[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF THE FINANCIAL
STABILITY OVERSIGHT COUNCIL
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
AND INVESTIGATIONS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
SEPTEMBER 17, 2014
__________
Printed for the use of the Committee on Financial Services
Serial No. 113-98
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HOUSE COMMITTEE ON FINANCIAL SERVICES
JEB HENSARLING, Texas, Chairman
GARY G. MILLER, California, Vice MAXINE WATERS, California, Ranking
Chairman Member
SPENCER BACHUS, Alabama, Chairman CAROLYN B. MALONEY, New York
Emeritus NYDIA M. VELAAZQUEZ, New York
PETER T. KING, New York BRAD SHERMAN, California
EDWARD R. ROYCE, California GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma MICHAEL E. CAPUANO, Massachusetts
SHELLEY MOORE CAPITO, West Virginia RUBEEN HINOJOSA, Texas
SCOTT GARRETT, New Jersey WM. LACY CLAY, Missouri
RANDY NEUGEBAUER, Texas CAROLYN McCARTHY, New York
PATRICK T. McHENRY, North Carolina STEPHEN F. LYNCH, Massachusetts
JOHN CAMPBELL, California DAVID SCOTT, Georgia
MICHELE BACHMANN, Minnesota AL GREEN, Texas
KEVIN McCARTHY, California EMANUEL CLEAVER, Missouri
STEVAN PEARCE, New Mexico GWEN MOORE, Wisconsin
BILL POSEY, Florida KEITH ELLISON, Minnesota
MICHAEL G. FITZPATRICK, ED PERLMUTTER, Colorado
Pennsylvania JAMES A. HIMES, Connecticut
LYNN A. WESTMORELAND, Georgia GARY C. PETERS, Michigan
BLAINE LUETKEMEYER, Missouri JOHN C. CARNEY, Jr., Delaware
BILL HUIZENGA, Michigan TERRI A. SEWELL, Alabama
SEAN P. DUFFY, Wisconsin BILL FOSTER, Illinois
ROBERT HURT, Virginia DANIEL T. KILDEE, Michigan
STEVE STIVERS, Ohio PATRICK MURPHY, Florida
STEPHEN LEE FINCHER, Tennessee JOHN K. DELANEY, Maryland
MARLIN A. STUTZMAN, Indiana KYRSTEN SINEMA, Arizona
MICK MULVANEY, South Carolina JOYCE BEATTY, Ohio
RANDY HULTGREN, Illinois DENNY HECK, Washington
DENNIS A. ROSS, Florida STEVEN HORSFORD, Nevada
ROBERT PITTENGER, North Carolina
ANN WAGNER, Missouri
ANDY BARR, Kentucky
TOM COTTON, Arkansas
KEITH J. ROTHFUS, Pennsylvania
LUKE MESSER, Indiana
Shannon McGahn, Staff Director
James H. Clinger, Chief Counsel
Subcommittee on Oversight and Investigations
PATRICK T. McHENRY, North Carolina, Chairman
MICHAEL G. FITZPATRICK, AL GREEN, Texas, Ranking Member
Pennsylvania, Vice Chairman EMANUEL CLEAVER, Missouri
SPENCER BACHUS, Alabama KEITH ELLISON, Minnesota
PETER T. KING, New York CAROLYN B. MALONEY, New York
MICHELE BACHMANN, Minnesota JOHN K. DELANEY, Maryland
SEAN P. DUFFY, Wisconsin JOYCE BEATTY, Ohio
STEPHEN LEE FINCHER, Tennessee DENNY HECK, Washington
RANDY HULTGREN, Illinois DANIEL T. KILDEE, Michigan
ANN WAGNER, Missouri STEVEN HORSFORD, Nevada
ANDY BARR, Kentucky
KEITH J. ROTHFUS, Pennsylvania
C O N T E N T S
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Page
Hearing held on:
September 17, 2014........................................... 1
Appendix:
September 17, 2014........................................... 37
WITNESSES
Wednesday, September 17, 2014
Clowers, A. Nicole, Director, Financial Markets and Community
Investment Team, U.S. Government Accountability Office......... 8
Pinschmidt, Patrick, Deputy Assistant Secretary, Financial
Stability Oversight Council, U.S. Department of the Treasury... 7
APPENDIX
Prepared statements:
Clowers, A. Nicole........................................... 38
Pinschmidt, Patrick.......................................... 57
Additional Material Submitted for the Record
Maloney, Hon. Carolyn B.:
Letter to FSOC Chairman Jacob Lew, dated July 29, 2014....... 62
Pinschmidt, Patrick:
Written responses to questions for the record submitted by
Representative Barr........................................ 65
OVERSIGHT OF THE FINANCIAL
STABILITY OVERSIGHT COUNCIL
----------
Wednesday, September 17, 2014
U.S. House of Representatives,
Subcommittee on Oversight
and Investigations,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 10:33 a.m., in
room 2128, Rayburn House Office Building, Hon. Patrick McHenry
[chairman of the subcommittee] presiding.
Members present: Representatives McHenry, Fitzpatrick,
Bachus, Duffy, Fincher, Hultgren, Barr, Rothfus; Green,
Maloney, Delaney, Beatty, Heck, Kildee, and Horsford.
Ex officio present: Representative Hensarling.
Also present: Representatives Garrett, Neugebauer, and
Royce.
Chairman McHenry. The Subcommittee on Oversight and
Investigations will come to order. The title of today's
subcommittee hearing is, ``Oversight of the Financial Stability
Oversight Council.''
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time.
The Chair will now recognize himself for 5 minutes for an
opening statement.
Today, we will follow up on a hearing that this
subcommittee held in March of last year where we discussed the
Financial Stability Oversight Council's (FSOC's) failure to
address recommendations from a 2012 U.S. Government
Accountability Office (GAO) audit. Unfortunately, nearly 2
years after its September 2012 report, the GAO still concludes
that the FSOC has not made satisfactory progress towards
implementing many of its recommendations.
The FSOC may well be the least transparent Federal entity
in the government. Of the 42 meetings held, no substantive
description of discussions or members' perspectives have been
provided in the meeting minutes. In fact, two-thirds of the
meetings were held in executive session, completely closed off
to the public.
For comparison's sake, even the Federal Reserve releases
fairly detailed transcripts of meetings of the Federal Open
Market Committee (FOMC), as well as background material relied
on by meeting participants and lengthy minutes that describe in
detail the issues considered and the participants' perspectives
on those matters.
What this means for the companies that are potentially
subject to the SIFI designation by the FSOC is that they must
submit vast quantities of information demonstrating systemic
risk and have no idea whether this information is reviewed, and
if so, by whom. Furthermore, it is unclear what role, if any,
the Office of Financial Research (OFR) plays in the data review
process and how the information is ultimately made available to
the FSOC's voting members.
Even Congress, which created the FSOC and its unprecedented
authority under the Dodd-Frank Act, has been denied access to
their process. The dearth of information in the FSOC's minutes
makes it impossible for Congress to conduct effective oversight
of the FSOC and to determine whether the agency has
appropriately implemented the Dodd-Frank Act.
For example, detailed minutes from the FSOC's designation
of nonbank financial companies for ``heightened prudential
supervision,'' would help Congress assess the effectiveness of
the FSOC's application of the statutory criteria for
designation. Detailed minutes would also help Congress assess
other matters including: the nature and quality of members'
discussions concerning systemic risk; the relationship between
the FSOC and the several staff committees that assist it,
including the extent to which the FSOC conducted independent
analysis or simply served as a rubber stamp; and how the FSOC
incorporated data and analysis provided by the OFR as part of
its deliberations.
The FSOC has now been in existence for 3 years, yet it is
still not clear how the FSOC has performed annual reevaluations
of its SIFI designations, as required by the law. Although the
FSOC's July 31st meeting minutes of this year do indicate that
reevaluations took place for 2 firms designated over a year
ago, it is unclear what standards were used to conduct these
annual reviews, and it is unclear whether a review has been
planned or conducted for the third company.
In fact, during a recent hearing this past July, a mere 2
weeks before the FSOC voted on the reevaluations, Chair Yellen
of the Federal Reserve testified that she was unaware whether
redesignation decisions were on the agenda for the FSOC
consideration. This is problematic.
Therefore, it is not shocking that the GAO concluded that
almost 2 years after its 2012 report, the FSOC has not made
satisfactory progress in terms of complying with many of its
recommendations, including those intended to ensure that the
FSOC has a comprehensive set of systemic risk indicators,
whether or not it is coordinating and clarifying rules with the
OFR and other regulators, and whether or not it has the ability
to adequately assess the effect of SIFI designations on the
market and on the designated companies.
I look forward to the hearing today and the testimony from
our panel of witnesses. And I hope they will address these
mounting questions that have developed about the FSOC process
and its considerably opaque yet very powerful actions over the
last 3 years.
With that, I will recognize the ranking member of the
subcommittee, Mr. Green of Texas, for 5 minutes.
Mr. Green. Thank you, Mr. Chairman. And thank you for
holding this important hearing to discuss the Financial
Stability Oversight Council, FSOC.
The FSOC represents an important piece of the Dodd-Frank
solution to the challenges we faced following the 2008
financial crises. As a result of the crises, 489 banks failed
between 2008 and 2013, while only 21 banks failed from 2002 to
2007. An estimated 3.2 million foreclosures were completed from
2009 to 2011, versus about only 1.4 million foreclosures from
2006 to 2008.
An estimated $3.4 trillion in real estate wealth was lost
since 2008; 26.2 percent in pension value has been lost since
2008. An estimated $7.4 trillion in stock market wealth was
lost between July 2008 and March 2009.
And on September 29, 2008, when the House initially voted
down TARP, the Dow dropped 778 points. An estimated 8.8 million
jobs were lost between 2007 and 2009.
In 2008, the unemployment rate was 5.8 percent, versus 9.6
percent in 2010. The suicide rate quadrupled between 2008 and
2010. There were about 850,000 bankruptcies in 2007, versus 1.4
million bankruptcies in 2009.
Mr. Chairman, while we may disagree as to whether we should
amend or end Dodd-Frank, there should be little disagreement
regarding the lack of data and oversight of certain sectors of
the financial markets, which led to overexposure and
overleveraging of many large financial institutions. Some
important lessons were learned that we should share with you.
One of the lessons learned was that we need greater
coordination and better data to fully understand the ways in
which our financial markets were changing.
Through Dodd-Frank, we created the FSOC, chaired by the
Secretary of the Treasury. The FSOC is comprised of 10 voting
members, our Federal regulators, and one independent member
with insurance expertise, together with five non-voting
members, including the Director of the Office of Federal
Research, the Director of the Federal Insurance Office, a State
insurance commissioner, a State banking supervisor, and a State
securities commissioner. Congress empowered the FSOC to oversee
the landscape of the financial markets and to designate certain
financial institutions as systemically important financial
institutions, or SIFIs. Through this designation, these firms
could be subjected to heightened standards under the Federal
Reserve to ensure the safety of our financial system.
Nonbank financial institutions of any size can be
designated by the FSOC through a two-thirds vote, and to date
only three firms have been so designated. Nonetheless, despite
only being a few years removed from the worst financial crisis
since the Great Depression, the FSOC and its SIFI designation
process is under scrutiny.
Because clarity from the FSOC is important, I do not oppose
companies asking for additional guidance or feedback regarding
the FSOC process. Their contention that certain sectors of the
financial markets are fundamentally structured differently than
bank holding companies should be considered when determining an
SIFI designation.
However, we must remember that Dodd-Frank has been a
massive undertaking for our Federal regulators. They continue
to work tirelessly to implement the law, and adjustments will
be needed.
To be clear, I have always contended that I support efforts
to improve Dodd-Frank, which is why I believe we should
entertain questions regarding transparency in the FSOC's
decision-making process. However, I do not support efforts that
would ultimately undermine the FSOC's ability to monitor
systemic risk in our financial system.
I thank the witnesses for appearing today. I look forward
to their insights.
And I yield back the balance of my time.
Chairman McHenry. We will now recognize the chairman of our
Capital Markets Subcommittee, the gentleman from New Jersey,
Mr. Garrett, for 5 minutes for an opening statement.
Mr. Garrett. Thank you, Chairman McHenry--or is it Chief
Deputy Whip Chairman McHenry--for holding this important
hearing. I am not sure I will use all that time. I very much
appreciate this hearing on oversight of FSOC, the Financial
Stability Oversight Council.
Conducting a thorough and robust overview of this Council
is one of the most important things that this committee can be
doing right now. Why is that? Because FSOC has repeatedly
defied bipartisan calls to do what? To cease and desist its
nonbank designations. We have asked them to improve the
transparency of their operations, and also simply to use more
data-driven and thorough analysis, and frankly, to be
accountable to Congress.
Rarely in all my years have I seen a regulatory body that
is so defiant of the demands of bipartisan Congress.
More recently, as media outlets have reported, FSOC has
designated a new insurance company as a systemically important
financial institution (SIFI). Designating more private
companies as too-big-to-fail and turning their regulation over
to the Federal Reserve and its ever-growing safety net, if you
will, is not going to solve the problems of taxpayer exposure
to the financial system. Now, I am sure everyone here has heard
the old saying, ``When you are in a hole, stop digging.''
Well, sir, I would ask you to do this: When you leave here,
please tell Secretary Lew to put the shovel down.
This is just not my analysis. Here is a quote from an
independent financial analyst over at Guggenheim Securities,
Jaret Seiberg. In a note he sent out to his clients, in
referring to your most recent designation, he said, ``We
believe customers now will prefer to do business with an
insurer that the government has said is too-big-to-fail.''
So by your designation, you are driving business that way.
In conclusion, the FSOC must stop taking us down this road.
It must stop expanding the taxpayer-backed safety net. It must
stop distorting competitive forces in various financial
markets. And hopefully, in several months, we will have in this
body and in the Senate a critical legislative mass to be able
to reform this agency and to stop spreading too-big-to-fail.
With that, I yield back.
Chairman McHenry. We will now recognize the gentlelady from
New York, Mrs. Maloney, for 3 minutes.
Mrs. Maloney. Thank you. And I thank the chairman and the
ranking member for holding this hearing.
The Financial Stability Oversight Council, or FSOC, has a
three-part mission: identifying risk to financial stability;
promoting market discipline; and finally, responding to
emerging threats to financial stability.
Dodd-Frank gave the FSOC one primary tool to mitigate
systemic risk: the power to designate financial institutions as
systemically important financial institutions, or SIFIs. This
is an important and necessary power, and without it we would
have no protection against another AIG.
But because designating companies as SIFIs is so
consequential to the companies that are designated, it is
imperative that the designation process be as transparent,
clear, and robust as possible. In setting up the designation
process, the FSOC went through a lengthy public rulemaking that
included three separate public comment periods. They should be
commended for actively engaging with stakeholders and the
general public in creating the designation process, but this
doesn't mean that the FSOC designation process is perfect and
that no improvements can be made.
In fact, now that we have been through the designation
process a few times, and three companies have been designated
as SIFIs and one has been proposed for designation, I believe
that the FSOC should review what has worked and what can be
improved. And that is why in July, I sent a letter to Secretary
Lew recommending four specific changes that I believe would
make the designation process more fair, thorough, and
transparent, without undermining the FSOC's ability to identify
and mitigate systemic risk.
I ask unanimous consent to place this letter in the record.
Chairman McHenry. Without objection, it is so ordered.
Mrs. Maloney. The four recommendations that I made are that
first, the Council should provide notice to companies that they
are in stage two and let them know what is happening,
particularly if they are requesting this information.
Second, the Council should begin its engagement with a
company that is under consideration. Once it has advanced to
stage two, start working with them, instead of waiting until
stage three.
Third, when the Council provides a company with notice that
it has advanced to stage three, the Council should, to the
extent feasible, identify what are the particular issues that
they feel merit further review.
And fourth, the Council should adopt a policy of
automatically granting an oral hearing to the company upon
request. These companies need to know, for their own planning
and their own internal efforts what exactly is going on.
I think these are common-sense proposals that I hope will
be accepted by Treasury and FSOC. But also, it is important
that we not lose sight of the problems that made FSOC
necessary: the fact that no regulator prior to the crisis had
responsibility for monitoring risk across the entire financial
system, which allowed the huge risks to build up outside of the
traditional banking sector.
So I look forward to hearing the witnesses, and I thank you
very much.
Chairman McHenry. We will now recognize the gentleman from
Maryland, Mr. Delaney, for 2 minutes.
Mr. Delaney. Thank you, Mr. Chairman.
My colleague, Mr. Garrett, made a good observation when he
read from the research report, and I think he said that the
analyst said that business would be going towards companies
that were designated as systemically important. But it seems to
me one of two things will happen to a certain percentage of a
company's business if it is designated systemically important:
either business will go towards it; or business will go away
from it.
Either way, this designation will affect how the market
works and will affect these private enterprises, which is why I
believe it is extraordinarily important that the process for
designation and the communication and the transparency be done
to the highest standard possible. Because in fact, every one of
these enterprises that is being considered for designation is
already a regulated institution, oftentimes to an
extraordinarily high degree.
So I am looking forward to hearing in your testimony how
you plan on addressing some of the concerns that my colleague
from New York has raised, and which I have also addressed with
a piece of legislation that I have co-authored with my
colleague, Mr. Ross, in terms of making sure that companies who
are considered as a potential SIFI have an opportunity--they
and their regulators--to discuss in great detail what the
strategy is for designation and what other alternatives are
available for these companies to avoid a designation, if
possible.
For example, if a business had an activity that the FSOC
considered problematic, are we giving companies an opportunity
to divest that activity so that the activity in concern could
actually be removed from the institution? That seems to me to
be, as an example, a better way to accomplish the objectives of
FSOC.
So I care a lot about transparency; I care a lot about
process; and I care about making sure these companies have a
seat at the table, as do their regulators, to have a robust
dialogue and to come up with alternatives for SIFI designation.
Because SIFI designation will, in fact, affect how these
companies participate in their market, how businesses who do
business with them, and counterparties who do business with
them, think about them, either positively or negatively.
Chairman McHenry. The gentleman yields back.
The Chair will now recognize our witnesses for today's
panel.
Our first witness is Mr. Patrick Pinschmidt. He is Deputy
Assistant Secretary of the Financial Stability Oversight
Council. Mr. Pinschmidt was previously a Policy Advisor to the
Congressional Oversight Panel created to review the current
state of financial markets and the regulatory system.
He also served as vice president of U.S. equity research
for both Morgan Stanley and Merrill Lynch. He has a bachelor's
degree from Georgetown University and received an MBA from
Columbia Business School.
Our second witness is Ms. Nicole Clowers. She is Director
of the Financial Markets and Community Investment Team at the
United States Government Accountability Office. Ms. Clowers has
been with the GAO for over 15 years. She has a bachelor's
degree from Virginia Tech and a master's in public
administration from the University of Georgia.
Thank you both for being here.
The witnesses will be recognized for 5 minutes.
I know this is not your first rodeo, and so you are aware
of the lighting system. You are also aware that this committee
has an atrocious sound system, so if you bring the microphone
uncomfortably close to your face and then speak clearly, we
might be able to hear you.
And without objection, the witnesses' written statements
will be made a part of the record.
Mr. Pinschmidt, you are now recognized for 5 minutes.
STATEMENT OF PATRICK PINSCHMIDT, DEPUTY ASSISTANT SECRETARY,
FINANCIAL STABILITY OVERSIGHT COUNCIL, U.S. DEPARTMENT OF THE
TREASURY
Mr. Pinschmidt. Thank you.
Chairman McHenry, Ranking Member Green, and members of the
subcommittee, thank you very much for the opportunity to
testify today regarding the Financial Stability Oversight
Council.
Next month will mark the fourth anniversary of the
Council's first meeting. Federal and State financial regulators
now meet regularly to coordinate and work together to identify
and respond to potential threats to financial stability. The
Council has convened over 40 times, and just over the last year
has considered issues including market volatility, the debt
ceiling impasse, interest rate risk, developments in Europe and
emerging economies, housing finance reform, operational
incidents in the U.S. equity markets, and cybersecurity.
The broad range of these issues illustrates the importance
of an organization charged with looking across the financial
system to identify, monitor, and respond to risks to financial
stability.
Congress gave the Council a number of authorities to
address risks to financial stability. The Council has shown a
willingness to use these authorities and a commitment to
rigorous analysis.
It has designated three nonbank financial companies for
Federal Reserve supervision and enhanced prudential standards.
It has designated eight financial market utilities for enhanced
risk management standards. It has issued for public comment
proposed recommendations regarding money market mutual fund
reform. And it has made specific recommendations in its annual
reports regarding reforms to address vulnerabilities in the
tri-party repo markets and other areas.
In its first 4 years, the Council has also worked
extensively with the GAO and other oversight bodies, and we
respect their role in making recommendations to help the
Council fulfill its statutory responsibilities.
I want to now highlight some of the ways in which the
Council has built an organization framework that supports
openness and collaboration throughout its work. Beginning with
its very first meeting in October 2010, the Council voluntarily
adopted a transparency policy. The Council expanded that policy
earlier this year to improve the flow of information to the
public.
With respect to the nonbank designations process, the
Council has established a rigorous and fair process for
evaluating nonbank financial companies for potential
designation. Although a rulemaking was not required in this
context, the Council developed a rule and guidance regarding
this authority and provided the public with three separate
opportunities to comment on this approach.
The Council's careful analysis of individual nonbanks
include extensive interactions with the companies under
consideration. Together, for the three nonbank financial
companies that have been designated, the firms submitted
thousands of pages of information to the Council, met with the
Council or staff dozens of times, and each company received a
detailed written explanation of the Council's analysis before a
vote on the final designation was taken.
It is important to note that much of the Council's work,
particularly with regard to companies under consideration for
potential designation, relies on sensitive, company-specific
information that would not be shared by firms or regulators
without an expectation of confidentiality. The Council has a
statutory responsibility to protect the confidentiality of this
information, as its disclosure could result in destabilizing
market speculation.
Within this context, the Council is continually examining
how it can monitor emerging threats to the financial system
while also opening up more of its work to the public. In this
regard, the Council's annual report is an important example of
the Council's commitment to sharing information about its work
with Congress and the public in a clear and transparent manner.
Since its first meeting, the Council has received a number
of suggestions regarding its practices, including some from
members of this committee. Although it is a relatively young
organization, the Council has already demonstrated its
commitment to improving the effectiveness of its work and its
engagement with the public.
Consistent with that history, I expect that the Council
will consider potential changes to its nonbank designations
process in the coming months and will continue to evolve.
Thank you, and I look forward to your questions.
[The prepared statement of Mr. Pinschmidt can be found on
page 57 of the appendix]
Chairman McHenry. We now recognize Ms. Clowers for 5
minutes.
STATEMENT OF A. NICOLE CLOWERS, DIRECTOR, FINANCIAL MARKETS AND
COMMUNITY INVESTMENT TEAM, U.S. GOVERNMENT ACCOUNTABILITY
OFFICE
Ms. Clowers. Chairman McHenry, Ranking Member Green, and
members of the subcommittee, thank you for having me here today
to discuss our work on FSOC. As you know, FSOC was created to
address a regulatory weakness highlighted by the recent
financial crisis--namely, a lack of an agency responsible for
looking across the system to identify and respond to threats to
the financial system.
In September 2012, we issued our first audit report of FSOC
and made nine recommendations. Since that time, FSOC has taken
steps to address some of the recommendations. However, as we
reported in 2012, and our findings and recommendations made
clear, additional work is needed.
Our 2012 recommendations were intended to improve FSOC's
risk-monitoring functions, accountability, transparency, and
collaboration. Since 2012, as I said, FSOC has taken some steps
to address our recommendations.
For example, it has worked to improve communication with
the public by redesigning its Web site and making more timely
notices of upcoming meetings. FSOC has also developed bylaws
for its deputies committee, which is an important collaboration
improvement.
However, more work is needed to fully address our
recommendations. With the rest of my time, I would like to
highlight some key recommendations where we think additional
work is needed.
First, we recommended in 2012 that FSOC develop a
systematic and comprehensive approach to identify systemic risk
in emerging threats. We noted that FSOC's approach might not
help identify new risk that member agencies had not already
identified.
Two years later, FSOC continues to rely on largely the same
process. While OFR has made some progress in developing data
tools to support FSOC since the 2012 report, we observe that
these tools suggest that one tool is still under development
and the other is not risk-focused.
Second, related to accountability and transparency, we
recommended that FSOC keep detailed records of their closed-
door meetings. While no specific level of detail is required
for FSOC's minutes, the limited documentation of their
discussion makes it difficult to assess FSOC's performance.
FSOC officials said they have attempted to improve meeting
minutes that are provided to the public, but FSOC officials
said they do not plan to keep more detailed minutes or have
them transcribed because of the confidential information
discussed. We continue to believe the lack of detailed minutes
limits both transparency and accountability.
Also related to accountability, we recommended that FSOC
comprehensively evaluate whether the designations of financial
companies for enhanced supervision are having the intended
impacts. Congress intended that the designations would lead to
greater financial stability. These designations will likely
have other significant benefits and costs, both for the
designated firms as well as the Nation's economy.
Given these potential impacts, it is important that
retrospective reviews of the designations are undertaken. FSOC
has not yet begun preparations for or committed to conducting
such reviews. We have previously reported on the importance of
advanced planning for these reviews.
Finally, to improve collaboration and coordination, we
recommended that FSOC clarify its roles and responsibilities
among FSOC and its member agencies for systemic risk
monitoring, and adopt practices to coordinate rulemaking across
member agencies. FSOC officials told us they do not plan to
implement these recommendations because the overlapping
responsibilities for monitoring systemic risk has not been
problematic.
They also said FSOC lacks the authority to direct
independent agencies. We maintain that action within FSOC's
existing authority is needed, as our past work has shown that
the lack of clear roles and coordination can lead to
duplication, confusion, and regulatory gaps.
In conclusion, Mr. Chairman, FSOC has taken some steps to
address our recommendations, but more work is needed. We
believe that fully addressing our recommendations will improve
FSOC's systemic risk monitoring functions, allow Congress to
hold them accountable for results, and enhance collaboration
among FSOC's members.
Chairman McHenry, Ranking Member Green, and members of the
subcommittee, this concludes my prepared statement. I would be
happy to answer any questions at the appropriate time. Thank
you.
[The prepared statement of Ms. Clowers can be found on page
38 of the appendix.]
Chairman McHenry. Thank you, Ms. Clowers.
And thank you both for your testimony.
I will now recognize myself for 5 minutes for questions.
Can you please describe, Mr. Pinschmidt, to what extent the
FSOC and OFR have developed comprehensive mechanisms for
identifying and monitoring systemic risk?
Mr. Pinschmidt. Yes. Thank you.
The FSOC operates a very robust committee system to--
Chairman McHenry. I am asking very specifically here. We
only have 5 minutes, so if you can just get into the specifics
here.
Mr. Pinschmidt. Yes. I guess what I would say is it is
important to have some context in terms of the committee's
structure and--
Chairman McHenry. I am aware of the committee's structure.
I am asking, the GAO report is a pretty damning one when it
comes to this question of whether or not you have a
comprehensive systemic risk monitoring system, and they say you
do not. So what is your response to that?
Mr. Pinschmidt. I believe Ms. Clowers is referring to the
OFR Markets Monitor, which is a publication by the OFR that
provides a systematic overview of the marketplace and key
trends and developments, and it has been something that is
shared on a regular basis at the FSOC Systemic Risk Committee
on--
Chairman McHenry. Is that sufficient?
Mr. Pinschmidt. No. It is not really meant to be
sufficient. It is one input--
Chairman McHenry. What are the other ingredients for
sufficiency so you can measure systemic risk?
Mr. Pinschmidt. The other ingredients would be the other
working groups, the other areas of the different regulatory
communities that are focused on key areas of--
Chairman McHenry. So, as a matter of oversight, to make
sure that is, in fact, the case, how can I know that, when the
GAO in their audit says that you do not have that systemic risk
assessment?
Mr. Pinschmidt. The systemic risk assessment that Ms.
Clowers was referring to is viewed within the FSOC context as a
complement to its ongoing work throughout the committee systems
and the ad hoc groups that are focusing on specific risks.
Chairman McHenry. Okay.
Ms. Clowers, to this question, why does the GAO believe
that the FSOC and OFR have failed to develop comprehensive and
systemic mechanisms for identifying and monitoring systemic
risk?
Ms. Clowers. They lack such processes. They use the
Systemic Risk Committee to help identify risk, but what happens
in that committee is each member brings ideas and those ideas
bubble up.
What we are looking for is a comprehensive, systematic
approach or a common set of indicators that would look across
the system to identify potential threats, that these indicators
would be forward-looking, risk-focused, and less dependent on
who shows up to a meeting, rather that it be routine, everyone
would know which data they are looking at.
Chairman McHenry. Okay.
So, Mr. Pinschmidt, I want to bring something up, and I
know you are fairly well-versed in it. When you worked at
Morgan Stanley, you wrote a piece in June of 2008 about Lehman
Brothers. I know you have answered this question before, but
the piece is entitled, ``Bruised, Not Broken, and Poised for
Profitability,'' talking about Lehman Brothers. And going in
just 2 months before Lehman's bankruptcy and failure, you are
touting that they are on the road for profitability.
I bring this up not to embarrass you. You have obviously
written a lot. You have had a very long career. But this
highlights how difficult it is to really assess systemic risk,
does it not?
Mr. Pinschmidt. Yes. Certainly, I made the wrong call on
that, and a lot of other people did too. But what I would say
is, sort of more importantly, the market misjudged the impact
of Lehman's failure in terms of counterparties, other
institutions. And it just kind of reminds us today--and I think
to Ms. Clowers' point--that we need to make sure that there are
appropriate safeguards in place.
We need to make sure that there is increased transparency.
To the extent that firms are large and outsized, we need to
make sure that there are enhanced prudential standards and
there are steps taken in terms of resolution authority to--
Chairman McHenry. So to that question--
Mr. Pinschmidt. --the risks from a firm's failure.
Chairman McHenry. So to that question of transparency, that
is what we are here today talking about.
I want to move on. The FSOC recently announced that it is
taking ``a more focused analysis of industry-wide products and
activities to assess potential risks associated with the asset
management industry.'' So does this mean that the FSOC is no
longer going to designate asset management companies as SIFIs?
Mr. Pinschmidt. Congressman, what that means is--and I
think you are referring to the readout from the July 31st
Council meeting. At that meeting, the Council directed FSOC
staff and member agency staff to undertake an analysis of asset
management activities and their products.
That decision was--is driven by a recognition that asset
managers are different from other companies--
Chairman McHenry. Sure. But this was interpreted, so is
BlackRock still at stage two in this process?
Mr. Pinschmidt. Companies, unless they are voted on, remain
in a stage.
Chairman McHenry. So that is called purgatory, right? It is
neither heaven nor hell. It may not be so bad. It may not be
for any sort of length of time that you can determine. And you
just leave people in a suspended state of animation. Is that a
fair assessment?
Mr. Pinschmidt. The Council operates a three-stage process.
Stage one is based on public metrics that each company can
assess. The key threshold is $50 billion in assets, and then if
you trip one of five other metrics you are in stage two. Unless
the composition of the company's metrics changes, that company
remains in stage two.
Chairman McHenry. Forevermore?
Mr. Pinschmidt. Unless there is a vote.
Chairman McHenry. Okay. And could there be a vote to put
them back in stage one?
Mr. Pinschmidt. That would only be appropriate--a vote
isn't needed to put them into stage one. They would
automatically go back to stage one if the metrics changed and
therefore they didn't hit the thresholds to advance to stage
two.
What I would like to sort of stress on this is that stage
one is purely mechanical. There doesn't have to be any analysis
by the Council; it is based on publicly available data. If you
trip those metrics, you are in stage two, and therefore subject
to more evaluation by the Council.
Chairman McHenry. I have gone well over my time.
We will now go to Mrs. Maloney of New York for 5 minutes.
Mrs. Maloney. Thank you.
I think that there may be a disconnect between the
Council's duty to identify and mitigate systemic risks and the
tools that they have to work on it. For example, if the Council
identifies a particular company that is systemically risky, it
has by statute the tools to mitigate that risk by an SIFI
designation, which puts them under stronger regulation with the
Fed.
But if the Council identifies an industry-wide activity
which was really part of the prior financial crisis with the
credit default swaps and other activities that are systemically
risky, the most it can do to mitigate that risk, according to
the statute, is to issue a nonbinding recommendation to other
regulators.
So my question is, is it fair to ask the Council to
identify activities based on systemic risk but then not give
the Council the authority to do anything about any of these
activities except for a recommendation? I would like a comment
on that.
It seems to me that sometimes it is the activities that are
the most risky in a financial situation, not necessarily the
institutions, which may be reacting to a financial crisis that
was created by the risky activities. To me, I think the risky
activities should have more attention, really.
So my question is that, and I ask Mr. Pinschmidt.
Mr. Pinschmidt. Thank you, Congresswoman. What I would note
is that the Council has very strong convening powers bringing
regulators together across the financial system, and that in
and of itself is very important when looking at activities,
because activities don't necessarily impact individual
institutions and individual marketplaces; they stretch across
the financial system.
So in that convening power there are a number of steps that
the Council could take based on the nature of the risk, to the
extent risk is identified. One of the steps is just asking for
more information: working with the primary regulators; working
with the industry; asking for more information and getting more
detail and more data. A lot of times when risks are identified
it is because there is not enough information there, so that is
a very logical outgrowth of that process.
Other times, to the extent a risk is identified and there
is more work that a regulator can do, there are two options for
the Council. It can highlight a risk in the annual report or it
can issue a Section 120 recommendation to a specific regulator
regarding potentially taking some action.
So again, and I think in the broader context, though, it
starts a process, it focuses regulators, and there are a number
of authorities that can come out of that process.
Mrs. Maloney. Do you think that the Council should have the
authority to issue binding regulations to address serious
activities that are based on risk?
Mr. Pinschmidt. It is really not for me to answer that
question, but I would defer to the Council on that.
Mrs. Maloney. Okay.
Ms. Clowers, can you comment on whether the FSOC has the
tools it needs to carry out its statutory duties?
Ms. Clowers. It has the tools necessary and the people
necessary in the room to make decisions and carry out its
duties. Where we have recommended that we think additional work
is needed is work on the development of their systemic risk
monitoring functions.
There has been some discussion today of the different data
tools that are available, including those provided by the OFR.
We think those tools could be enhanced by making them more
risk-focused and forward-looking. And also, even the OFR
Advisory Committee has encouraged OFR to be more aggressive in
the development of their tools.
Mrs. Maloney. I would like to ask Mr. Pinschmidt, when the
Council is analyzing whether a company is systemically
important, they don't measure whether the failure of the
company would destabilize the system in normal times; they
measure whether it would destabilize the system in a period of
stress in the financial industry. Can you comment on how that
standard has affected the Council's analysis of whether
companies are systemically important and what are the benefits
or the drawbacks of that system?
Mr. Pinschmidt. That guidance was built into the final rule
on guidance for the nonbanks designations process, and
essentially the rationale behind that was a recognition that
rarely do firms fail in a vacuum; there is generally a
precipitating event, there is broader market weakness, economic
weakness. And so thus, it is appropriate to look at firms in
the context of not perfect markets, not terrible markets, but
not great markets either.
Mrs. Maloney. What are the drawbacks of that system?
Mr. Pinschmidt. I'm sorry, I--
Mrs. Maloney. What are the drawbacks of that system, of
just designating it in a time of extreme stress--and the
benefits? Do you think that is the right approach? Should we do
it just for financial stress times or also normal times?
Mr. Pinschmidt. I think it is a recognition that when a
firm is undergoing stress, there are generally precipitating
events and the market is not functioning generally--
Mrs. Maloney. So you support that approach. Thank you.
Mr. Fitzpatrick [presiding]. The gentlelady's time has
expired.
I am going to recognize myself for 5 minutes.
Good morning, and I appreciate your participation in the
hearing.
In his opening statement, Chairman McHenry, I guess
referring to the GAO report, identified FSOC as perhaps the
least transparent agency in all of the Federal Government. And
likewise, Mr. Delaney, in his comments, addressed concerns that
because of the significant influence that FSOC has in the
designation process, how critical it is that the thought
process, the reasoning, that it all be laid out and that it be
transparent.
So my question for you, Mr. Pinschmidt: Is it your position
that FSOC cannot be made more transparent than it is today?
Mr. Pinschmidt. What I would note is the FSOC really values
transparency, and--
Mr. Fitzpatrick. Could it be made more transparent?
Mr. Pinschmidt. Yes. I think that has been a continuous arc
since the first meeting 4 years ago.
Mr. Fitzpatrick. Specifically, what actions are you
prepared to take, including further clarification, more
detailed meetings, minutes, and--
Mr. Pinschmidt. Yes. I think there have been a number of
suggestions, including from this committee, and we have
received suggestions from outside stakeholders. And as I noted
in my oral remarks, we expect, in terms of at least the
nonbanks designations process, the Council will begin to
evaluate potential changes there.
And what I would note is, look, we are not--the Council
shouldn't be frozen in its ways. To the extent that there is
good feedback and suggestions out there that make sense, the
Council is open to considering those, and I expect that, again,
for--in the example of transparency, it is a balance for the
Council--
Mr. Fitzpatrick. Sure. Do--
Mr. Pinschmidt. --because the Council--sorry.
Mr. Fitzpatrick. Through August of 2014, you have had 42
meetings. Have any of those meetings been transcribed? Have any
of those transcriptions, if you have them, been released?
Mr. Pinschmidt. The practice of the Council has been to
release public minutes following the next meeting, once they
are approved.
Mr. Fitzpatrick. Where substantive matters are considered?
Mr. Pinschmidt. The minutes serve as the record for the
meeting.
Mr. Fitzpatrick. And how about executive sessions? Are
there executive sessions of the Council?
Mr. Pinschmidt. Certainly from time to time there--like
around Hurricane Sandy there were meetings that were held on
short notice to bring regulators together to respond to what
was going on.
Mr. Fitzpatrick. Mr. Pinschmidt, on a slightly different
matter, in testimony before the Senate Banking Committee on
September 8th, Governor Tarullo expressed his, what he called,
``pretty strong presumption'' that traditional or core
insurance activities do not pose systemic risk.
Former House Financial Services Committee Chairman Barney
Frank expressed the same view earlier this summer before this,
his old committee.
Do you agree with Governor Tarullo and Chairman Frank that
traditional or core insurance activities do not pose systemic
risk?
Mr. Pinschmidt. I haven't had the opportunity to speak with
Governor Tarullo or former Chairman Frank on that. What I would
note, in terms of the insurance analysis that has been done by
the Council, that has been done at a company-specific level,
looking at the designations authority. And the nature of those
determinations for the two insurance companies that were
identified was based on the size, interconnectedness, and
leverage, and other factors of those institutions, not
necessarily a reflection on core insurance products or
practices that were particularly highlighted.
Mr. Fitzpatrick. So the question is, do core insurance
activities--do they or do they not pose systemic risk?
Mr. Pinschmidt. The nature of the evaluation that was done
by the Council on the specific insurance firms related to those
firms' general size, structure, interconnectedness with the
financial system, and the impact of their potential failure on
market functioning.
Mr. Fitzpatrick. So your answer is yes?
Mr. Pinschmidt. What I am trying to say is the nature of
the analysis undertaken by the Council on those companies was
based on company-specific factors and what effect the failure
of those companies would have on the broader financial system.
Mr. Fitzpatrick. Governor Tarullo also noted that AIG and
Prudential were designated as systemic not because of their
core insurance activities but due to what he called
``nontraditional insurance activities,'' where runnability is
more of a concern, and also with respect to things that are not
insurance activities of any sort. Do you agree with Governor
Tarullo that to justify designating an insurance company as an
SIFI that one would have to find that the company engages in
activities that are not traditional insurance activities and
that do pose systemic risk?
Mr. Pinschmidt. I haven't had an opportunity to talk to
Governor Tarullo regarding his testimony, but the analysis that
was done for the insurance companies was company-specific
rather than industry as a whole, and it was based on the size,
leverage, and interconnections of those companies and how that
makeup could transmit to the rest of the financial system.
Mr. Fitzpatrick. I now recognize Mr. Delaney for 5 minutes.
Mr. Delaney. Thank you, Mr. Chairman.
MetLife is a 146-year-old company that has generally been a
pretty well-regarded company, and it is likely that they are
going to sue the United States over this designation, in part
because they feel like the process was bad. Do you consider
that a failure of the process?
Mr. Pinschmidt. I cannot comment on any specific companies
that have not been designated. What I can say is the Council
runs a very thorough and robust process.
I did note one example in my testimony. For one of the
companies that was ultimately designated, the Council and its
member agency staff met with or had phone calls with the
company 20 times over a period of a year. There were 200 data
submissions totaling 6,000--
Mr. Delaney. Did the members of the Council meet with the
senior management team of the company as a group?
Mr. Pinschmidt. Prior to a vote on the final designation,
the company was offered a hearing before the Council and the
company presented to the Council, yes.
Mr. Delaney. How much before the designation was that
presentation made?
Mr. Pinschmidt. That was 60 days before a vote on a final
designation. And it is worth noting that prior to that hearing,
the company was given a very detailed basis for the proposed
designation, roughly 200 pages long outlining the key views of
the Council.
So it wasn't the company coming in there blind, not knowing
where the Council was. They kind of had all the facts in front
of them; they could argue different points and present their
case.
Mr. Delaney. When you talk about the factors that went into
this designation, aside from activity-based analysis, which I
think your comment to the Chair was that you considered other
factors, and you talk about size and leverage--when you think
about leverage, do you adjust for the nature of the
liabilities? Because insurance companies have very long-dated
liabilities.
Mr. Pinschmidt. Certainly. This is not a mechanical
approach by any stretch. It is very specific; it is very
analytical. There is a lot of back-and-forth with the company.
There are significant questions from the Council side.
There are significant questions from the company side. So to
sort of force certain metrics based on where they sit and make
a determination would not be the right approach.
Mr. Delaney. When you looked at the designation of MetLife,
for example, did you factor into your analysis that MetLife, if
it were to be designated, or other insurance companies that
would be designated, would, in fact, as a result of
designation, get out of certain businesses that they are
currently in that have counterparty risks associated with them
and that those businesses would likely run or go from a large,
heavily regulated 150-year-old company into new startup
insurance companies that were being organized in fact to take
advantage of the fact that certain business activities would
have to leave MetLife?
Did you factor into your overall systemic risk analysis for
the good of the financial system that designation actually
forces activities out of large, well-regulated companies into
institutions that have lighter regulation, are not as well-
capitalized, and don't have as long of a track record?
Mr. Pinschmidt. The Council, as part of its ongoing risk
monitoring, is, of course, always looking at what are the
developments in the financial system, what is the impact on
financial market functioning--
Mr. Delaney. But my question is specifically as it relates
to a company, did anyone sit there and say, ``Well, if we
designate this company, the following businesses will likely
leave the company and they will go into new startup, largely
unregulated or lightly regulated institutions with limited
track records,'' and did that--did risk associated with that
transfer of activities from large, safe, big, long-term to new
startup, unproven, lightly regulated--did that--the risk
associated with that transfer, which I view there being risk,
was that factored into the risk cost, if you will, of
designation?
Mr. Pinschmidt. In terms of the company-specific
designation authority, the statute is clear on that front that
the Council must consider--must identify risks in terms of kind
of the remedy and what happens next, in terms of enhanced
prudential standards--
Mr. Delaney. But my question is, did someone sit at the
table and say, ``If we designate this company, then the
following businesses will likely go into other more lightly
regulated institutions or new startup companies''--yes or no,
was that considered?
Mr. Pinschmidt. That is not part of the statutory factors.
The Council is focused on risk identification--
Mr. Delaney. So downstream risk that is created from a
designation, right--because if you designate a company and it
is really big, and because of your designation it cuts itself
in half and it spins off a bunch of businesses and it gets spun
off to small, lightly capitalized, lightly regulated
businesses--the risks associated with that are not factored
into the designation. That is what I am hearing, at least.
Mr. Pinschmidt. Certainly, if that were to be the case, it
would be something that would be looked at across the broader
Council work streams and efforts. But in terms of the actual
designation decision, the statute is very clear that the
Council has to focus on risk identification and the Federal
Reserve Board is responsible for--
Mr. Delaney. It doesn't sound like a very balanced risk
approach, at least in my judgment.
I yield back.
Mr. Fitzpatrick. Mr. Bachus, the chairman emeritus of the
full Financial Services Committee, is recognized for 5 minutes.
Mr. Bachus. Thank you.
Welcome, Deputy Secretary. You concluded your oral
testimony by saying the Council has received a number of
suggestions regarding the process for evaluating nonbank
financial companies, and that you expect that the Council will
consider any potential changes in the coming months. I applaud
that statement.
And I wanted to point out to you that Mr. Neugebauer and I,
in 2012, asked for a GAO study, and they reported back that
Dodd-Frank requires the FSOC to periodically reevaluate its
designations of nonbank financial companies. Are you aware of
that requirement in Dodd-Frank?
Mr. Pinschmidt. Congressman, I believe you are referring to
the Council's intent to review at least every 5 years the
metrics for stage one, in terms of kind of the initial
threshold for companies that would be considered.
Mr. Bachus. Also, they actually said that you will conduct
a comprehensive assessment to determine whether the
designations are having the intended impact. Well, no, they
said that you don't have to do that. I'm sorry.
But they suggested that it would be a good idea that you
conduct an assessment after you have made the designation to
see whether that designation is having the intended consequence
of improving financial stability of the company and any risks
that they might have. Congressman Ross and Congressman Delaney,
who was just asking questions, have introduced a bill that I am
cosponsoring which calls for an assessment of intended impact,
which has been suggested by the GAO.
Of course, AIG, G.E, and Prudential already have those
designations made, with perhaps more on the way. Wouldn't you
agree that it may be very helpful and important to know whether
the designations are having the intended consequences, or
whether maybe they are even having some negative consequences?
Mr. Pinschmidt. Congressman, certainly we share, I think,
your goal on that. The Council, across all different markets,
and particularly with some of the largest institutions, is
constantly monitoring as to how things are playing out.
Specifically for designated entities, I would note that there
is an annual review process of each designation that takes
place, and that would--clearly we are not that far away from
the initial designations, but you could imagine scenarios going
forward as company businesses change, risk profiles change,
market functioning change--
Mr. Bachus. Do you make those public? Do you mean that
every year you will review the designations, and part of that
is whether they are having positive or negative implications--
Mr. Pinschmidt. The annual review is consistent with the
Council's statutory authority here focused more on the risk
identification, and that would logically encompass what has
happened to the profile of the firm, how are they engaging with
other market players, are there any material changes in their
business model and their riskiness.
Mr. Bachus. Right. But do you understand what I am saying?
Wouldn't it be a good idea once the designation is made maybe
on that annual basis to also say, ``Okay, after we made this
designation, this is what has happened, these are some
positives, these may be some negatives,'' where you could
adjust, or at least reconsider whether or not the designation
was even helpful?
Mr. Pinschmidt. Certainly in terms of how the designation
impacts market functioning and these specific firms, that is
considered on an annual basis.
Mr. Bachus. Okay.
Mr. Pinschmidt. I think to the general questions of market
functioning, that encompasses ongoing work at the Council--
Mr. Bachus. I would just say maybe take a look at that
legislation and give me your thoughts on it, and Mr.
Neugebauer, and maybe Mr. Ross, and Mr. Delaney. It is a
bipartisan thing.
Let me go quickly to AIG. Mr. Fitzpatrick was talking about
the runnability, and we know that was a credit default swap
thing where they wrote $430 billion, $440 billion worth of
credit default swaps; they didn't buy any. A lot of people
bought and sold.
So that didn't impair their insurance operations until
their credit rating changed. They had a tremendous credit
rating problem, and that then did impact their insurance. And I
can understand that designation if you have somebody doing
something over here which may be dangerous, cause credit rating
problems, and then impact their insurance market.
I am not sure how that would go with a Prudential or a
MetLife, and I just point that out to you. AIG really wasn't an
insurance problem; it was a gambling problem. And it was being
on one side of the market with $440 billion worth of debt and
no money to back it up if it failed. I don't see that with
G.E., Prudential, or MetLife.
If you would like to respond?
Mr. Pinschmidt. What I would note is that each designation
is company-specific. There is a core group of--there are 10
statutory considerations in a 6-category framework that comes
into play, but the factors that are looked at at each company
are very company-specific.
And, generally speaking, it is a combination of issues. It
is never one thing, or it hasn't been thus far one thing. So I
would just note that, again, it is a company-specific analysis
and it would be hard for me to kind of generalize.
Mr. Bachus. Thank you.
Mr. Fitzpatrick. And the gentleman's time has expired.
Thank you.
Mrs. Beatty is recognized for 5 minutes.
Mrs. Beatty. Thank you so much, Mr. Chairman, and Ranking
Member Green.
And thank you to our witnesses today.
We have talked a lot about being designated this morning as
an SIFI, so let me ask you these two questions: Last night, a
couple of my staff were singing the words to ``Hotel
California,'' and one of them said, ``Is this a Hotel
California scenario, where once designated a company, will you
remain an SIFI forever?''
If so, why? And if not, can you describe to me the process
of review, including the frequency and high-level
considerations in this review?
Mr. Pinschmidt. Thank you for that question. Maybe if I
could step back here and then sort of briefly outline the
process of review of companies for designation.
It is a three-stage process. Stage one is purely
mechanical, based on metrics and thresholds. To the extent a
company triggers those metrics, it automatically goes to stage
two.
And stage two is viewed as solely very preliminary. It will
be--Council member agencies will pull the 10-Q if it is a
public company, understand the company, do some initial
analysis, and understand to the extent that there are potential
risks here what might they be or what areas would there be
opportunities for further investigation and understanding.
To the extent that there is sufficient rationale to move a
company to stage three, there is a vote by the Council on that
action. And once a company is moved to stage three, that is
when the real work and engagement begins with the companies
under consideration.
The companies are notified at the beginning of that
process. As part of that notification there is a detailed
information request, numbering up to 10 pages long, with
potentially 100 to 150 different questions.
And that begins a very long, robust back-and-forth between
the Council and the company on just drilling down on the
business, understanding the risks. There is a lot of
opportunity for the company throughout that process to engage
with the Council, to ask questions. And certainly based on the
information that the Council is requesting of the company and
the nature of the review, the company will get a sense for what
the Council is interested in focusing on.
So then closing out stage three, there is a vote on a
proposed determination. If there is a proposed determination,
then at that stage the Council delivers to the company a very
lengthy basis outlining the reason why the Council is concerned
or the factors that the Council is highlighting in its
analysis.
And that is very important because it provides the company
the opportunity to sort of understand where the Council is, to
level set, what are the key issues, what are the concerns. To
the extent that they feel the Council is looking at the wrong
thing or is misguided, they can address that.
There is an opportunity for an oral hearing before the
principals of the Council. The one company that chose to accept
that offer came in, presented its case, again had a robust
back-and-forth. All the principals of the Council were there
and the Council took that information, incorporated it into its
thoughts, and then, only then, was there a final vote.
So, it is a very lengthy process from that standpoint.
Mrs. Beatty. Okay.
Mr. Pinschmidt. And then in terms of your initial question
on sort of, once you are designated, what happens next, there
is judicial review of a designations decision, and then
annually the Council does evaluate the decision. So to the
extent that the company's risk profile, footprint, and market
dynamics change, and they rise to a certain level of
materiality, then that would certainly come into play.
Mrs. Beatty. Okay. I have a second part, and the clock is
running out. I have several insurance companies in my 3rd
Congressional District of Ohio. If one of my local State
domicile's insurers were designated, can you briefly explain to
me what the process would be of determining issues of
regulatory jurisdiction between the Ohio Department of
Insurance and the Federal Reserve?
Mr. Pinschmidt. Yes. The role of the Council is on risk
identification. Once a company is designated, they are subject
to consolidated supervision by the Federal Reserve. That
supervision, as I understand it, will be mainly focused at the
holding company level and understanding the profile of the
firm; it will not necessarily encompass some of the insurance
activities and individual insurance subs.
Mrs. Beatty. And lastly, will the Federal Insurance Office
be involved in providing the guidance to the Fed? Because under
Dodd-Frank Section 120, FSOC has recommendation authority.
And we are out of time.
Mr. Fitzpatrick. The gentlelady's time has expired.
Mr. Hultgren is recognized for 5 minutes.
Mr. Hultgren. Thank you, Mr. Chairman.
First question to Mr. Pinschmidt: I am told that during a
Democrat staff briefing last week you told their staff that the
FSOC principals would not meet with the entities that are under
consideration for SIFI designation until an actual stage three
designation was recommended. In practice, this means that
companies will not have an opportunity to bring their case to
the voting members until the eve of the designation, and after
the decision is essentially made.
The Wall Street Journal reports that the FSOC has followed
this informal policy with the two asset managers that are
reported to be under consideration for SIFI designation. These
groups have not been able to meet with the FSOC principals or
even get confirmation from anyone at the FSOC that they are
even under consideration.
How is it not contrary to basic standards of administrative
procedure and due process for policymakers to draw what amounts
to policymaking conclusions prior to the complete consideration
of relevant facts and public input?
Mr. Pinschmidt. In terms of the interactions with companies
during the designations process, in stage three, which I
believe you are referring to, there is significant interaction
between the Council member agencies and the companies that
extends for a very lengthy period of time. There are
significant meetings; there are conference calls; there is
information flow in both directions.
And then after a proposed determination, the company has
the opportunity to request an oral hearing, and the Council has
noted that it expects to grant all requests for oral hearings.
But more importantly, as part of that oral hearing, the company
does receive a very detailed basis--sometimes 200 pages long--
outlining the Council's key concerns about the company and
providing the company an opportunity to respond.
Mr. Hultgren. Your policy, to me, appears to be in direct
violation of due process. It feels like the decision has
already been made. There may be hearings after that point, but
for them not to hear sooner than the designation seems like a
direct violation of administrative procedure.
Let me move on.
Is FSOC aware that the New York Superintendent of Financial
Services, which is MetLife's chief regulator, wrote Treasury
Secretary Lew on July 30, 2014, to encourage FSOC to reconsider
a formal SIFI designation for MetLife? Mr. Lawsky argued
against an SIFI designation because: one, MetLife does not
engage in noninsurance activities that create an appreciable
systemic risk; two, in the event that MetLife or one or more of
its insurance subsidiaries were to fail, DFS and other
regulators would be able to ensure an orderly resolution; and
three, MetLife is already closely and carefully regulated by
DFS and other regulators.
Is it not concerning that MetLife's chief State regulator,
who is no doubt intimately familiar with the company's business
portfolio and any relevant risks, is so adamant against an SIFI
designation? Will you commit to factoring his concerns into any
final designation decision of the company?
Mr. Pinschmidt. Congressman, unfortunately, I can't comment
on letters relating to actions that haven't necessarily been
taken by the Council. What I can note is that as part of the
work of the Council on the designations authority, there is
broad consultation not just within the Council and the members
of the Council, but also at the State level.
Mr. Hultgren. Mr. Pinschmidt, has FSOC conducted any
analysis to determine how applying risk-based capital standards
to insurers will affect the amount of coverage that insurers
can offer? Could this ever cause the cost of insurance to rise
to a prohibitive level? May there come a time when it is
impossible to obtain certain kinds of insurance coverage
because insurance companies that have been subjected to bank-
like capital standards simply won't be able to afford to offer
it?
Mr. Pinschmidt. Congressman, on that front, the Council is
focused on risk identification. The enhanced prudential
standards for insurance companies or designated entities will
be developed by the Federal Reserve Board. My understanding is
that they will make efforts to tailor them to the specific
characteristics of the insurance industry, but as part of that
process, I would expect there would be some consultation with
the Council.
Mr. Hultgren. I hope there would also be a consideration of
the risk to consumers of losing options--insurance options--
that could be there because of your activity driving up the
significant cost to insurance companies. Certainly, that would
be a more significant risk to the marketplace.
Let me finish up with one last question. Should FSOC show
greater deference to an industry's primary regulators in making
SIFI designation decisions?
Mr. Pinschmidt. Certainly the Council looks to regulators
and its members with industry expertise to hear that expertise
as part of the discussion. The nature of individual company
designations, however, encompasses broader market dynamics.
The companies that are considered do not necessarily solely
impact the companies within their industry. They can impact
market functioning across asset classes, across industries.
Therefore, it is also appropriate to hear the viewpoints of the
broader Council members.
Mr. Fitzpatrick. The gentleman's time has expired.
Mr. Hultgren. My time has expired.
I yield back. Thank you.
Mr. Fitzpatrick. Mr. Heck is recognized for 5 minutes.
Mr. Heck. Thank you, Mr. Fitzpatrick--Mr. Chairman. Has a
nice ring to it, sir.
Ms. Clowers, I have this bias that we are always fighting
the last war with the last approach. It is like we are driving
with our eyes transfixed in the rearview mirror.
That is why I was so intrigued by part of the language in
your report, if I may quote briefly, ``Second, in 2012 we
recommended that FSOC develop more systematic, forward-looking
approaches that would help in separating emerging threats to
financial stability from more current risk and prioritizing
them in its annual report. Since then, FSOC made some progress
in addressing this recommendation but could do more.''
Would you give a specific and concrete example of how they
could do more in this regard?
Ms. Clowers. Certainly. In looking at the most recent
annual reports, it does look like they have become more focused
in terms of identifying current and emerging threats. But
still, they continue to report them together and they are not
prioritizing those threats. And in talking to FSOC officials,
they don't plan to prioritize the threats because they realize
that could direct people's attention to certain areas.
But that is exactly what we think should happen. There is
not infinite, limitless resources, both among the regulators
and the companies, and providing more specifics in terms of the
priorities of the threats would be helpful in directing scarce
resources.
Mr. Heck. So you think they should separate current from
emerging and prioritize them?
Ms. Clowers. Correct.
Mr. Heck. When it relates to emerging threats, again, be
specific and concrete, how would they go about that analysis
and evaluation? Give me an example of the kind of thing that
might manifest itself in that regard, if you would, please.
Ms. Clowers. Certainly. Start with what we have seen in the
past is, for example, the debt of the government is listed as
an emerging threat, when it was--I think it was listed in 2012
when most anyone who was reading the papers could realize that
was a current threat.
There are also threats that would come and go off the list
without any explanation of why. For example, modeling risk of
different companies--it had appeared one year, wasn't there the
next year, so you don't know why.
To go to your question about how they could do a better
job, it is using the tools that are under development,
particularly the financial stability monitor that is a
promising tool to develop a common set of indicators that would
look across the system. But again, it must be forward-looking.
To date, those--the metrics aren't forward-looking and goes
to your point. It is looking at sort of what we know today and
not what we know could happen in the future.
Mr. Heck. Right. Thank you.
Mr. Pinschmidt, why don't you keep transcripts?
Mr. Pinschmidt. The meeting minutes that are produced by
the Council generally serve as the official record of the--
Mr. Heck. They are not transcripts. Why don't you keep
transcripts?
Mr. Pinschmidt. Congressman, the challenge for the Council
is, there is a clear recognition that transparency is
important, and we have taken a number of steps over the years
to improve our transparency--
Mr. Heck. Mr. Pinschmidt, why don't you keep transcripts?
Mr. Pinschmidt. As I was trying to note, the obligation to
transparency has to be balanced with an obligation to protect
confidential, supervisory information. The nature of the
Council meetings involves generally very highly sensitive,
confidential company information, broader industry
information--
Mr. Heck. So does the FOMC. They keep transcripts but they
retain them for a period of time. Why don't you keep
transcripts?
Mr. Pinschmidt. The practice has been to have the official
minutes serve as the record for the Council--
Mr. Heck. Why don't you keep transcripts?
Mr. Pinschmidt. Congressman, the practice has been to have
the minutes serve as the official record for Council meetings.
Mr. Heck. So what I am hearing you say is you choose not to
keep transcripts.
Mr. Pinschmidt. The official minutes have served in that
capacity.
Mr. Heck. No, they do not. Official minutes are not
transcripts.
Mr. Pinschmidt. Congressman, I recognize your concerns on
this, but the challenge for the Council is, the Council is
charged with looking across markets, looking across
institutions, discussing systemic risk. Those conversations, by
their very nature, are very sensitive and confidential and--
Mr. Heck. So do you believe they are--you literally believe
they are even more sensitive than what the FOMC discusses?
Mr. Pinschmidt. I really can't comment on the--
Mr. Heck. Well, they are not. And you should keep
transcripts.
I yield back the balance of my time.
Mr. Fitzpatrick. The gentleman yields back.
The Chair recognizes the gentleman from Pennsylvania, Mr.
Rothfus, for 5 minutes.
Mr. Rothfus. Maybe if we can continue with that line that
my colleague was asking about on transcripts, I mean,
transcripts can be kept confidential, can't they?
Mr. Pinschmidt. I am not really sure about that. I really
have no basis to respond there.
Mr. Rothfus. When FSOC proposes to designate a company as
an SIFI and there are meetings being held at FSOC to discuss
that, there is going to be an exchange of ideas and comments
back and forth, I would assume, yes?
Mr. Pinschmidt. Yes. So, Congressman, certainly in terms of
individual proceedings regarding individual companies, the
Council makes every effort, particularly in stage three, to
communicate with the company, have a two-way conversation, make
sure that the--
Mr. Rothfus. Is the company there, though, when you are
discussing whether or not to designate it as an SIFI,
internally?
Mr. Pinschmidt. After a proposed determination the company
has the opportunity to present to the entire Council--
Mr. Rothfus. But are they there when you are making the
determination and the conversations are going back and forth
among the committee members?
Mr. Pinschmidt. Certainly the substance of the many company
meetings with the Council member agencies and, in fact,
presentations--
Mr. Rothfus. I am talking about when the determination is
being made among FSOC members. And that is where we are
wondering about what the conversations are. And that is why we
think, personally, that it is important to have a transcript,
so that after the designation is made and the company wants to
come in and find out what was going on, they can look at the
transcript. Wouldn't that be fair?
Mr. Pinschmidt. In terms of the record for the company, the
Council provides a 200-page document to the company before a
designation has been made.
Mr. Rothfus. But the company is not going to have access to
the internal deliberations of the committee if they can't be
looking at transcripts of what was going on.
Mr. Pinschmidt. But the company will have access to the key
concerns and factors cited in the Council's proposed
determination and has an opportunity to respond to that.
Mr. Rothfus. Ms. Clowers, GAO made many recommendations to
FSOC in its 2012 report that would assist in shedding some
light on the way FSOC makes its decisions. In your written
testimony you get into some of this, but could you tell us how
many have been implemented to date?
Ms. Clowers. We have seen progress on a few of the
recommendations dealing with, for example, the communications
with the public, redesigning their Web site. They have also
made more information or more timely notices of their meetings
with the public. We also saw steps in terms of trying to
enhance collaboration among their committees by developing
bylaws for their Deputies Committee, which we think is an
important step.
But as I said in my oral statement, we believe additional
work is needed on a number of the issues you are highlighting,
from transparency and accountability issues.
Mr. Rothfus. So specifically, what recommendations haven't
been implemented?
Ms. Clowers. To date, we have not closed any of the
recommendations. We continue discussions with the Council on
all of them.
For example, on the issue of the transparency that you have
been discussing in your comments, we continue to look for
additional steps by the Council to enhance the transparency of
their decision-making. For example, with the minutes, if they
are transcribed, that would provide a record not only for
transparency but accountability, as you are suggesting, for
future decision-makers to go back and to have a better
understanding of the deliberations.
Mr. Rothfus. One of the recommendations that you made was
for FSOC to more fully incorporate key practices for successful
collaboration. I think that would mean that FSOC should engage
with regulators, industry, and academics. Has FSOC done this,
from your perspective?
Ms. Clowers. They have taken some steps to enhance
collaboration. I know they have had different industry in for
meetings, from asset managers to others. We continue to look
for additional steps to be taken.
Part of that recommendation was for FSOC to play a greater
role in coordinating rulemaking among member agencies. We
think, given FSOC's position of bringing together all the
member agencies, they have an opportunity to create a forum for
that type of discussion.
Mr. Rothfus. Mr. Pinschmidt, is FSOC in the process of
implementing any of the outstanding recommendations?
Mr. Pinschmidt. Yes. What I would say is, we certainly
value the work of the GAO. They bring a very important
perspective to our work and--
Mr. Rothfus. Which of the outstanding recommendations are
you in the process of implementing?
Mr. Pinschmidt. I think we are continuing to talk to them
about all of them. And we have taken some steps on a number of
their recommendations.
Mr. Rothfus. Can you tell me one of them that you are
currently implementing?
Mr. Pinschmidt. I would point to, back in May the Council
revised its transparency policy. That was a result of a months-
long review based largely on the GAO input. And as a result of
that review, what we do now is we post meeting agendas one week
in advance, and on the day of an actual meeting we provide a
readout detailing what was discussed--
Mr. Duffy [presiding]. The gentleman's time has expired.
The Chair now recognizes the gentleman from Nevada, Mr.
Horsford, for 5 minutes.
Mr. Horsford. Thank you, Mr. Chairman, and Ranking Member
Green.
I want to thank both of the witnesses for being here today,
and I really associate myself with the comments of my
colleagues on both sides of the aisle about the need for review
of some of the methodology as well as greater transparency and
improvement in that area.
I do want to shift my question, though, to an area that has
not been discussed yet this morning, which is one of the
fundamental issues that led to the economic collapse in 2008,
and that was the housing crisis. I am from Nevada and our
housing market has still not recovered; we have the most
unstable housing market in the country, with about a third of
our homes at every income bracket upside down in value, some of
them as high as 50 percent or more.
It is my understanding that the GAO report, in its most
recent report, noted that the FSOC should develop a systematic
approach to identify potential threats to the financial
stability.
So, Mr. Pinschmidt, as you continue to look at threats to
the market's financial stability, can you assure us that the
health of the housing market will not be ignored? And what
strategies is the FSOC pursuing in that respect?
Mr. Pinschmidt. Certainly. The housing market has been
something that has been highlighted 4 years running in the
Council's annual report, and there is clearly more work to be
done there in terms of the actual recovery, but also in sort of
building out the structural mechanisms in the housing market
following the collapse in 2008 and 2009.
In terms of the annual report, it is something that
recognizes when there is a risk that is outstanding and needs
to be addressed, and it serves as a good barometer for what the
Council is focusing on. So to the extent that this has been
highlighted as a recommendation 4 years running now clearly
indicates that this is a priority and ongoing work.
Mr. Horsford. And so, what is being done? What discussions,
what review? You said that one of the 40 meetings that you had
was on the housing finance reform. What areas have you pursued
and what recommendations are coming from that analysis?
Mr. Pinschmidt. There are two sides to, generally, the
Council's engagement on this issue. Clearly, there are a number
of staff working groups and regulators with specific equities
in this. There is the structural issue, in terms of housing
finance reform, and then there is the broader issue, which I
think you were alluding to, in terms of the very slow recovery
and the impact on consumer spending, the impact on the economy,
and broader issues. So, it is a two-front process.
Mr. Horsford. Ms. Clowers, what would you suggest, from the
GAO perspective, on this issue of the housing crisis as an
emerging issue that is still very much a priority, or should
be, for the FSOC to be working on?
Ms. Clowers. I think it goes to our recommendations about
the need to develop a systematic and comprehensive approach to
identifying both current and emerging threats, that developing
a common set of indicators across the system would allow
regulators to determine where there might be threats emerging.
And I would encourage FSOC to continue to work with OFR to
develop those tools so they are risk-focused and forward-
looking.
Mr. Horsford. Thank you.
I would like to also ask about an issue that I have heard
from one of our major industries in Nevada, which of course is
gaming, and the fact that there is some concern that as a
nonbank industry that does issue credit in the course of their
business, that this is an area where FSOC may be pursuing. Can
you give me some indication of what FSOC is thinking from the
perspective of a major industry like gaming?
Mr. Pinschmidt. I can't really comment specifically, but
what I can note is the only nonbanks that are eligible for
designation--and obviously there are other metrics and
thresholds, but there has to be initial determination that 85
percent of revenue or gross assets are in the business of
finance or financially related. So I am not sure if that
applies to the particular example that you noted, but I would
throw that out there.
Mr. Horsford. Okay. From a transparency standpoint--
Mr. Duffy. The gentleman's time--
Mr. Horsford. --it would be helpful to get that information
out, because there are concerns.
Mr. Duffy. The gentleman's time has expired.
The Chair now recognizes the gentleman from Kentucky, Mr.
Barr, for 5 minutes.
Mr. Barr. Thank you, Mr. Chairman.
Mr. Pinschmidt, moral hazard is a common justification for
regulation, but it can also be exacerbated by government
intervention. A criticism of the SIFI designation process is
that being officially identified as too-big-to-fail can
actually increase the moral hazard by incentivizing
increasingly risky investments since taxpayers, and not
shareholders or creditors, are likely to bear the costs.
Is it possible that an SIFI designation or a designation
for enhanced prudential supervision would actually exacerbate
moral hazard for an investment fund, for example, rather than
reduce that risk?
Mr. Pinschmidt. The nonbank designations authority is
designed to actually recognize where companies are large,
interconnected, and where their material financial distress
could pose a risk to financial stability. It is not designed to
prevent material financial distress.
What happens after a designation is the Federal Reserve
Board issues enhanced prudential standards, and those are
designed to basically put some safeguards in there. To the
extent that the company was to get into trouble, they would
have more capital.
But also, there are other efforts that come into play, too.
If failure is inevitable, then there is a resolution authority
and living wills, and those are designed to manage that failure
in a more effective way by limiting the collateral
consequences--
Mr. Barr. But what about this idea that designation as an
SIFI actually would have the potential to increase risk because
you are giving that institution a special designation that
provides a layer of protection from the taxpayer and not from
shareholders or creditors?
Mr. Pinschmidt. The tools that come into play after
designation are designed to basically make it so that a company
can fail without threatening financial stability.
Mr. Barr. Let me just shift gears here. Putting aside kind
of exotic insurance products like credit default swaps, for
traditional insurance activities like life insurance, how would
traditional insurance activities pose a systemic risk to the
financial system?
Mr. Pinschmidt. The Council, in its evaluation of certain
insurance companies under Section 113, that has been a company-
specific exercise, looking at the nature of those companies,
the nature of their interaction, the leverage, the balance
sheet exposure, understanding the impact of those specific
companies if they were to get into trouble and fail and what
would that impact be on the broader financial system. It didn't
necessarily take into account specific activities; it was more
company-focused.
Mr. Barr. Well, okay. If it is company-focused and you have
a hypothetical company that, again, does not engage in exotic
insurance products like a credit default swap, like an AIG, but
it is just a traditional life insurance company, would FSOC in
any circumstance view that as a systemically risky company?
Mr. Pinschmidt. It is all situational-dependent, as you can
imagine. I think the key threshold for an FSOC designation is
if that company's failure--it is--designation doesn't sort of
contemplate, ``Is the company likely to fail? Is there
something going wrong?'' It doesn't take any of that into
account.
It is, ``What happens if a company is failing? What would
be the impact on the broader market system?'' And certainly
activities can come into play on that, but generally speaking,
for the companies that have been evaluated thus far, it has
been on the company-specific factors.
Mr. Barr. Final question--I want to talk about the Form PF,
which has been described to me as a very onerous form. It is a
form that I am told asset managers must provide to the SEC, the
CFTC, and FSOC for systemic risk assessments. And the data that
is required in filling out these forms and submitting these
forms is apparently very voluminous and there are no clear
procedures for how these forms are used by the relevant
agencies.
So the question is, who is reviewing these forms? Are they
materially beneficial to the regulators and to FSOC in terms of
evaluating systemic risk? Because there is apparently
tremendous cost associated with assembling and reporting the
data associated with these so-called Form PFs. What is the
benefit and what is happening with that submitted paperwork?
Mr. Pinschmidt. Congressman, in terms of the Form PF, those
are submitted by the--generally the hedge fund industry to the
SEC.
Mr. Duffy. The gentleman's time has expired.
The Chair now recognizes the gentleman from New Jersey, Mr.
Garrett, for 5 minutes.
Mr. Garrett. Thank you.
I just have a couple of questions. In Ms. Clowers testimony
she states, ``Even if FSOC determines that some information
should not be made public, its current practices do not provide
detailed records even for policymakers, including members of
FSOC, to assess decisions.'' Not only do I find that appalling,
but obviously from a bipartisan perspective, members from both
sides of the aisle find it appalling that more information does
not come out and the transcripts do not come out.
So, first question: Who made the determination that
detailed information and the transcripts would not be kept? Who
was the person who made that determination?
Mr. Pinschmidt. Congressman, the practice of the Council
has been--
Mr. Garrett. I know the practices. Someone had to make the
decision. Did you make the decision to do that--to keep it
secret?
Mr. Pinschmidt. Congressman, I think it is a reflection of
the nature of the--
Mr. Garrett. Did they have a vote on it at some point in
time?
Mr. Pinschmidt. If there was a vote, that would have been
disclosed.
Mr. Garrett. Okay. So there was never any vote, it just--
you never did it.
You have heard from both sides of the aisle that we believe
that information should be heard. Did you hear that from both
sides, from Democrats and Republicans just now?
Yes. That is a yes.
Will you go back and now look in to see how this
information can be kept confidential in the manner that you
think it needs to be kept confidential but still provide the
transcripts? Will you make that commitment to us today?
Mr. Pinschmidt. Congressman, what I will say as part of my
remarks, in terms of my oral statement, was that the Council is
a young organization--
Mr. Garrett. Will you go back and make that recommendation
to do so?
Mr. Pinschmidt. We recognize that there are areas that we--
Mr. Garrett. Will you make that recommendation--I just need
a yes or no.
Mr. Pinschmidt. I can go back and get you more information
if that would be helpful.
Mr. Garrett. So you are going to keep it secret until some
future date.
You also talked, as far as other secret information that
you continue to keep is with regard to the annual review. You
told us what the annual review is and you said you have already
reviewed some of these companies and you actually did it with--
for G.E. and Prudential I believe, right?
That is a yes?
Mr. Pinschmidt. That is correct.
Mr. Garrett. That is right.
For their annual review, I think, as far as I can tell, you
simply sent out a notice to these companies saying that, ``You
are still an SIFI.'' Is that basically correct?
Mr. Pinschmidt. After the review, that is correct, yes.
Mr. Garrett. After the review. Was the review the exact
same process that you had for the initial review? In other
words, did you go through the entire three-stage process, allow
the executives to come back in and sit down and go through all
that information again?
Mr. Pinschmidt. The annual review was based--again, we are
sort of in a unique situation here because it was just under 12
months after the--
Mr. Garrett. Okay.
Mr. Pinschmidt. --initial designation--
Mr. Garrett. Right.
Mr. Pinschmidt. --but the annual review--
Mr. Garrett. That is annual, 12 months.
Mr. Pinschmidt. Yes. So the annual review took into account
the key factors that weighed on the decision to designate.
Mr. Garrett. So they don't get a chance to come back on
each annual review to say, ``Well, this is our interpretation
of this, and this is our interpretation of that?''
Mr. Pinschmidt. Each company is provided--before the annual
review commences they are notified and they are offered the
opportunity to submit information and--
Mr. Garrett. Submit information, but it is not the exact
same process as the first time around, to come in with the
staff and what have you and sit down and go through it, just as
you said for the first time?
Mr. Pinschmidt. At this stage, it is a different spot.
Mr. Garrett. Will you recommend that it be changed back so
that the annual review is commensurate with the first review?
Mr. Pinschmidt. Congressman, certainly the spirit of your
remarks and the suggestion about ways to improve, I think the
Council is taking a lot of that in, and to the extent that
there are ways to improve certain processes, including annual--
Mr. Garrett. The Council is taking a lot into review. Ms.
Clowers and others have made recommendations, but it doesn't
seem that--you may hear them, but you may not implement them,
is our concern.
When you make this analysis for these companies and others
and you are looking at across the horizon, as far as systemic
risk, one of the items we heard from another panel is the ad
hoc nature of intervention by the Fed, under Section 13-3 in
the last case, that led to uncertainty in the marketplace. Is
that something you look at too, as far as you look across the
horizon as far as systemic risk potentialities--the ad hoc
nature of the implementation of 13-3 by the Fed?
Mr. Pinschmidt. So you are referring to the use of 13-3
during the crisis?
Mr. Garrett. That is what they did in the past, and they
saw that that ad hoc nature some economists said led to the
uncertainty in the marketplace and exasperated things. So now
going forward, understanding that the Fed still has those
powers, do--in a changed manner under Dodd-Frank, of course--do
you look at that as being a potentiality for a systemic risk
going forward?
Mr. Pinschmidt. There is certainly a number of factors that
are considered as part of the designation process, and--
Mr. Garrett. I am not talking about the designation
process, per se. I am looking into seeing what the Fed's powers
are and how that may cause a systemic risk.
Mr. Pinschmidt. That is not something I am directly
familiar with, no.
Mr. Garrett. You are not just looking at companies. Your
own analysis shows that you are looking at monetary policy and
other governmental policies and spending and what have you. You
look at all those things, don't you?
Mr. Pinschmidt. Yes, to the extent certain issues impact
the financial functioning and--
Mr. Garrett. So is 13-3 one that you look at?
Mr. Duffy. The gentleman's time has expired.
Mr. Garrett. Could he just answer--
Mr. Duffy. The gentleman may answer the question.
Mr. Pinschmidt. I can certainly get back to you on that
one.
Mr. Garrett. Thank you.
Mr. Duffy. The Chair now recognizes the gentleman from
Texas, Mr. Green, for 5 minutes.
Mr. Green. Thank you, Mr. Chairman.
And I thank the witnesses for appearing.
I would also like to thank the staff for the outstanding
job that they have done in preparing us for this hearing.
Much has been said about insurance companies--about them
being regulated, about them having oversight. And to some
extent, I think these are some statements that merit a lot of
credibility.
But we also have to remember that AIG was an insurance
company. AIG was a regulated insurance company. AIG was also
engaged in capital markets, credit default swaps, derivatives.
FSOC exists in great part because of an insurance company,
AIG, that was ostensibly holding the world together. It is
unbelievable what the length and breadth of AIG's involvement
in capital markets was. And I thank God we have an FSOC that
can look across the entire spectrum and spot the AIGs of the
world before they become a systemic risk and have an enormous
impact on our economy.
This process that FSOC has is something that Congress
accorded it, for the most part, in that if a company is
displeased with the decision, that company has the right to
appeal. So it doesn't have to live with what FSOC concludes; it
can appeal.
A part of that process means that you go back to FSOC
itself, but that is not unusual. In court when you file a
motion for a new trial, the judge who heard your case is the
judge who determines whether you should get a new trial. If you
appeal beyond that, you can go to a district court, Federal
district court. We trust the court system in this country.
Appeal is a process that every person has if you are sued
or if you file suit and you don't like the decision. And it is
interesting to note that when people lose, people appeal. They
don't always win when they appeal, but they can appeal.
And corporations are people, my friends. Corporations do
what people do. When they lose, they appeal. This doesn't mean
that FSOC hasn't done its job because a corporation is
disenchanted with the process or disenchanted with an appeal.
That is what happens. That is the American way.
Let's talk for just a moment about who really is impacted
by what we are doing today, because to listen to what is being
said, you would think that this is a big dispute between mega
corporations and the government. But this is really about
people.
It is about the people who had their homes foreclosed on--
3.2 million of them when we had the crisis. And by the way,
minorities were disproportionately impacted. Seventy percent of
African-Americans were likely more impacted with foreclosures
when this took place.
$3.7 trillion in real estate wealth lost. That hurt
schools. That was an impact on the tax base.
This is what we are trying to protect with Dodd-Frank and
FSOC--people, not mega corporations, not the AIGs of the world.
We are trying to look into them and make sure they don't do
what was done again.
26.2 percent in pension value lost. $7.4 trillion in stock
market wealth lost. That is about $66,200 per household.
These are real people who suffered. I was there when we
took that vote on TARP, and I saw the stock market as it took
its 778-point decline. I got the calls the next day from people
who were talking about their 401Ks.
Real people suffer. This is about more than mega
corporations doing battle with the government. Evictions: with
8.8 million jobs lost, people got evicted.
I stand with the people, and I stand for FSOC doing its job
because if it doesn't, real people will be hurt.
Thank you, Mr. Chairman. I yield back.
Mr. Duffy. The gentleman's time has expired.
The Chair now recognizes the gentleman from California, Mr.
Royce, for 5 minutes.
Mr. Royce. Thank you very much, Mr. Chairman.
And I appreciate Mr. Pinschmidt being with us today. I will
go back to something that Chairman McHenry mentioned, and that
was following the FSOC's July 31st meeting, the Council
announced that it would take a more focused analysis of
industry-wide products and activities, and in the asset
management industry they would do this this way rather than
designating specific asset managers as systemically risky.
So it is my understanding there has been a working group
set up, or maybe about to be set up, to look at these products
and activities. I have maybe five questions here that I would
just ask you, and then you can give me your response.
But if you want to list these as I go through them, the
first would be, can you tell us the makeup of that working
group, and the timeline for a review? Will there be a report
put out for public comment at the conclusion? Does the OFR have
a role in the process, I would ask? And will there be
additional roundtables where all stakeholders can participate?
Mr. Pinschmidt. Congressman, you are right. Following the
July 31st meeting, the readout for that meeting noted that the
Council asked staff to undertake a detailed review of asset
management activities and products. The Council has long
recognized that asset managers are different than perhaps other
nonbanks, and that was part of the reason in the 2012 final
rule on the designations authority that the Council noted that
additional work needed to be done, and that was the impetus for
the OFR study, which identified certain activities.
So to the extent that work is being done there, clearly
when you look at asset managers and you compare them to other
nonbanks, even the largest asset managers, their balance sheets
are substantially smaller than other nonbank firms. There is
very little leverage.
There is an agency business model, which is quite distinct
from a balance sheet business model. So to the extent that a
company was in distress, they are not necessarily selling their
own assets. The customers are kind of--it is their decision.
Mr. Royce. Right.
Mr. Pinschmidt. So these are different--oh, sorry.
Mr. Royce. But the makeup of the working group and the
timeline for review, if you could give me some information on
that?
Mr. Pinschmidt. In terms of the process going forward--
Mr. Royce. Right.
Mr. Pinschmidt. --that is a decision that is being worked
out at the Council level and--
Mr. Royce. That decision hasn't been made yet? Will there
be a conclusion put out for comment, do you think?
Mr. Pinschmidt. To the extent the Council recognizes the
importance of engaging with the public on its work, and that
was part of the reason the Council hosted an asset management
conference back in May. So we would expect, to the extent that
this work moves forward, additional sort of consultation and
collaboration--
Mr. Royce. Maybe a public comment section--session at the
end, then, would be appropriate, you are anticipating.
Does the OFR have a role in the process?
Mr. Pinschmidt. Certainly all the member agencies of the
Council will be involved.
Mr. Royce. Have the FSOC participants agreed that they will
not meet with entities under consideration until an actual
stage three designation is made, or--do you know? What is going
on, on that front?
Mr. Pinschmidt. Congressman, in terms of the nonbanks
designations process, what I would note is that we did put out
the final rule that was subject to three rounds of comment. We
recognize that was done 2 years ago now, and we have gone
through a process with three different companies for
designation.
There are clearly new facts on the ground. The Council
doesn't want to be frozen in its ways and its process. So as I
noted in my oral remarks, certainly the Council recognizes we
have received a lot of input; we have gone through the process
a few times and we are evaluating--
Mr. Royce. Let me ask you this question: Is this policy
formalized or documented? Are you putting out a documented
process here that--
Mr. Pinschmidt. Yes. In terms of the interpretive guidance
that accompanies the final rule, it notes the interaction
between the Council and this is also supplemented in the
hearing procedures for the designations process--it notes the
interaction between the Council and companies under
consideration.
Mr. Royce. We have talked about transparency and due
process during this hearing, and I think a simple solution here
would be publishing what the process actually is regarding
interaction with companies in stage two, or purgatory, I think,
as our colleague rightly termed it, and that might be your best
way forward, if I might suggest.
Thank you.
Mr. Duffy. The gentleman's time has expired.
The Chair now recognizes himself for 5 minutes.
Mr. Pinschmidt, I listened to your opening statement and I
was taken with your commitment and support for openness,
transparency in policy, and a flow of information. I think
those are some of the phrases that you used in your opening
statement.
As I have listened to the testimony today, I have great
concern that FSOC isn't open, it isn't transparent, and there
is not a good flow of information. And I think you have seen a
bipartisan concern in regard to the information that flows, in
regard to transcripts from the meetings, from FSOC.
And I think all of us recognize that there are things that
cannot be disclosed. There is confidential information that you
have access to that the companies don't want disclosed and
wouldn't want to share it with you if it was to be disclosed.
But there is a lot of information and a substantial portion
of a transcript that can be disclosed, and there can be
redactions. And FSOC, per your testimony today, has no
willingness to actually engage in a process of disclosing not
minutes, but transcripts of a meeting, maybe even with a delay.
So I guess as you sit here today, you are still committed
to not using the various tools even that the FOMC will use,
with a delay in time and redacting sensitive information, that
FSOC is still not, seeing bipartisan concern here, going to at
least go back and discuss the possibility of disclosing
transcripts?
Mr. Pinschmidt. Congressman, what I can say is that the
Council recognizes it has a very important responsibility for
transparency. It is a responsibility that has to be balanced,
though, with the protection of confidential financial
information.
Mr. Duffy. Have you ever heard of redacting? Can you redact
confidential information? That is a tool that you would have if
you disclosed transcripts.
Ms. Clowers, is that a tool that could be used--redacting
sensitive information?
Ms. Clowers. Yes.
Mr. Duffy. Do you believe that if we had a little delay in
time, as would be appropriate, and redacted sensitive
information, that transcripts could be disclosed?
Ms. Clowers. Correct. That is one of the things we noted in
our 2012 report. We looked at different models, such as the
open markets, and noted that those type of tools are available
for FSOC.
Mr. Duffy. Does the FOMC discuss sensitive information like
monetary policy?
Ms. Clowers. Yes.
Mr. Duffy. And they still provide transcripts, yes?
Ms. Clowers. Yes.
Mr. Duffy. And, Mr. Pinschmidt, you are discussing far more
sensitive information? Is that your testimony here today that
the FOMC can provide transcripts to the public but you can't?
Mr. Pinschmidt. Congressman, what I would say is that the
Council is committed to getting more information out--
Mr. Duffy. Listen, you are not. I would say I love the
dance that you have done today, but you are not. You have not
given us--any of us--a satisfactory answer that, listen, we are
going to go back and we are going to have a hard conversation
on transcripts and redacting and making sure that we send out
more than--I am looking at your annual reevaluation of
designation of nonbank financial companies and you wanted us to
believe that your minutes, or the summary, which is a
paragraph, is sufficient for the public.
That is what you wanted us to believe, and as I look at it,
at the end it says, ``Members of Council then asked questions
and had a discussion.'' Nothing about the questions. Nothing
about the discussion. Nothing. And then, ``The Council did not
either--did not rescind either company's designation.''
What was the vote on this? What was the votes that were
taken? How did everybody vote?
Mr. Pinschmidt. Congressman, the--
Mr. Duffy. How did everybody vote?
Mr. Pinschmidt. --the document you are referring to is the
readout from the meeting.
Mr. Duffy. How did everybody vote? Do you disclose the
votes?
Do you know that I have a card right here, and every vote I
make is public. Go to the Supreme Court. Every vote is public.
How does everybody vote on FSOC? That isn't even disclosed.
And I look at the notice of proposed designation at
MetLife. You had one present vote. Who was that?
Mr. Pinschmidt. Congressman, I am not in a position--
Mr. Duffy. Who was it?
Mr. Pinschmidt. --to identify.
Mr. Duffy. No, you are not.
Again, you came and you said, you know what? We support
openness, transparency, flow of information.
You know what? I bet it was the one person who had
insurance experience. And I would love to hear the conversation
that he had with FSOC in those meetings, the one guy with
insurance experience who voted present and probably would
dissent.
Again, don't come in and tell us you are open and
transparent. We all want to see the process opened up; we want
to see what is happening.
Ms. Clowers, in her work--GAO has given you the same
advice. So I guess I would look at the bipartisan effort and
message that has been sent from this committee and go back and
have a solid conversation and review the policies at FSOC.
Mr. Pinschmidt. Congressman, we certainly look forward to
working with the committee on that going forward.
Mr. Duffy. Thank you. I appreciate that.
My time has expired.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
And without objection, this hearing is adjourned.
[Whereupon, at 12:25 p.m., the hearing was adjourned.]
A P P E N D I X
September 17, 2014
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