Has Anyone Seen Michael Douglas?
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Michael Douglas and Hal Holbrook starred in an early 80’s film called The Star Chamber. In the movie, a group of judges would secretly meet to decide the fate of criminals released by a justice system gone awry. The Financial Stability Council (FSOC) is looking more and more like the judges in the movie—meeting in the dead of night to decide who lives and who dies.
Today, FSOC is meeting in a closed door session without any press, public agenda, or broadcast. Whispers around town are that they will vote to move a small group of non-bank financial companies into the final stage of the 3 stage process to designate an entity as a significant non-bank financial company (SIFI). This preliminary designation means regulators believe the company poses a systemic risk to the U.S. financial system. Companies will be notified and have an opportunity to provide additional information and convince regulators otherwise before they designate a company as a SIFI.
Why is that so bad? For starters, the Federal Reserve has yet to finalize the rules on who could be designated and what the consequences of designation are. Without finalizing these rules, FSOC is putting the cart before the horse. How can FSOC designate, even on a preliminary basis, when it isn’t even certain what companies are eligible for designation? Furthermore, until it knows what the consequences of designation are, how does FSOC know that designation is appropriate?
Meanwhile, FSOC claims to be transparent, but the council’s unclear process for designation, closed-door meetings, and general mystery suggest otherwise.
Another fantasy FSOC wants you to believe is its claim of accountability. In January 2011, President Obama issued Executive Order 13563, which mandated that all federal agencies conduct a cost-benefit analysis for rulemaking. While FSOC acknowledged it would comply with the requirement in its proposal, it nevertheless failed to include any analysis in the proposal or the final rule and guidance.
Just yesterday, the Treasury Secretary Tim Geithner, also the Chairman of FSOC, issued a sharply worded letter to his fellow regulators on money market funds urging them to vote for enhanced prudential rules for money market funds. This is a blatant attempt by this overzealous council in a power grab from the SEC, which is the primary regulator of money funds. Secretary Geithner called for the same reforms that SEC Chairman Mary Schapiro failed to implement because the majority of SEC commissioners were not satisfied with the analysis and due diligence incumbent on good rulemaking. And yet, the FSOC is end-running the process and trying to force-fit rules that will destroy an essential cash management and short-term financing product to millions of investors, companies, municipalities, and non-profits.
In response, the Chamber’s David Hirschmann said, “…In the new Dodd-Frank world, regulators can just keep asking the same question until they get the answer they want. The majority of SEC Commissioners want to study the performance of 2010 money market fund reforms before deciding if more regulations are necessary. We also think it is prudent to ask questions before shooting.”
In The Star Chamber, the judges at least waited for law to act before meeting in private. In real life, FSOC isn’t even allowing the rules to be finalized or regulators to study a problem before drawing up their plans in secret.