Bureaucrats Making it Up as They Go Along

In the Dodd-Frank Act, Congress, without irony, decided the best way to end “too big to fail” was to have a committee of regulators label certain companies “too big to fail.” That committee, established under Title I of Dodd-Frank, is called the Financial Stability Oversight Council (FSOC) and is chaired by the Treasury Secretary. Like so much of Dodd-Frank, FSOC gets to write its own rules. Unfortunately FSOC won’t even write those rules, but instead it has decided that it knows systemic risk when it sees it. This has led to an ad hoc process that almost makes the bailouts of 2008 look systematic.

Compare the process for asset management firms and that for insurance companies. In late 2013, the Treasury released a report on the asset management industry. It was widely viewed as an attempt to make the case for labeling some asset management firms “systemic.” The report was widely criticized. Such criticism did not stop FSOC from conducting a public conference on the asset management industry in May 2014. Whether it was the public reaction to the conference or the paper, FSOC has largely abandoned labeling asset managers as “too big to fail.” That was an appropriate outcome as firms in that industry are not systemic and shouldn’t be lead to expect a federal rescue.

Now don’t get me wrong: A shoddy report and a conference do not constitute a thorough process. As someone who has overseen a rulemaking process, I can say they do not even meet the basics of the Administrative Procedures Act. But just when that process seemed wholly inadequate, along comes the “process” for insurance companies.

Not unexpectedly, AIG went along without a peep. Given its role in the crisis that’s not a surprise. But there’s been no report or even a conference on whether insurance companies pose systemic risk. Completing either one would, of course, require FSOC to define systemic risk and to offer some minimal metrics. Instead, what we have is unelected bureaucrats simply making it up as they go along.

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And here I was thinking Dodd-Frank was meant to end the haphazard behavior of regulators in 2008 and lead us towards a predictable rules-based approach to ending systemic risk!