Public Policy Analysis & Opinion
A U.S. Treasury Department report on insurance calls for investment in infrastructure (really)
It’s a New Year, and in much of the country, the weather makes settling in with a real page-turner seem like the natural thing to do. So why not download the 176-page PDF edition of The U.S. Treasury Report to the President on Asset Management and Insurance? Really! Why not?
What’s not to love? Besides, you already paid for the report. Your tax dollars at work!
Where to begin?
Executive order
On February 3, 2017, the White House announced Executive Order 13772, which purported to establish the Trump Administration’s policy toward financial regulation. The order listed seven “Core Principles” to “regulate the United States financial system.”
Right. Who would doubt that Administration officials begin and end their day worrying about regulating the United States financial system?
So, what are these Core Principles?
- Empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth
- Prevent taxpayer-funded bailouts
- Foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry
- Enable American companies to be competitive with foreign firms in domestic and foreign markets
- Advance American interests in international financial regulatory negotiations and meetings
- Make regulation efficient, effective, and appropriately tailored
- Restore public accountability within federal financial regulatory agencies and rationalize the federal financial regulatory framework.
Sounds almost as good as the sales pitch my father gave me in the summer of 1985 when he offered me the “opportunity” to drive his brutally used late-model Volkswagen Squareback. The car’s lack of beauty, grace, or speed, coupled with its lack of air conditioning or reliably operative windows, saved me a tremendous amount of money that I might have spent on dates. That car still haunts my memory like a mobile sauna.
The report is a remarkable document. It stands out not for technical acumen or creative policy prescriptions, but for the number of typos and misspellings that stain its pages.
Oh, what lurks under the hood of “Trumpwagen Model 13772?” Just what does “rigorous regulatory impact analysis” mean in plain English? One might suspect that the power plant of Core Principles runs on a mix of “moral hazard” and “information asymmetry.”
Wish list
The executive order directed the Secretary of the Treasury, Stephen “Travelin’ Steve” Mnuchin, to communicate with agencies holding charges related to financial regulation and to produce a report on the following:
That report, and all subsequent reports, shall identify any laws, treaties, regulations, guidance, reporting and recordkeeping requirements, and other Government policies that inhibit Federal regulation of the United States financial system in a manner consistent with the Core Principles.
This action reminded me of January 1995, at the launch of George Pataki’s New York gubernatorial administration when his superintendent of insurance, Edward Muhl, posted a letter asking insurers to submit suggestions for laws, regulations, and practices that the administration might work to repeal. The Pataki administration said, “Send us a wish list!”
The report to the President on asset management and insurance, titled A Financial System That Creates Economic Opportunities is a remarkable document. The report stands out not for technical acumen or creative policy prescriptions, but for the number of typos and misspellings that stain its pages.
Now, many people who voted for the Trump-Pence ticket expressed the desire to “shake things up in Washington,” but few of us understood that effort began with the U.S. Treasury using “alternative” spellings of common words. For example, the Treasury threw off the confines of elitist spelling by boldly changing the term “competitiveness” to “Advancing American Competiveness [sic] Abroad.”
As the reader runs across one problem after another in the text, he or she might assume that someone in the Treasury Department believes that those crinkled lines under words in word processing programs mean “extra points!” Of course, readers who subscribe to dirty conspiracy theories might look at misspellings and typographical errors and see something more sinister. What if some liberal holdover put those errors in the text to send messages to fellow travelers?
Does the sloppy typing and spelling represent a cry for help? Think of the captive blinking his eyes incessantly during a filmed interrogation to let the outside world know that he is lying. “No,—blink, blink, blink,—they are treating us well—blink, blink, blink—the food is good, and they do not beat us—blink, blink, blink—all is well!”
We are not talking about some insurance regulatory newsletter produced from a home office by an overwrought writer in the 1990s, before publication layout software included spellcheck. The lack of simple editing in a report published by a first-tier government department in a First World nation diminishes the credibility of the entire work.
Gozer’s minions
The Treasury report carries the names of two authors: Secretary Mnuchin and his “counselor” Craig S. Phillips.
We live in what a Chinese curse calls “interesting times,” and it’s too late for even The Ghostbusters to do anything about that alternative fact. In more than a useful cinematic allusion, Secretary of the Treasury Steve Mnuchin—between personal trips on government planes—seems pleased to play the role of Vinz Clortho the Keymaster and minion to Gozer the Destroyer.
In the role of Zuul, the Gatekeeper is Craig S. Phillips, “Counselor” to Secretary Mnuchin. Be afraid of Zuul; be very afraid. Craig S. Phillips is a veteran of a particularly nasty operation at J.P. Morgan. Counselor Phillips was “Present at the Creation” of the Financial Panic and Economic Collapse of 2007-2008. Phillips has the financial equivalent of blood on his hands, so his place at the Treasury Department calls into question the Trump Administration’s commitment to that Core Principle about “taxpayer-funded bailouts.”
At J.P. Morgan, Counselor Phillips was part of the operation that excreted toxic assets into financial markets, labeled with the name “securities.” Perhaps to throw the auditors off the trail, the bank purchased debt-default insurance-by-another-name from American International Group. What could go wrong? Worldwide financial collapse?
Without the intervention of New Deal-era countercyclical spending mechanisms, taxpayer-funded bailouts, and a politically hampered economic stimulus program, Counselor Phillips and others like him who practiced financial Dark Arts would have hurled the United States toward another Great Depression.
If the “No-Drama” Obama Administration Justice Department had responded to the public sense of injustice and unleashed an army of federal prosecutors on Wall Street, people like Counselor Phillips might still be using library computers in “institutional settings’ to browse for Martha Stewart videos on how to make a proper “shank” or the perfect applejack recipe. In a Clintonesque effort to remain friends with the financial sector (contributors), however, the Money-Changers remained unmenaced in terms of criminal prosecution by the Obama Administration or then-New York Attorney General Andrew Cuomo.
Public confidence
Some will defend the Phillips appointment by saying that Franklin D. Roosevelt appointed Joseph P. Kennedy—a Wall Street manipulator—to launch the Securities and Exchange Commission. Sometimes it takes a technician with dirty hands to clean up a bad mess.
Of course, the Roosevelt example breaks down in comparison to Trump, because Kennedy accepted that the old system damaged the economy and needed reform. Furthermore, in 1938, the sight of the retired president and sitting governor of the New York Stock Exchange, Richard “Dicky” witney, handcuffed and boarding a train to Sing Sing presented a sobering example to Wall Street.
The Trump Treasury team seems intent on an atavistic restoration of the Gilded Age, but with Orwellian language to conceal its policy goals. For example, consider the Core Principle “Restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework.”
In this case, as at the National Association of Insurance Commissioners, the reader should understand the phrase “public accountability” as meaning “under the strict supervision of lobbyists for the financial sector.” The NAIC finds something resembling a smut-driven glee in the pages of the Treasury report. The report repeatedly calls for maintenance of the “state-based system of insurance regulation.”
Innocents abroad
In addition, the report writers seem obsessed with the International Association of Insurance Supervisors. The Treasury officials seem to see the IAIS as a vitally important venue for “Advancing American Competiveness [sic] Abroad.”
The Treasury report calls for a more active role for the Federal Insurance Office at the IAIS—a rational policy recommendation. Also, the report advises the American participants at the IAIS to adopt a “Team USA” approach, as if the participants did not represent a handful of disparate parochial interests.
For example, the NAIC “leadership” uses association-paid travel to the IAIS as a source of patronage to build loyalty and discipline among rank-and-file members. In addition, the NAIC uses its participation in the IAIS to pander to subsectors of American insurance in return for domestic political capital and filing fee revenue. The Treasury recommendations do not conform with the NAIC’s self-interest; the NAIC got to the IAIS first.
After more than a hundred pages of vague references to general terms sometimes used in discussions somewhat related to insurance regulation, the Treasury report includes this detailed complaint about a Risk-Based Capital (RBC) requirement:
Insurers find equity investments in public/private partnerships especially appealing. This is particularly true for life insurers, which benefit from not only potentially higher yields and returns, but more importantly, long-duration assets that better match cash flows on long-duration insurance liabilities. Infrastructure investment is also attractive to property and casualty insurers that historically have been among the largest investors in municipal bonds.
Nevertheless, current state requirements regarding the amount and type of capital insurers must hold do not reflect the special features of infrastructure investments and, in some cases, may actually penalize insurers to the point that such investments are not economically viable. As such, more calibrated regulatory treatment of infrastructure investments, particularly as regards capital requirements, may allow insurers to consider committing more funds to this investment class. State insurance regulators, through the NAIC, are taking preliminary steps to explore revising Risk-Based Capital standards to permit increased insurer investment in infrastructure projects.
Someone seems to have bought enough drinks in the lounge of the Trump International Hotel in Washington, D.C., to get the attention of the report writers concerning an obscure treatment of RBC rules. Of course, the $1 trillion Trump Infrastructure Plan that the Congress passed … well, the insurance sector should get those checkbooks ready nonetheless!
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.
