David Dayen: FSOC Annual Report Shows Continued Interest in Austerity Bargain Over Reducing Financial System

By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen

With Jack Lew now installed at Treasury, I decided to take a look at the annual report of the Financial Stability Oversight Council (FSOC), the Dodd-Frank creation that’s supposed to monitor systemic risk. We already know the leanings of the not-so-new regime at Treasury: they think Dodd-Frank worked to secure a more stable financial system, an opinion reiterated Tuesday at a Senate Banking Committee hearing.

Senator Sherrod Brown, co-author of Brown-Vitter, thought he found a nut by saying that the FSOC annual report identified “risk-taking at large interconnected banks” as a threat to economic stability (see UPDATE). He didn’t mention that this comes on page 146 of a 149-page report. And it’s not really taken all that seriously. The report asserts that the “synthetic uplift” from credit rating agencies on TBTF banks has declined, and then explains all of the reasons why Dodd-Frank ended TBTF. Under separate questioning yesterday from Elizabeth Warren, Lew said that “Our job right now is to implement … Dodd-Frank … I think this is not the time to be enacting big changes.” Bank size and complexity and the risk-exacerbating reality of too big to fail is not one of the seven major themes of the report, outlined in the executive summary. It’s clear that the TBTF part was a throw-in, and included merely to be rebutted. Anyway, their capital and liquidity recommendations amount to “keep doing what you’re doing.”

So what is the FSOC concerned about with the financial system? Some perfectly reasonable issues, like fire sales in the wholesale funding markets, particularly money market funds. But on this, as with most issues here, the FSOC covers their posterior by listing “concrete steps” they’ve taken to defuse the issue, when in reality little has been done. FSOC took over for the SEC when they failed to produce regulations at the end of Mary Schapiro’s term, and they issued proposed regulations in November. The public comment period ended in February, and FSOC has done nothing with them; the comments are “under review,” per the annual report. Meanwhile, FSOC has made clear that they would step aside if the SEC restarted their process, which could mean another year of wheel-spinning.

This is also true on housing finance reform, basically a fully owned subsidiary of the federal government. There is no indication of the real problem propping up the GSEs, namely the failure to fix the private capital markets for mortgages. Anyway, the boilerplate on winding down the GSEs and “promoting the development of standards and best practices in he mortgage markets” pales in comparison to the profits Fannie and Freddie are sending back to the Treasury (mostly through their market dominance), which will push against any alteration of the status quo. Mild issues like increasing guarantee fees and a couple CFPB rules get mentioned, but not protections against fraud or putback risk. In fact, there’s basically no discussion of fraud in the entire document, despite the continued lengthening rap sheet from financial crimes. You’d think this would rate as even a minor threat to the system.

Then we have the section on standard operational risks, like in a natural disaster or cyberattack. I’d dare say this is not worth the time of the FSOC and is more of a whole-of-government concern. The council highlights reference interest rates as a potential point of instability, but they only go so far as to cite the LIBOR scandal, ignoring more recent riggings to ISDAFix and oil market prices. The report merely recommends fixing LIBOR, when the crisis obviously goes much deeper.

The discussion of interest rate risk is worthwhile, noting the reach for yield that results from the low interest-rate environment. But the recommendations are basically to “stay attuned” to heightened risk among systemically significant institutions. This shows the weakness of the council that isn’t using the full powers of their mandate. I don’t think regulators benefit from an oversight entity just saying “hey, you watch that” at any sign of potential risk.

The seventh theme considered threats from Europe and abroad. But it’s the sixth theme that really got to me:

Notwithstanding the overall improvement in the U.S. financial system, concerns persist about economic and financial market impacts of long-term fiscal imbalances. In particular, the process of U.S. fiscal adjustment has raised questions about the manner in which long-term fiscal issues will be resolved. In 2012, financial markets continued to respond to fiscal and political uncertainty, though market volatility was impacted less than was the case during the debt ceiling crisis in 2011.

So under the direction of Jack Lew, the FSOC believes one of the major impediments to the financial system is the lack of a grand bargain. You’ll notice that “persistently high unemployment” doesn’t appear as a risk. As long as we’re talking about macro policy rather than the financial system, why isn’t that a preoccupation of the council? CBO’s recent estimates and the collapse of the austerity argument globally (indeed, Abenomics is specifically mentioned just a couple paragraphs later) show the absurdity of continuing to pump for a grand bargain, but darn it, Jack Lew was sent to Treasury for a reason.

I don’t think anybody expected Treasury to change measurably with the change in regime from Geithner to Lew, but it’s nice to get confirmation. FSOC just doesn’t look like a serious entity to me. Surprise, surprise.

It’s a long report, so if you’d like to dive into it, here’s the link.

UPDATE: Just for context, here is the transcript of the relevant questioning of Jack Lew by Sherrod Brown at Tuesday’s hearing, which shows a similar concern to what I have: that Lew and FSOC aren’t taking the issue of TBTF very seriously at all.

Brown: FSOC’s annual report cites risk-taking at large, interconnected banks, what we could call the too-big-to-fail banks, those six banks over $500 billion in assets, it cites risk-taking as a threat to our economy. The report says, and I’ll quote, “market participants may continue to perceive that some institutions receive special treatment by virtue of their size.”

You acknowledged at your confirmation hearing that this perception gives the mega-banks a funding advantage in the capital markets. That’s pretty clear. The FSOC report shows that the large mega-banks get a one or two notch up, if you will, boost in their credit ratings.

Standard & Poor’s said that Brown-Vitter, our legislation, which calls for higher capital requirements, will in fact eliminate the too- big-to-fail funding advantage they got. Dodd-Frank requires, as you know, FSOC to make recommendations in its annual report to promote market discipline.

So my question, Mr. Secretary, is why has FSOC failed to meet this requirement by recommending higher capital requirements for these six largest too-big-to-fail banks?…

But you said something else that the market implies that too-big- to-fail may still be around. It’s more than implying. It doesn’t really matter what Jack Lew or Sherrod Brown or David Vitter thinks about this, it’s what the markets think. And the markets continue to say that too-big-to-fail is alive and well.

Several members of FSOC have agreed that too-big-to-fail banks should have more capital. A recent Huffington Post report said the U.S. Treasury’s avoided publicly weighing in on this debate.

Your — your — this is not really a question, it’s more sort of summary statement, but your legal responsibility as FSOC chairman is to promote market discipline and eliminate the perception. The perception’s still there.

Dodd-Frank — as I said, you’re a sophisticated guy. You’ve seen what’s happened when one of the leading bank lobbyists, after the legislation was signed, said this is half time, and then put an even larger, more powerful legion of lobbyists on ways to weaken these standards.

At the same time, Basel III may be better than now, but with what it’s done with risk adjustment and risk assessment and all, you know that Basel III’s not going to be very strong capital standards. It’s minimal compared to what the market says we should do.

And I just hope you take this legal responsibility as chair of FSOC to promote market discipline and eliminate that perception of too-big-to-fail.

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About David Dayen

David is a contributing writer to Salon.com. He has been writing about politics since 2004. He spent three years writing for the FireDogLake News Desk; he’s also written for The New Republic, The American Prospect, The Guardian (UK), The Huffington Post, The Washington Monthly, Alternet, Democracy Journal and Pacific Standard, as well as multiple well-trafficked progressive blogs and websites. His has been a guest on MSNBC, CNN, Aljazeera, Russia Today, NPR, Pacifica Radio and Air America Radio. He has contributed to two anthology books, one about the Wisconsin labor uprising and another on the fight against the Stop Online Piracy Act in Congress. Prior to writing about politics he worked for two decades as a television producer and editor. You can follow him on Twitter at @ddayen.


  1. JGordon

    I just listened to an interview that Morris Berman and Christopher Hedges did together (my favorite author, Dimitry Orlov is featured in a later segment, but that’s off-topic for this post):


    Anyway, together they make the point that when empires collapse, as the US empire is currently doing, you can never, ever expect the leadership of empire to (ever) do anything especially worthwhile to mitigate the collapse in any way. Rather, all of their actions, by definition, will make the situation much worse than it needs to be.

    That is why you all should just learn to accept things and support the Obama regime and the police state. While it’s not like anything your going to do is going to cause them to do anything useful (especailly when so few here have any idea of what’s going on anyway because of cultural/ideological blindness), so just don’t worry so much about whatever they’re doing. If they want to keep all the fake money they’re printing all to themselves, then let them have it I say.

    By the way Dan, how’s that QE3 program been working out for the US? I sure do miss the days of you railing for it every other post over on fdl.

    1. JGordon

      Oh, David. Sorry. You know, I make a crapload of typos all the time. If only I could train myself not to do that. Bummer.

    2. Waking Up


      Thank you for the link to the interview with Chris Hedges and Morris Berman. I wish everyone in this country would listen to that interview. Maybe it would open up a better dialogue on what is happening to our society.

  2. Hugh

    Dodd-Frank was Potemkin reform. What little it potentially contained is being neutered in the regulation writing process. FSOC as a creation of Dodd-Frank really should tell you all you need to know about. That a high level servant of the kleptocrats like Jack Lew has anything to do with it should remove any lingering doubts.

    Unemployment is no problem for these guys because they have effectively defined the crisis in jobs out of existence. Real unemployment is at least 12.5% by my calculations, but the official rate has been whittled down to 7.5%. Take a natural unemployment rate of 5% and you are down to 2.5%. Each percent equates to 1.55 million. So we are talking 3.88 million. Throw in “structural” elements like robotics, skills mismatches, etc., and you can knock this number down to 2 to 2 1/2 million. That’s a blip on their screen, and they treat it like one in their actions, although they still throw a few crumbs to us rubes about it in their rhetoric.

    1. Hugh

      about. > about it.

      I should add that that the jobs crisis goes beyond unemployment. It also includes the crapification of the American work place: crap jobs paying craps wages with few or no benefits and no job security.

      1. jake chase

        I think you are probably too optimistic with 12.5%. My guess would be 20%. How many people outside the toadying and herding professions are staying above water? We don’t really make much in America any more except disgusting fast food and propaganda.

    2. Jackrabbit

      It’s also useful to note the MSM complicity in constantly reporting about an improving job market.

      Whose going to dispute it? The unemployed? Economists?


      Unemployment is not included in FSOC’s Report because they view it as a political risk, not a financial risk.

    3. banger

      Shadowstats.com consistently has unemployment as around 23%. It’s hard to know for sure. All I know for sure is people are suffering–particularly younger non-professional workers.

  3. Jackrabbit

    FSOC is a safety-valve and early-warning-system for TBTF Banks.

    It institutionalizes back-door bailouts so that politicians don’t have to experience a “Lehman Moment.” And it reduces the possibility that any one regulator might grow a conscience and crack down on risks (financial innovation!) that TBTF Banks want to take on.

    What could go wrong? We have seen the financial industry push risk to the limit – and find creative ways to push past the limits – time and time again.

  4. Beet Oven

    When you hear DC bloviations such as these, it’s healthy to get plenty of exercise and enjoy a hobby or two, so as to not exacerbate digust:

    Lew said that “Our job right now is to implement … Dodd-Frank … I think this is not the time to be enacting big changes.” Bank size and complexity and the risk-exacerbating reality of too big to fail is not one of the seven major themes of the report”

  5. Susan the other

    Bernanke emphasized over and over again the importance of short term fixes so that we bring unemployment down but long term fiscal adjustments. He was forced to identify the most important one as Medicare/Medicaid. Why if they don’t want to say it do they want to do it? It won’t fly. Now or later. The FSOC is the same as Timmy’s Treasury. Not concerned about unemployment. None of the voting members come from Unions or otherwise working people. Sounds like the perpetual absence of a grand bargain at this rate. Has government always been simply a case of denial? Is this the definition of our great government?

  6. clarence swinney

    Alan Keueger, Chair of the President’s Economic Advisors , said that the U.S. economy is continuing to recover from the Worst downturn since the Great Depression.
    It is slow, very slow. Rank the underemployed to unemployed we see 13.8% . 22 million.
    Has Washington abandoned the search for jobs? Jobs that pay decent wages. Jobs that have pensions and health insurance coverage? This Economy is healing back to an old economy. Growing Inequality
    and a declining Middle Class. We need for workers to get a fair share of the profits and index the minimum wage to inflation. The President is trying. Invest in pre-school and infrastructure, raise the minimum wage. Encourage return of jobs from overseas via tax breaks. Make it easier for homeowners to refinance mortgages and take advantage of current low interest rates.
    The good news is that Treasury is to pay down some debt for the first time since Obama took office.
    It expects to pay down $35 Billion in marketable debt for the first time since 2007. Unexpected high revenue and lower outlays in spending. Treasury expects to have a cash balance of $75 Billion after paying down that debt. Treasury now projects a cash balance of $80 billion at the end of the third quarter.

  7. allcoppedout

    Unemployment figures have long been a bad joke. If we target areas going door to door we find rates between 18 and 60% in the UK.
    I’ve seen Yves make more sense of this in two minutes on RT than in years of the business school speak I was exposed to. One might call this the ‘furniture farce’ – wood exported from the US to Asia, turned to furniture and sent back to be purchased in the US. This effectively shifts money from skilled working people to the management-financial class. Over the last 30 years we have seen liquid assets in our bottom 50% fall from 14 – 1% (UK). This has happened just as technology could have embodied and routinised much management and finance – instead the spreadsheets simply identified resources that could be stolen by the management-financial class. I think this is reducing most of us to the condition of “subsistence farmers” who do just enough to get by and hide this because anything extra they do gets stolen. There is another form of unemployment-under-employment in this.
    I see unemployment as a label in a wider complex of income distribution and also like the hand-ball rule in soccer. I’d no doubt be playing for Manchester United if I was one of a select few allowed to pick up the ball and run with it! The management-financial class is doing something like this.

    When I talk to bankers and even very mediocre undergraduates in business schools I find very little recognition of how unskilled they are and how highly skilled people like joiners or cut-and-sew operators are in comparison with them. Most of the managerial-financial class are, in fact, unemployed or under-employed, with the peculiarity that they are well-paid in the condition.

    The basic stats don’t seem available for a scientific calculation. For this we need to know how much of what work needs doing across the world, how much of this we could get done, the personnel and training needed and a list of similar factors describing a real productive economy. Unemployment-under-employment would then be a factor of those not contributing to this. Given our historic failure not to achieve reasonable and secure living standards everywhere, I suspect unemployment in respect of this standard is massive. We could start, as all science does, in approximation (Ludwig, Sneed and others).

    Later in the model we need to understand that the idea of work is not to produce more and more work (growth) – but rather social capital and individual opportunity to do more of what people want to do. Who would give a stuff about unemployment if we had robots to do the work and all had vouchers for a share of the products? And remember the origin of the term robot is in the Eastern European word for worker!

  8. craazyman

    they’re zombie humans and zombie banks. they exist in a narcotized and demented symbiosis of sloth and sullenly deranged and implacable ignorance, held together by the force of unreflective and spiritually dispossessed will to power, a symbiosis which they themselves neither created or refined, but simply adopted, and not after it was sought out and conquered through guile and willing acquisence to a physical danger as a price for a virile but ciminal theft of other’s treasure, but because it was given to them, by circumstances which they inherited, an accident of both birth and luck — if one can call such a burdening by cold and misanthropic kleptocratical lunge for enrichment to be luck — inherited as the detritus from the errors and cupidinous ignorance and malevolent insinuations of an entire generation of intellectual scammers whose crass errors of logic formed through a concerted and unquestioned but flagrantly obvious suppression of natural insight has been elevated to the status of a system of thought whose only power lies not in its capacity for truth but in its capacity for obfuscation and contempt. One sees their names in the media and hears of them on TV — if one has a TV — and one can only feel an intellectual nausea and see, in the mind channel that Sees but flinches instinctively at the empty horror, men and women, so called only because their bodies partake of that thing we call human, stagger in their suits and ties and dreamless sleep toward the emoluments of a bureaucratic and political affirmation that brings no epiphanies, no awkward awakenings of mind and spirit, no mornings of cold doubt and gnawing regret, nothing in fact that could redeem and bless and cure, but perpetual blind and mindless motion in which they are engaged until they end of their days, or ours. I am not sure whether this is a purgatory or a hell, but to have a life in which you destroy your fellow man through the machinations of tendentious lies and cynical political ploys, and you profit from it and you perpetrate it and you do so believing your are virtuous, this is really quite a case for a DSM diagnosis. Perhaps some future school of psychicatry will see this for what it is, a form of insanity, but that would require an honesty and transcendent clarity that seems both the rarest of faculties and the least likely to be exercised by any form of institutional power.

    1. jake chase

      You ought to consider eliminating the periods from what could be the finest one sentence epitaph for the business and economics education cancer which has eaten the country out of house and home and is now up and running on medicine as well.

  9. CapVandal

    Why not talk about the 6 firms identified as TBTF?

    BAC, C, GS, JPM, MS, WFC

    BAC, C, and JPM should be split up for the BENEFIT OF THEIR SHAREHOLDERS. BAC and C are selling at significant discounts to book value. JPM has proven that their trading book is subtracting value.

    GS and MS aren’t really banks.

    WFC isn’t systemically important. Splitting their mortgage business from their bank would also be a plus for shareholders.

    Why? These are simply too big to regulate. I don’t trust the regulators to be any more effective than Jamie Dimon.

    Why doesn’t it happen? The old agency problem — management isn’t interested in ‘shrinking’ their way to greatness.

    Really effective regulation would require capital levels that would erase any economic benefit of size.

    I would start with BAC. Let Treasury do a leveraged buy out. Split em up. Keep the profits.

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