Sunday, 1 October 2017

The Financial Stability Oversight Council adds to the growing (De)regulatory Amnesia

Today’s post reacts to the news that the Financial Stability Oversight Council (FSOC) has removed AIG’s designation as a ‘Systemically Important Financial Institution’ (SIFI), which has the effect of lessening the regulation of the massive insurer that was at the heart of the Financial Crisis. In this post, the focus will be on that decision and how it plays into a growing deregulatory movement which is gaining strength all the time although, as we shall see, this ‘amnesia’ that is taking hold is based upon particularly short-sighted and overly-politicised ‘point-scoring’ which puts the very fragile financial system in great peril.

It was announced on Friday that, technically, the giant insurer American International Group, more commonly known as AIG, is no longer ‘too big to fail’. The insurer, who at the height of the crisis was afforded an $85 billion bailout, was on Friday taken off the ‘systemically important financial institution’ list which conveys a number of increased regulations – from the original four non-banking institutions on the list, only Prudential remains and it is widely expected that the insurer will be removed from the list also. The designation, which is conferred by the FSOC in the United States but is part of a larger campaign to protect against global systemically-related pressures, began in the aftermath of the Crisis with the Financial Stability Board’s rulings on global SIFIs, but the composition of the FSOC is incredibly interesting. The Council, created by the Dodd-Frank Act, is made up of ten voting members and five non-voting members, and include such people as Steven Mnuchin (Secretary of the Treasury), Janet Yellen (Chair of the Federal Reserve), and also the Chair of the Securities and Exchange Commission (Jay Clayton). What is of interest to us is who voted which way and, also, their reasoning for doing so. The first port of call, particularly with regards to understanding the issue of the post – deregulation – is naturally Steven Mnuchin.

At this point in the first year of the Trump Presidency, we know for certain that the Trump Administration is determined to loosen the regulations on the very same entities that brought the American, and global economy to its knees. Recent posts on the two key architects of this push – Steven Mnuchin and Gary Cohn – have looked at this issue, and almost every mainstream media outlet covers the topic. Whilst we know that this is the case, the Administration and its supporters have been thwarted, for the majority of the time, in its endeavour so that calls for deregulation are staggered and piecemeal, with the proposed development of the Financial CHOICE Act being just one example. However, on this occasion Mnuchin got his way and, judging from his comments, this move to de-list AIG from the SIFI list represents a big win for the Administration: ‘the Council has worked diligently to thoroughly reevaluate whether AIG poses a risk to financial stability… this action demonstrates our commitment to act decisively to remove any designation if a company does not pose a threat to financial stability’. This commitment, which is clearly demonstrative of Mnuchin’s bias towards facilitating the interests of business over the public, was interestingly shared by a number of Obama-era appointees, including Yellen (Fed) and Woodall (Independent), both in addition to Trump-era appointees Giancarlo (CFTC), Noreika (OCC), and McWatters (NCUA). Those opposed to the de-listing included Cordray (CFPB), Gruenberg (FDIC), and Watt (FHFA), with Clayton being recused on the grounds that he worked with a law firm – Sullivan & Cromwell – that had ties to AIG; therefore, AIG was delisted by a vote of 6 to 3. Interestingly, the result of this vote has raised a number of issues, which range from external pressure from powerhouses like Carl Icahn, to a suggestion that this move is just one small piece in a larger aim to do away with the SIFI designation altogether.

The House Financial Services Committee has suggested that the Council is inefficient, with the global head for insurance ratings at Fitch suggesting that the whole process, when aimed towards designated the systemic risk of insurers, was inherently a ‘challenging exercise’ which was essentially bound to fail eventually. Yet, another interesting aspect to this decision is that Carl Icahn, who is AIG’s third-largest investor and who has been steadily campaigning to change AIG’s direction and ramp-up its profitability, will be currently celebrating this ‘win’ as his goal since taking his stake in the insurer is to remove its SIFI designation, so much so that he had to leave his post as ‘Special Regulatory Advisor’ to Donald Trump because of concerns regarding conflicts of interest, particularly with his stake in AIG in mind; Senators, in July of this year, were raising concerns as to whether Icahn was pressurising the Trump Administration to remove the designation, with Friday’s news confirming those concerns without there being any ‘direct’ trail between the two since Icahn’s recusal. However, demonstrating the existence of a formal trail is irrelevant in reality, because Trump and his Administration make no excuses for siding with business over public safety, and in 2017 this approach falls in line with the Westernised thinking that the dangers of the Crisis are past.

In the U.K., Theresa May has been basing her vision on the post-Brexit landscape on the staunch commitment to the ideal of ‘free market economies’, which she suggests is the ‘greatest agent of collective human progress ever created’. Leaving the obvious semantic argument concerning her use of the word ‘collective’ aside for one moment (as nurses head to foodbanks), the commitment to this ideal within the post-Brexit landscape is proving to be the consistent basis for the concern that what will actually come to fruition is the deregulation of the U.K.’s ‘crown jewels’ – the financial service industry. However, the two environments on either side of the Atlantic are very different, for two reasons. Firstly, the U.S.’s nationalistic and protectionist approach means that in order for that vision to become reality, the agents of their monetary advancement i.e. large banks, insurers etc., must be allowed to grow to an abnormal size once more. In the U.K., the sentiment is different, in that the aim is to preserve, rather than grow, in the face of the ever-present threat that once the Country heads out into the world without the support of the E.U., its position will be fundamentally weaker (the recent trade dispute between Boeing and Bombardier, and the lack of care for the British position, is a testament to this). However, both sentiments for deregulation will have the same result, and that is the elevation of the venal.

If we think for one moment about AIG, then two things may come to mind. Firstly, now that the SIFI designation has been removed, is it not the case that AIG will do everything it can to grow? Of course this is the case, which then poses the question of whether the regulators will reattach the SIFI designation – the chances of this will be remote, because the regulatory environment will be overcome by the sense of growth and prosperity, neither of which will warrant a SIFI investigation. Secondly, if we imagine that AIG suffers a serious issue, or gets caught up in a systemic issue arising from, say, a global escalation in credit, then are we supposed to believe that the Trump Administration would let AIG fail? Again, the chances of this are remote, because as we have spoken about before, the Financial Crisis sent a signal to the largest corporate players – play together, and play big, and you will be saved. Whatever the cause of the next economic crisis, rest assured it is the taxpayers who will foot the bill – large institutions cannot be allowed to fail, it is that simple; Friday’s announcement means only one thing, and that is that the next game, whatever that may be, is now in full effect.

Keywords – AIG, Deregulation, Capitalism, Donald Trump, Steven Mnuchin, SIFI, too-big-too-fail, Financial Crisis, @finregmatters

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