WASHINGTON — Federal Reserve General Counsel Scott Alvarez mounted a defense of a Dodd-Frank Act provision that allows regulators to handle the failure of large financial institutions at the holding company level, arguing it would have helped during the financial crisis.
Speaking at a Women in Housing and Finance conference, Alvarez said that instead of propping up American International Group, the government would have unwound the company under its orderly liquidation authority.
“If we would have had the power to do it, the better course would have been to liquidate AIG,” Alvarez said.
Instead, regulators had to inject money into the failing insurance company under the Troubled Asset Relief Program.
“The price to the government of rescuing AIG turned out to be too high,” he said.
“On balance, having the power to liquidate AIG under a Title II-type framework would have been superior to federal reserve lending and Treasury injection of Tarp,” Alvarez added, referring to the section of Dodd-Frank that includes OLA.
Republicans have targeted OLA since Dodd-Frank passed, arguing that because it allows the Federal Deposit Insurance Corp. to tap the Treasury Department to help it unwind the institution, it puts taxpayers at risk. Supporters of OLA, which includes the banking industry, note that any cost to the Treasury must be reimbursed by large financial institutions through a special assessment.
Alvarez, who is slated to retire later this year, added that he supported bankruptcy reform to accommodate large financial institutions, a measure that is often presented as an alternative to OLA. But he says that is not enough to handle the failures of systemically important financial institutions.
“Bankruptcy reform would also be helpful, and there are constructive efforts under consideration by Congress to do that,” Alvarez said. “But bankruptcy is still focused on satisfying creditors and it’s not attentive to financial stability. And bankruptcy does not include a ready source of funding, which is critical when trying to resolve a large financial firm during times of crisis.”
The Trump administration is conducting a review of OLA to determine if it poses a risk to taxpayers.
In addition, Alvarez weighed in on another measure that several Trump administration officials have publicly supported: the reinstatement of a Glass-Steagall-style separation of a financial institution’s retail and investment banking operations.
“I don’t think there's a compelling case to separating the two,” Alvarez said. “If you believe that there are synergies between broker-dealers and banking institutions that are beneficial, then it makes sense to do it all in one organization.”
Regulators now have the tools to perform adequate oversight of the combined institutions, Alvarez said.
“You can limit the transferring risks from the bank to the broker-dealer in the same organization,” he said.