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Public Policy Analysis & Opinion
The war on business as usual
A sour public mood invites a more confrontational approach to financial services
By Kevin P. Hennosy
There appears to be a growing gap between how “Wall Street” and “Main Street” perceive the U.S. economy, and that bifurcation will make for an interesting year in the mosh pit of insurance public policy.
On January 13, 2010, the Insurance Information Institute (I.I.I.) released an opinion survey of property/casualty executives which found that “77% of executives in the property/casualty industry expect financial troubles to diminish in 2010.”
Nevertheless, the executives’ opinions are less optimistic when considering more consumer-driven aspects of the insurance sector’s financial standing. For example, the I.I.I. survey’s profitability expectations, broken down by line of business, include this assessment:
A majority of industry leaders believe that profits will not improve in most property/casualty lines. Broken down by lines of insurance, only 51% of respondents believe there will be an improvement in personal auto; 37% expect an improvement in homeowners; 16% of respondents expect an improvement in workers compensation; and 23% of respondents expect an improvement in commercial lines.
The public takes a darker view of the economy and its economic future. The American public is mad. People feel ripped off; they want their money back; and they want to see changes on Wall Street.
There was a time when most wage earners felt disconnected from Wall Street’s drama. The long-term financial security of most workers rested in pension plans that operated under strict conservative rules augmented by a government guarantee.
Then, in the 1980s, workers were forced out of pensions and lured into variable and unguaranteed investment products. Corporate raiders replaced pension plans with unallocated annuities sold by such stellar firms as First Executive Life, which failed in 1990. Massive advertising campaigns convinced workers that they could be tycoons just by opening one investment account or another.
Now many workers feel uncomfortably close to Wall Street, and they see retirement accounts with balances that in no way support a retirement. As we enter an election year, American voters are in a mean mood.
The disgruntled mood of the voters will certainly shape Congress’s actions this year as they write legislation to re-regulate financial services, including insurance, and run for re-election.
Already, insurers who received emergency infusions of public funds are included in a proposed new tax aimed at clawing back the money. Furthermore, in January 2008, Democrats in the White House and Congress began taking a much more confrontational stance with regard to re-constructing a national regulatory framework over banking, securities, and insurance. Officials know that people are scared.
The public’s discontent is not completely logical. Contrary to the unfettered, Darwinian discussions conducted in “latte liberal” coffeehouses, bar rooms, or at “tea parties” across the country, there is every reason to believe that if government had “just let the bad banks fail” we would have suffered a much more severe collapse than we did. Actions taken by the Bush and Obama administrations, Congress and the Federal Reserve allow commentators to write about the “financial crisis” and not the “Second Great Depression.”
Decisions made during the American economy’s near-death experience in late 2008 and early 2009 shoveled trillions of public dollars into purportedly private institutions. The Troubled Asset Relief Program (TARP), which included a plethora of loan arrangements including zero interest loans from the Federal Reserve and stock purchases that ignored the concept of private ownership and control, probably saved the world from a 1930s-style financial collapse. Instead of 10% unemployment in the United States, we could have been looking at the return to 25% or 30% unemployment, with the accompanying disintigration of purchasing power, increase in government expenditures, and collapse of tax revenue, that made recovery from The Great Depression so difficult.
The gravity of the situation in September 2008 forced policymakers to make hasty decisions to extend this public financial support to private institutions. One would expect human beings faced with making quick decisions under extreme pressure to make a few mistakes. Yet, these emergency actions were marred by a level of malfeasance unseen since Boss Tweed’s New York or the Grant administration. The people who created the original TARP had their fingerprints on the creation of the financial crisis.
Bush Treasury Secretary Henry Paulson proposed TARP. Paulson has spent most of his adult life as a freewheeling investment banker and made a substantial fortune operating in the loopholes and gray areas of financial regulatory framework. Both in and out of government, Paulson advocated expanding those loopholes and gray areas and undermining the framework. Paulson’s ideological abhorrence of government intervention led him to allow Lehman Brothers to fail, which hastened the collapse of currency, debt and equity markets.
Presented with a crisis of historic perportions, Paulson created the TARP absent any framework to provide public oversight of the public funds. The money simply went from the public treasury to institutions that had recently violated the most basic tenets of fiduciary responsibility.
The Democrats cannot crow too much about Paulson’s Folly because Treasury Secretary Timothy Geithner played a role in the initial response to the financial crisis that is not the stuff of re-election campaign commercials. Then the president of the Federal Reserve Bank, Geithner played a shadowy role in providing a massive infusion of public funds to the failed insurer American International Group (AIG). Geithner appears to have secretly appoved treatment of AIG institutional creditors, such as Goldman Sachs.
Saved from suffering losses from its AIG relationship and flush with TARP cash, Goldman Sachs profited greatly. In mid-January 2010, Goldman Sachs reported that 2009 was the firm’s most profitable year ever. Goldman Sachs played at the casino using the American people’s credit card and benefited from friendly dealers.
In addition, critics accuse Geithner of looking the other way when AIG disclosed its intention to use public funds to pay executive bonuses to officers of the disgraced firm—bonuses worth more than most angry voters earn over their working lives.
Spokespersons for financial institutions defend the use of such bonuses as a means to keep talented employees and partners. In the case of AIG and other failed financial institutions, that tune sounds a bit flat on the ears of wage earners. If a blue collar worker took actions that resulted in the destruction of production equipment and/or the regulatory recall of product, even if they did “nothing illegal,” the wage earner would expect a “pink slip” and not a bonus large enough fund the budget of a medium-sized town or county.
Fee
On January 14, following the announcement of another round of Wall Street bonuses and earnings, President Obama made a statement:
My commitment is to the taxpayer. My commitment is to recover every single dime the American people are owed. And my determination to achieve this goal is only heightened when I see reports of massive profits and obscene bonuses at some of the very firms who owe their continued existence to the American people—folks who have not been made whole, and who continue to face real hardship in this recession.
The president noted that contrary to generally held perceptions, of the $700 billion TARP money distributed by the previous administration, the Treasury Department had recovered all but $170 billion. The president noted that this outstanding sum was both a large amount of money and an expense to the public purse. President Obama proposed application of a fee on the largest financial institutions to recover the public’s funds.
To recover this outstanding balance, the president proposed levying a fee on institutions with $50 billion in assets or more, for a term of 10 years. “[T]he size of the fee each bank owes will be based on its size and exposure to debt, so that we are recovering tax dollars while promoting reform of the banking practices that contributed to this crisis,” said the president.
Based on the description of the proposal provided by the White House, there is no reason to believe that insurance companies would be exempt from the term “financial institutions”; however, both the American Insurance Association and The Amercan Council of Life Insurers declined to comment on the plan specifically until the proposal was published.
“We cannot go back to business as usual,” the president declared.
Too big to fail
On January 21, the White House took another step to address voters’ fear and resentment of Wall Street. The president announced a two-pronged plan to address the problem of companies that are “too big to fail.” The proposal reflects a shift in administration policy and perhaps telegraphs the waning influence of presidential advisor Lawrence Summers. The proposal will:
1. Limit the scope of financial institutions—The president and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.
2. Limit the size of financial institutions—The president also announced a new proposal to limit the consolidation of our financial sector. The president’s proposal will place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits.
Until President Obama made his announcement, the administration had opposed establishing government authority to break up financially solvent firms based on the systemic risk it posed to the financial system.
Knowledgable political observers see this change as the president’s shift back to relying on a cadre of economic and political advisors who guided him through the primary campaign in the 2008 election. First among these economic advisors is the 82-year-old former Federal Reserve chairman, Paul Volker, who has strongly advocated for changing the rules of the game governing the financial sector’s largest firms. Volker seems to understand that before firms are too big to fail, firms are too big to regulate, which invites systemic risk and widespread disaster. Volker’s return to the inner circle of financial advisors also seems to suggest that Vice President Joe Biden’s influence on economic policy might increase over the next year.
The policy change also seems to denote a lessening of influence for two advisors who come from the Clinton faction of the Democratic Party. Treasury Secretary Geithner remains influential, but the Obama political team is tiring of his obvious tin ear on public opinion. The other, Lawrence Summers, has a long history of being Wall Street’s favorite Democrat. Under President Clinton, Summers successfully advocated for the repeal of the Glass-Steagall Act, which allowed massive consolidation of the financial sector over the past decade. Many of President Obama’s earliest supporters blame Summers for taming the president’s early economic policy pronouncements, which has disheartened Obama’s political base.
Congressional leaders welcomed the administration’s policy shift. Rep. Barney Frank, who chairs the House Financial Services Committee, said:
I welcome the president’s strong support for additional provisions in the financial reform legislation to address the too big to fail problem. The president’s initiatives build on provisions that originated in the House Financial Services Committee and were included in the Wall Street Reform and Consumer Protection Act, which passed the House on December 11. By adopting the amendment offered by Rep. Paul Kanjorski, we included provisions in this bill to give the regulators the power to do everything the president has proposed. Those measures were very controversial and were unanimously opposed by Committee Republicans. Now, with the president’s strong support, I believe we should be able to overcome this resistance and take the next step.
The author
Kevin P. Hennosy is an insurance writer who specializes in the history and politics of insurance regulation. He began his insurance career in the regulatory compliance office of Nationwide Insurance Cos. and then served as public affairs manager for the National Association of Insurance Commissioners (NAIC). Since leaving the NAIC staff, he has written extensively on insurance regulation and testified before the NAIC as a consumer advocate. |
