By Sheila Bair
FORTUNE -- Hark. Do you hear it? That sound of ringing bells coming from the nation's capital as we enter the holiday season? Is it Salvation Army Santas taking to the street corners? Church campaniles playing "Carol of the Bells?" Or maybe angels getting their wings a la the Christmas classic It's a Wonderful Life?
Nope. It's the ka-ching of K Street lobbyists ringing up the billable hours as they pile into the newest industry battle against financial reform. I am speaking of nascent efforts to regulate the multi-trillion dollar asset management industry. This war promises to be even bigger than the one megabanks have waged against the Volcker rule's proposed ban on speculative trading.
The shot heard 'round the beltway was a seemingly innocuous report by a government research group called, appropriately, the Office of Financial Research or "OFR." The OFR was created by the Dodd-Frank financial reform law to -- among other things -- conduct and sponsor research related to "financial stability." That seems reasonable after the 2008 financial crisis nearly brought down the world economy.
The OFR was asked by its parent agency, a group of major financial regulatory heads called the Financial Stability Oversight Council or "FSOC," to look at potential risks associated with asset managers. These entities -- which include mutual funds, private equity and hedge funds, as well as the asset management divisions of insurance companies and banks -- collectively control about $53 trillion of assets. Ten firms each individually control over $1 trillion in assets with the largest, by far, being BlackRock (BLK), which manages $4.1 trillion.
While acknowledging the lack of complete data to conduct the analysis, the OFR report had, I thought, some useful observations about things asset managers do that are frighteningly similar to the kinds of things that banks did in the lead-up to the financial crisis. You know, things like excessive leverage (yes, a number of them do use significant leverage to enhance returns), taking big risks to reach for yield, mismatching assets and liabilities, and putting assets in separate accounts that are not transparent to regulators or their public investors.
Was the report perfect? No. Is anything? But its primary purpose, as I understand it, was simply to help FSOC look outside of the regulated banking system to learn more about the business and activities of asset managers so it could determine if there were any risks that might threaten markets and the economy. That is what the FSOC and OFR are supposed to do.
People love to beat up on the big banks (and I do my fair share), but believe it or not, they were not the root of all evil in 2008. Asset managers and insurance companies also created significant problems. As you will recall, taxpayers had to risk trillions in government support to bailout both the American Insurance Group, a.k.a. AIG (AIG), as well as the money market/mutual fund industry. What's more, it is important to understand that when we bailed out the banks, we also bailed out these nonbank institutions, as some were heavily invested in bank debt or were standing on the other side of bank derivatives trades. Without the bank bailouts, these nonbanks could have taken big losses.
Yet, based on the fund industry's holier-than-thou attack on poor OFR, you would think they were trying to protect Cindy Lou's Christmas against the evil Grinch. The industry's biggest fear seems to be that this report is the precursor to the FSOC designating big firms like BlackRock and Fidelity as "systemic" meaning (gasp) that they would be subject to tougher regulation by the Federal Reserve Board.
I think the industry is jumping to conclusions. If I were they, I'd save my money for employee Christmas bonuses and tell the lobbyists to stand down. The FSOC is only beginning to analyze the issues identified in the OFR report, and there are many different ways the regulators could respond. Some of the issues could be addressed with better disclosure. Others, like leverage and liquidity, could be addressed with some simple, basic standards set by the Securities and Exchange Commission (SEC). The SEC already regulates the big asset managers to protect those who invest in their funds. The agency has not, traditionally, looked at this industry from the standpoint of broader risks to the financial system, but that doesn't mean it couldn't start.
True, the FSOC might ultimately decide that some individual asset managers are too big and interconnected to fail without disrupting the broader economy. But the answer is not necessarily to designate them as "systemic" and push them into the arms of the Fed.
A better alternative would be for those firms to become simpler, smaller, and less interconnected. Dodd-Frank's "systemic designation" was meant to put large firms on the government's "naughty list." Intrusive Fed supervision was meant to be their lump of coal. Under the law, they still have the option of getting on the "nice" list of un-systemic institutions by restructuring and downsizing.
Now wouldn't that be a nice Christmas present for us all?
The credit bureaus haven't signaled they will follow FICO's push to make credit scores free of charge.
FORTUNE -- Earlier this week, FICO, the mother of all credit scores used by most U.S. lenders, announced it would start giving some consumers their credit scores for free.
It's a welcome move for anyone eager to keep up with the status of their financial health, but the nation's three major credit bureaus sell their MORENin-Hai Tseng, Writer - Nov 6, 2013 10:31 AM ET
Unlike today's problems, tomorrow's headaches can't be cured by writing a few checks.
FORTUNE -- People tend to spend way too much time worrying about what's in the headlines and not enough time worrying about things, buried in small type, that are less obvious but lots more important. Today's case in point: J.P. Morgan Chase.
JPM (JPM), as we'll call it, has been playing the role of piñata for plaintiffs and regulators MOREAllan Sloan, senior editor-at-large - Oct 9, 2013 5:00 AM ET
Assets at the six largest U.S. banks are up 37% from five years ago. What happened?
FORTUNE -- One third of all business loans this year were made by Bank of America. Wells Fargo funds nearly a quarter of all mortgage loans. And held in the vaults of JPMorgan Chase is $1.3 trillion, which is 12% of our collective cash, including the payrolls of many thousands of companies, or enough to MOREStephen Gandel, senior editor - Sep 13, 2013 11:42 AM ET
Regulators balk on a rule that was meant to insure sensible mortgage lending.
FORTUNE -- Regulators have, once again, backed down on a piece of financial regulation put in place in the wake of the financial crisis. And that's too bad.
On Wednesday, six government agencies, including the Federal Reserve and the Federal Deposit Insurance Corp., proposed relaxing a rule in Dodd-Frank that was meant to limit risky mortgage lending. The proposed MOREStephen Gandel, senior editor - Aug 29, 2013 5:00 AM ET
In a town where buck-passing, deflecting, and spinning is standard fare, our Treasury Secretary stands above all others. Fortune found out firsthand.
By Adam Lashinsky, senior editor-at-large
FORTUNE -- I interviewed Jacob Lew, President Obama's second Treasury Secretary, last Thursday. A few nights earlier I asked a roomful of businesspeople if anyone could name the man who runs fiscal policy for the world's only superpower. No one could. And so I MOREAug 27, 2013 5:00 AM ET
Citigroup released a cumbersome, jargon-filled, 101-page earnings announcement. How can Washington possibly regulate entities like this?
FORTUNE -- You would think that a well-researched and insightful book about the Washington legislative process would have nothing in common with a big bank's quarterly earnings news release. But you'd be wrong.
If you read the two documents almost back to back -- as I've done recently -- you discover that the book and the MOREAllan Sloan, senior editor-at-large - Jul 19, 2013 5:00 AM ET
For every new rule aimed at curbing bank fees, another added cost for consumers will surely follow.
FORTUNE – By solving one problem, U.S. financial regulators may have unknowingly created others they may need to tackle.
On Tuesday, a government agency tapped to be the voice of consumers criticized U.S. banks for a range of practices, from confusing rules on overdraft fees to a plethora of other bank fees. "We are concerned MORENin-Hai Tseng, Writer - Jun 12, 2013 12:08 PM ET
Dodd-Frank requires banks to disclose a new measure of the riskiness of their loans and investments. Goldman is the only big bank still refusing to do it.
FORTUNE -- How risky is Goldman Sachs? Don't ask. Executives won't tell you.
On a conference call with analysts on Tuesday to announce first-quarter earnings, which beat expectations but still somehow disappointed, Goldman's CFO Harvey Schwartz was asked about a key measure that tracks how MOREStephen Gandel, senior editor - Apr 17, 2013 5:00 AM ET
A small Fed tax will do little to rein in big banks.
FORTUNE -- For the big banks, the Federal Reserve's stick remains pretty rubbery.
When Dodd-Frank, the banking reform law passed in the wake of the financial crisis, was originally envisioned, co-author Congressman Barney Frank, members of the Obama administration, and others believed the new rules would encourage banks to shrink by making it too expensive to remain big. That, they MOREStephen Gandel, senior editor - Apr 16, 2013 5:00 AM ET
|2 million Facebook, Gmail and Twitter passwords stolen in massive hack|
|Ron Paul: Bitcoin could 'destroy the dollar'|
|Top 10 U.S. cities for Chinese homebuyers|
|Apple completes key China Mobile deal - report|
|Pentagon to cut jobs, contracts by $1 billion|