Fisher Investments Editorial Staff

Financial Oversight or Overkill?

By, 09/20/2012

Financial regulators are poised to get much busier for a couple different reasons—one of them still just a possibility at this point, but worth noting nonetheless.

On one hand, it seems the Financial Stability Oversight Committee (FSOC) is preparing to request data from non-bank firms considered potential risks to the financial system this month. (The FSOC includes Treasury Secretary Tim Geithner, Fed Chairman Ben Bernanke and the heads of the SEC, FDIC and Commodity Futures Trading Commission.) What sort of firms might that list include? Primarily, it seems big insurance companies are under consideration, as well as the financial divisions of other companies considered large enough to have a potential spillover impact on financial markets.

Of the companies ultimately chosen, the FSOC will request confidential information including details on each firm’s financial relationships with other companies.  From there, it seems the council will make determinations as to whether certain firms are “systemically important,” the definition of which isn’t completely clear, but which apparently meets the following criteria: more than $50 billion in assets and one of the following—a 15-to-1 leverage ratio, $3.5 billion in derivatives liabilities, $20 billion in outstanding loans and bonds issued, $30 billion in gross notional credit default swaps outstanding or a 10% short term debt-to-assets ratio. Those companies deemed systemically important will then likely be more tightly supervised and regulated in order to “ensure” their activities, risk, etc. don’t translate into broader financial system risk.

While the intention is noble enough, the reality is such a task is monumentally difficult, if not near-impossible. In theory, any large enough company could be deemed systemically important, no matter how tangential its relationship with the actual financial markets. Now, to be sure, there are ways in which non-financially related companies could start a chain reaction that winds up touching the financial sector—that’s the very nature of a system in which a tremendous amount of business is conducted based on one or another form of debt. But attempting to apply a fine-tooth comb to practically the entire private sector-universe seems a case of rather extreme hubris at best and wildly misguided at worst. Because in attempting to then regulate and oversee those companies, it seems near-guaranteed financial regulators would unintentionally create dislocations as opposed to avert the next “big disaster,” whatever and whenever it might be.

But not to worry—this is where the second source of financial regulator-busyness comes in, and it may very well counteract the first: The Senate’s currently contemplating legislation that would allow the president a say in financial rule-making. You read that right—the Senate is debating the idea of giving the President, whomever he might be, a direct say in shaping future financial regulations.

Here’s where political agnosticism becomes critical in assessing suggestions like this. Maybe you’re a big fan of the sitting President—that’s all well and good, but he’s got a minimum of about four months left in office and a maximum of about four years and four months. Either way, he won’t be the president forever, and how comfortable are you with the idea of the “next guy,” whomever he is, then wielding that power? Same story the other way—maybe you’re not such a fan of the current president and would be happy enough with a replacement, but what if he’s only then in office for four years? In other words, is this really a rather blank check on financial system regulatory oversight we’re comfortable writing? Seems to us this was largely what the Founders had in mind when they separated power among three branches of government and put in place the myriad checks and balances which often lead to gridlock by design. Because it is many times that very gridlock that saves us from ourselves—and this may be a perfect example. Fortunately, at this point, the bill’s still very much just that, and so there’s no guarantee it becomes the law of the land.

The moral of the story is regulation is not ever to be taken lightly for its potential downstream effects on the private sector. And the private sector’s ability to operate efficiently and with minimal unnecessary bureaucratic involvement is key to efficiency and continued growth. Propositions like the two discussed here seem far more likely to ensure the future existence and stability of (in our view, especially extraneous and of dubious overall value) government jobs. 

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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