WASHINGTON — The Financial Stability Oversight Council is an enigmatic interagency body that has not provided enough rationale for designating certain insurance firms as a threat to the economy, the Republican leadership of the House Financial Services Committee said Tuesday.
During a marathon four-hour hearing, eight of the 10 voting members of the council — minus its leader, Treasury Secretary Jack Lew, and Federal Reserve Chair Janet Yellen — found themselves on the defensive that they were keeping lawmakers and the public in the dark about their activities.
When regulators tried to emphasize that they were dealing with confidential supervisory information, lawmakers dismissed that idea.
"Do you know that this body gets intelligence briefings from the FBI in regards to ISIS and terrorist attacks?" said Rep. Sean Duffy, R-Wis. "I would argue that American lives are in danger by these radical extremists. So we can get FBI briefings, but you won't give us briefings on the analysis that has gone into designation of certain companies in America?"
The exchange illustrated the continued outrage by Republican leaders at the FSOC, which they have repeatedly argued does not provide sufficient justifications for its actions. While the hearing occasionally dipped into areas unrelated to the interagency council, GOP lawmakers argued that the council's process is too opaque, its designation of insurance companies as systemically risky was unnecessary, and that it ultimately does more harm than good.
Committee Chairman Jeb Hensarling, R-Texas, said the FSOC is "one of the most powerful federal entities to ever exist and, unfortunately, also one of the least transparent and least accountable as well." The council has "earned bipartisan condemnation for its lack of transparency," he added.
Rep. Scott Garrett, R-N.J., complained that the FSOC, in its September meeting, apparently included "20 or so invited guests from various agencies" but that fellow commissioners from agencies represented on the FSOC were not among them.
Garrett asked FDIC Chairman Martin Gruenberg if he thought the two board directors of his agency who are not already members of the FSOC are untrustworthy — insinuating that the only other reason to exclude them from meetings is that the council has something to hide.
"I'm taking the perception here that either you don't trust your people or that you're doing something in secret," Garrett said. "So which [is it], Mr. Gruenberg? Do you not trust your people or you're trying to do something in secret?"
Gruenberg replied that he shares all information with other FDIC board members, arguing that the issue of not having them be present was really "a matter of functionality" in how many regulators attended the meeting.
Gruenberg similarly bore the brunt of Duffy's questions about why lawmakers could not receive more information about the designations of American International Group, GE Capital and Prudential as systemically important financial institutions.
"It seems to me that the line here is when you're dealing with confidential supervisory information, and the three [nonbank SIFIs] you referenced are open institutions," Gruenberg replied. "You have to strike a balance there."
Lawmakers in particular zeroed in on why insurance companies should have been designated as SIFIs when the independent insurance expert on the council, Roy Woodall, dissented in the decisions to designate Prudential as a SIFI in 2013 and MetLife in 2014.
Hensarling opened his questioning by asking whether anyone on the panel had expertise in insurance or the regulation of insurance firms — to which only Woodall responded in the affirmative. Rep. Blaine Luetkemeyer, R-Mo., said he was concerned about the lack of dedicated staff at the FSOC member agencies who have such expertise or familiarity. That may have led to "Fed-driven decisions on some of these designations," he said.
"So, how can with we make an educated analysis whenever you're making designations with regards to nonbank designations, which involve insurance companies? How do you make that determination, then?" Luetkemeyer asked National Credit Union Administration Chair Debbie Matz.
Lawmakers asked Matz several questions about her agency's role in the designation process, implicitly questioning what a credit union agency knows about large insurance firms.
"It is not the insurance part of the business that results in a designation," Matz replied. "It's in the financial services part of the business."
Democrats offered some defense for the regulators under fire. Rep. Al Green, D-Texas, rhetorically asked whether, if expertise is necessary for people to be able to make informed decisions about difficult technical matters, it is possible for juries of ordinary Americans to decide cases as jurors on complex topics.
"We have jurors who are ordinary, everyday working people who hear complex cases," Green said. "People hear these cases all the time and make life-and-death decisions who don't have expertise in a given area."
Woodall, for his part, appeared to agree that insurance expertise was not necessary, saying that his time on the council "has been a learning experience — they're learning about insurance and I'm learning about banking."
Several members asked the council members whether it had any intention of examining its own actions or the actions of its agencies as being a cause of systemic risk. Rep. Andy Barr, R-Ky., pointed out that the FSOC's own annual report and recent reports by the Office of Financial Research and others have identified potential risks associated with a lack of liquidity that could be due to excessive regulatory burdens, and yet the FSOC has not addressed that risk.
"This potential lack of liquidity that is resulting from regulation could mean that financial markets have less capacity to deal with shocks and would more likely seize up in a panic, just as they did in the 2008 financial crisis," Barr said.
Rep. Steve Pearce, R-Minn., had a similar concern. He said "there's a possible threat from what you all do to the market," and asked the chairman of the Commodity Futures Trading Commission, Timothy Massad, whether that has been discussed by the FSOC.
"I wouldn't characterize it that way," Massad said. "I would point out, for example, that what we do can protect people. When you consider AIG, for example, the government had to commit $182 billion to prevent the collapse of that company, which would have probably taken us into a worse Great Depression than what we had in the 1930s."