Public Policy Analysis & Opinion

"Doc Terri's" grand tour

International travel continues to be a perk for those in the NAIC leadership's good graces

By Kevin P. Hennosy

The National Association of Insurance Commissioners (NAIC) continues to exercise its imperial ambitions over the world. Well, at least the association is finding new ways for its senior staff and select members to experience overseas travel.

At the 2012 NAIC National Meeting, attendees heard of the majestic glory of NAIC Chief Executive Officer Theresa M. Vaughan, Ph.D., who has grasped the gold ring of international travel on someone else's dime. Join insurance regulation—see the world.

Vaughan's newest claim on international travel comes in the form of an appointment to chair an international organ for what can best be termed "financial policy development." She will chair an entity known as "The Joint Forum," which seeks to harmonize the international regulatory treatment of the world's largest financial institutions—like the ones that trashed the economy in 2007-2008.

With regard to the international stage, which attracts Vaughan like Broadway roadshows attract community theater ingénues, The Joint Forum lurks in a poorly lit corner of the that platform, near the edge of a flat and behind a scrim and next to a potted plant. Still, Vaughan can feel like a star.

Even the incomplete name "The Joint Forum" reeks of an old-school, upper-class arrogance where only those in the know are fit to know. The organization's original name was "The Joint Forum on Financial Conglomerates," with jurisdiction over "any group of companies under common control whose exclusive or predominant activities consist of providing significant services in at least two different financial sectors (banking, securities, insurance)."

Organizations like these owe their existence to the belief that policy is best made by "the right set" rather than through democratic institutions.

Entities like The Joint Forum linger from an age dramatized in the spy movie "The Good ­­­­Shepherd" where spawn of the right families, who went to the right schools and belonged to the right clubs, held the right to rule the world—whether they had a lick of sense or not.

The Joint Forum is a subsidiary organization of the Bank for International Settlements (BIS), which is an international organization of 58 central banks. The bank is a target for numerous conspiracy theories, which do not merit discussion.

The Joint Forum traces its roots to a time before the excess of international financial institutions gave us the Great Depression. It was an era when financiers believed they were above public laws. For example, when faced with an antitrust action being brought against Morgan's Northern Trust Securities holding company, J.P. Morgan had the nerve to tell President Theodore Roosevelt, "If we have done anything wrong, send your man to my man and they can fix it up."

Men like Morgan were used to operating under their own rules for their own benefit. Following World War I, Morgan was one of a handful of private and public financiers who founded the Bank of International Settlements (BIS) to facilitate war reparations payments from the German Weimar Republic. Henry Montegu of the Bank of England, which was then still a privately owned entity, and Hjalmar Schacht of the German Central Bank—who became Hitler's finance minister—joined with central bankers from Belgium, France, Italy, Japan and the Federal Reserve Bank of New York to form the BIS on January 20, 1930. In addition to the central banks, a banking group consisting of JP Morgan and Company of New York, The First National Bank of New York, and the first National Bank of Chicago also was a member.

The BIS mechanism proved so effective working on behalf of the financiers to extract capital from Germany that the Nazi Party rode German resentment into power. It is a supreme understatement to say "bad things happened," but Morgan's bondholders got their money.

Following World War II, the BIS faced liquidation over allegations made public at the Bretton Woods Conference that Nazis used the bank as conduit to steal assets from European Jews and the reserves of occupied countries. President Franklin Roosevelt appears to have supported liquidation, but President Harry S Truman reversed that policy.

In the post-war period, the BIS played a relatively quiet but influential role in the coordination of monetary policy—the final World War I reparation payment was not tendered until October 3, 2010. The BIS has worked to unify monetary policy to counter arbitrage operations in currency markets.

In the intervening 67 years since the end of World War II in Europe, relatively large numbers of subsidiary groups were created by the BIS in order to study aspects of international finance. The Joint Forum is only one such group. The forum consists of representatives of Australia, Belgium, Canada, Denmark, France, Germany, Italy, Japan, Netherlands, Spain, Switzerland, United Kingdom and United States.

Formation of The Joint Forum

The BIS created The Joint Forum on Financial Conglomerates in 1996 following a report produced in 1995 by an informal gathering of supervisors of banking, securities and insurance, which had met since 1993 and using the name "the Tripartite Group." When the report on financial conglomerates was complete, the forum did not disband; rather, it just shortened its name to expand its jurisdiction.

Groups like The Joint Forum and the NAIC seek to revive that "right set" approach to public policy. The messy public expectations that come with democratic processes need not come into play.

While it might give the political science community pause that a bank based in Switzerland has claimed a role in shaping U.S. insurance regulatory policy, the member of The Joint Forum with least standing to play a quasi-public role is Theresa M. Vaughan.

Every other member of The Joint Forum undergoes some form of public appointment, which carries public accountability. Membership on The Joint Forum usually comes through governmental office, such as a national banking supervisor or president of a central bank. These positions receive public review through the approval of an elected legislature or elected party leadership.

Vaughan is the outlier.

This is not to say that she lacks credentials. If Vaughan brings anything to the discussion, she brings credentials by the proverbial boatload.

Vaughan is the daughter of a professor who penned the most influential academic text on insurance of the past half century. There is every reason to assume that Vaughan earned her doctorate in risk and insurance at the University of Pennsylvania through discipline and scholarship. She is a professor in her own right and ultimately shared publishing credit for later editions of her fathers' textbook. She is a former insurance commissioner and former president of the NAIC. After leaving government service, she passed through the revolving door and cashed in on her experience to serve on the board of an insurance company.

What Vaughan clearly lacks is standing.

The Joint Forum is nothing if it is not an apparatus to shape United States' international trade policy. The U.S. Constitution clearly reserves the authority and responsibility for international trade to the federal government.

The Commerce Clause of the Constitution empowers Congress to "regulate commerce with foreign nations", while other Article I provisions empower Congress to "lay and collect taxes, duties, imposts, and excises", and prohibit states from doing the same without congressional approval.

The Constitution expressly prohibits individual states from conducting international trade policy. Furthermore, the framers provided for neither a Delaware-chartered corporation, nor its chief executive, to establish American international trade policy. The framers of the Constitution ordained these tenets based on the sorry experience of setting national economic policy on a state-by-state basis under the Articles of Confederation.

Vaughan is not a federal official. She is merely the hired help working for a Delaware-based corporation, which is in arrears in filing financial disclosure forms with the IRS. Neither Vaughan, the NAIC, nor any member of the NAIC holds the Constitutional standing to make international trade policy on behalf of the United States.

Cult of personality

This might come as a surprise to Vaughan. She has built quite a cult of personality around the NAIC.

At the recent meeting conducted in New Orleans, it was clear that Vaughan blurs the line between herself and the NAIC membership. In working sessions, she assumes the physical place at the table and exerts her opinions with the confidence of a "commissioner-at-large," rather than a chief of staff who was hired to serve the membership.

Nevertheless, as noted, even if she secured appointment as a state insurance commissioner, the Commerce Clause prohibits state officials from exerting authority over international trade. This restriction also calls into question the legality of numerous Memorandums of Understanding between foreign governments and the NAIC or individual states. The memorandums seek to define international trade in the business of insurance.

One must also speculate on how other members of The Joint Forum view Vaughan's participation in the policy mechanism. Again, all of the other members of The Joint Forum serve as public officials in their home jurisdiction.

This lack of standing in the eyes of the other members of The Joint Forum might explain the NAIC's current effort to wrap itself in the title "Standards Setting Organization." The term is made up, and the NAIC does not have the authority to "set standards."

Beyond the concerns related to Vaughan's standing in terms of the Constitution and in the eyes of foreign officials, her professional history raises questions.

In the case of J.P. Morgan dealing in a condescending manner with President Roosevelt, the rest of the story proves instructive.

In response to the financier's offer to "fix it up," the president said, "That can't be done."

Attorney General Philander C. Knox said, "We don't want to fix it up; we want to stop it."

The president and the attorney general spoke with a sense of moral purpose.

Vaughan's professional history includes an amiable approach to the concepts of right and wrong. While her credentials remain impressive, she also brings a level of moral ambiguity to her work. A former insurance commissioner from the State of Iowa, she filled an opening made when her predecessor launched an investigation of low-value life insurance sales to senior citizens. Vaughan never seemed intellectually curious about grandparents being ripped off, or matters related to fair play.

With the strong support of an Iowa-based life insurance firm, she ended up being made president of the NAIC in 2002. In the leadership of the NAIC, Vaughan took special interest in helping New York Life Insurance Company enter China, in accordance with Chinese entry into the World Trade Organization—without regard for the Chinese regime's human rights abuses or predatory trade policies. One of the NAIC "delegations" to China was briefly detained for attempting to bring "gifts" into the country that even Chinese officials deemed as too lavish.

After a shadowy scandal forced the departure of Catherine J. Weatherford from the staff leadership of NAIC, the association hired Vaughan. True to form, she proved less than curious about her predecessor's unethical management, which has been denied justice and moral accountability. Vaughan did nothing to provide a public accounting of persistent allegations of numerous instances of wrongful dismissal, hush money payments and self-dealing under the dubious management of Weatherford. In addition, Vaughan kept around a Class-C general counsel who made himself useful to Weatherford by making things up.

The most persistent allegation made against Weatherford concerns a kick-back scheme which awarded a multi-meeting contract to a hotel chain in return for a $150,000 wedding reception, which has cost the NAIC much in terms of treasure and meeting attendance. It is interesting to note that the first thing Weatherford did at the next place that hired her was to fire the meetings management staff.

One would expect that if an NAIC employee had fenced millions of dollars in NAIC assets (like meeting contracts) to obtain $150,000, his or her activities would be referred to the Jackson County Missouri Prosecutor's Office for criminal prosecution.

The financial collapse that the world is still climbing out of was caused by the failure of legislators and regulators to show the moral courage to say, "We don't want to fix it up; we want to stop it." There is no reason to believe, based on her record of service, that Vaughan's character contains that kind of moral gravity.

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.