on a subject which is still pretty new to me, and I’d love to hear any feedback. Thanks.)
This is part of the continuing Fed-Treasury Kabuki dance. The Fed-Treasury need have done nothing with respect to AIG, other than give AIG’s directors the address of New York’s bankruptcy court. When your objective all along was to protect AIG’s counterparties and you feel that you must conceal this, you can say anything to obfuscate the issue.
Yves Smith: You rock! Bob Oak from The Economic Populist here.
In the last few days I have found critical information on various Treasury actions, alerts from NC that I see nowhere else, thank you!
I am hoping you all are monitoring the various House Financial Services Congressional hearings this week on systemic risk and might weigh in on proposals and legislation….before they even get voted out of committee or even potentially written up. (before the damage is done).
I believe we must have some sort of agency on the level of a FDIC for these various non-bank financial institutions, capable of isolating any one institution from system risk as well as start looking to analyze and isolate the global system for contagion, but considering the Treasury’s previous actions, they ain’t it! (the Fed ain’t it either)
Insurance should be regulated at the Federal level. However, neither Treasury nor the Fed should be the ones regulating. We would need a new regulatory body, one preferably not staffed by ex and future wall streeters.
Also, agree with IA. The idea that the Treasury was powerless to deal with AIG last fall is nonsense – when someone comes to you asking for a $180 billion loan to ensure their survival, you have all of the power in the world. You just need to be willing to use it.
“Such authority also would allow the government to break contracts, such as the agreements to pay $165 million in bonuses to employees of AIG’s most troubled unit.”
Where does this sanctity of contracts come from? They ALREADY have the ability to break any contract they want, when they want to.
That just adds another layer to this, the point is not to be able to regulate, it is to protect the firms.
You cannot legislate the will to regulate.
From Bernanke´s testimony this morning in the house (Barney Frank et al.), http://www.federalreserve.gov/newsevents/testimony/bernanke20090324a.htm
AIG highlights the urgent need for new resolution procedures for systemically important nonbank financial firms. If a federal agency had had such tools on September 16, they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate. That outcome would have been far preferable to the situation we find ourselves in now.
If only FDIC-like powers would have been available, oh they would have used them for the benefit of the US taxpayers and society at large. You know, like the FDIC has been allowed to do their work with regards to Citigroup et al.
“It is to get broader authority to bail them out.”
Take over Rich Guy Hedge Fund and just pork out the $$$ to them. Perfect.
And, seize any Institution that is not aboard the Geithner-Bernanke Express.
Easy to see why folks like Rogers, Keiser, Bonner got outa Dodge. More to flee this Arbitrary Regime?
They are trying to bail out hedge funds!
Bernanke does want legislation to unwind international holding companies. He’s been explicit about this.
The reason he’s been bailing anyone who moves is because he’s got to protect international banks all over the world! And making good AIG’s stupid CDS portfolio is one way of doing that.
But, from day one I’ve gotten the impression Bernanke hates being in this position. Given the regime, I believe he’d unwind several large banks, as well as AIG. He’s not going to nationalize, he’s goind to break them up, bankrupt pieces, and sell whatever’s left.
NO FINANCIAL FASCISM!
NO INVESTMENT BANKING!
NO FASCIST FLEECING WITHOUT PROPER REPRESENTATION.
I am struggling here folk. We need some fighting words.
Forgot to start my last post with massive adulations for your postings. Thank you and please know that you are appreciated.
NO FASCIST FLEECING WITHOUT PROPER REPRESENTATION
But, its ok when there is proper representation?
Stop hyperventilating already and add something to the debate, NOT JUST MORE YELLING.
What concerns me more than anything is the underlying agenda. The treasury is blatantly trying to further supplant the states’ individual authority.
It’s already bad enough that the federal government doesn’t recognize that they work for the states according to the constitution. Did you know that at last report, 31 states (in the past 3 weeks) have prepared documents telling the federal government to “cease and desist”?
There’s always that damned NWO agenda isn’t there?
When did all of the nut cases learn to read again?
“Did you know that at last report, 31 states (in the past 3 weeks) have prepared documents telling the federal government to “cease and desist”?”
Cease and desist what? If you are telling someone to stop, there should be an action that is being targeted.
A little knowledge is a dangerous thing. Keep reading, but please read it all, not just the highlighted portions.
It’s people like you who don’t bother to read who are the problem.
Read this and then remember that “no knowledge” is even more dangerous. You sir, are the one who is completely ill informed. Get a source of information other than Fox, would ya?
You can’t even put into words what you are so mad about. If you don’t say it, how am I supposed to guess what the hell you are talking about?
So you were talking about New Hampshire? That’s where the NWO is these days? I’ve been, it didn’t impress me.
I am just encouraging you now. Think before you spew random facts and then accuse people of not knowing what you are talking about.
I freely admit I have no idea what you are talking about, or what point you are trying to make.
Here is one source. Note that it’s quite dated. The number of states (last I heard) who have written documents that remind the federal government, that according to the constitution, the ultimate law within the the United States lies at the state level and that the federal government is subservient to the states… is 31.
It’s not my fault if you aren’t staying aware. And if it isn’t obvious to you what is happening all around you and why the states want the Feds to back off, there’s no hope for you. Before you call me a nut case, perhaps you should be a little better prepared.
On a friendlier note, I urge you to pay attention to media other than Glen Beck and the MSM. They’re puppets who are told every night what flavor of koolaid you’ll be fed on that evening’s broadcast. They won’t tell one single thing about what’s really happening in America.
I have no further wishes to carry on this conversation. You’re the one who didn’t like what I wrote, and responded by calling me a “nut case”. You started it, and you were wrong. I’ve already wasted enough time on you. I just hope you’ll wake up for the good of yourself and your children before they too get shot full of vaccines. You do know about the vaccines, don’t you? If not… look it up. And for god’s sake, don’t let anybody you love get vaccinated. Look up “eugenics”.
eugenics? Why didn’t you just say that to begin with?
This WAS a conversation about Bailouts.
Anything else you want to “educate” me about?
One more for you.
I just can’t give up on you quite that quick. I’d rather help you than dislike you.
Because it wasn’t eugenics I was talking about in the first post, that’s why. Jesus, you’re just being difficult and I have no more time to waste like this. There are lots more people who are receptive where I can spend my time productively.
6;43 and 10:05 (I assume you are the same person).
Tangents to posts are OK. Vague, undocumented, and repeated mutterings related to post topics are not OK. Please look at recent posts for the standards on this blog. I’m not averse to your line of thought, but if you continue to express your view this badly, and persist when asked for specifics, your posts will be deleted.
No, I’m 10:05 and 6:43 is the person arguing with me. I have no agenda here. I appreciate and respect your concern. I’m finished posting here. Thank you for the venue.
This is frightening. Instead of making the institutions small so that they don’t need bailing out they want to concentrate yet more authority in yet fewer hands.
The unitary executive all over again.
I hope this is related to the post topic, but I am not sure.
Regarding the black hole known as AIG, it is almost literally true. It’s in fact a worm hole and when you walk through the door of AIG’s toxic asset storage room, you are immediately transported to Goldman’s boardroom at warp speed.
This piece of writing is outright dishonest. Congress specifically exempted Credit Default Swaps and other derivatives from regulation and oversight. Mostly driven by Republican introduced legislation. You can not have it both ways, crying about the fall out greed and opposing regulation. The Treasury needs the tools to work effectively and the proposal is exactly what the doctor ordered. Republican torpedoing of any rescue efforts is most damaging to the nation and shows an alarming lag of Patriotism.
“Congress specifically exempted Credit Default Swaps and other derivatives from regulation and oversight. Mostly driven by Republican introduced legislation.”
This is the same thing as introducing legislation to allow free trade. No legislation is required for free trade. Hence the name free, which in its honest sense is usually a good thing. The legislation is more often than not an attempt to limit free trade to those who pay into the congress, either side.
These companies are already regulated. The governemnt just needs to find the will to regulate. More legislation will just result in more BS and handouts for the lobby, both sides.
For the record, I am most of the time a dem. Just stop looking to more legislation for help, that just puts more hands into the pile.
BoingBoing just linked a Rolling Stone article on AIG, and I immediately recalled this post. Specifically, the mention of the OTS jogged my memory.