Tags: Lew | House | FSOC | IRS

Lew Takes FSOC Story to the House Side

Thursday, 23 May 2013 01:56 PM

By Robert Feinberg

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After Treasury Secretary Jack Lew testified on Tuesday before the Senate Banking Committee, on Wednesday he gave the same statement before the House Financial Services Committee.

Although the first day of testimony normally receives more press attention than the second, there is valuable information to be gleaned from the second day of testimony, even though the ore is admittedly of lower grade.

Accordingly, the following are some observations from the opening remarks of legislators and especially from the extensive Q&A period that took place on the second day:

1. Financial crisis. Committee Chairman Jeb Hensarling, R-Texas, jumped on Lew aggressively, rightly observing that the bank regulators that compose the Financial Stability Oversight Council (FSOC) helped cause the financial crisis or were negligent, despite having the needed authority to act, so that the same regulators that failed to prevent the last financial crisis are in charge of preventing the next.

He quoted a Government Accountability Office finding that in the three years since the enactment of the Dodd-Frank Act, the FSOC has still "not developed a structure that supports having a systematic or comprehensive process for identifying potential and emerging threats." He then escalated the rhetoric to charge that the sweeping powers of the FSOC are sometimes used in ways that may be dumb, negligent or possibly even criminal.

When Lew got a chance to respond, he did a fairly good job, as he had done on the Senate side, of making the case for stricter capital requirements. His remarks looked pretty good against the criticism from Shelley Moore Capito, R-W.V., of the capital regulations as they are applied to community and regional banks, given that her husband happens to be a banker.

When she complained that Lew's predecessor, Tim Geithner, had talked about removing outdated and outmoded regulations, this gave Lew a chance to respond that he has only been on the job for 2 ½ months, but that he made a record as director of Office of Management and Budget of trimming unneeded regulations in various sectors of the economy. Lew repeated his statement on the Senate side that the United States should promote strong capital rules in the global financial system.

2. Topic A. Hensarling referred to a hearing being held simultaneously by the House Oversight and Government Reform Committee looking into the IRS scandal. He made the dramatic gesture of holding up a copy of an IRS form and accusing the Lew of controlling an agency that demands information from citizens on their use of Facebook and Twitter and on their private prayer practices.

As Lew attempted to respond to Hensarling's charges, he was repeatedly interrupted as he told the committee that while the Treasury appoints the commissioner and general counsel, it does not get involved in the administration of the IRS. He added that a new commissioner has just taken office, the Inspector General (IG) is conducting an investigation and those responsible for wrongful actions will be held accountable in order to restore confidence in the agency.

Capito followed with an accusation that the IRS is conducting a "witch hunt" and attempting to tie Lew to the abuses by referring to his service as White House Chief of Staff. This line of questioning probably plays very well in West Virginia.

When the Democrats got their chance, they went into heavy defense mode. The ranking Democrat, Maxine Waters, D-Calif., who has had ethical challenges of her own, led Lew through a series of friendly questions and then offered him time to make up for the interruptions by Hensarling.

My impression is that Lew is successfully distancing himself from the scandal, and how big a problem the administration faces depends on what the IG finds. The Republicans still have a chance to insist that a special counsel is needed, but they would be wise to wait for the findings before escalating the debate further, because Congress itself continues to do poorly in the polls, and Lew still has a chance to present himself as a problem solver, rather than the cause of bureaucratic excesses that have prevailed throughout the bureaucracy under administrations of both parties.

3. Housing finance reform. Hensarling wisely moved from the IRS topic to the activities of the FSOC, which were the subject of the hearing, and he cleverly seized on a passage in the report that stated: "The Council recommends that the Treasury, HUD [Housing and Urban Development] and FHFA [Federal Housing Finance Agency] continue to work with Congress and other stakeholders to develop housing reforms."

As he ran out of question time, Hensarling complained that under Geithner, the administration had issued a white paper on housing finance reform but had never followed up during the time that Hensarling has been vice chairman and chairman of the committee. He concluded that he looked forward to engaging Lew on this issue.

I would note that whenever this dialog occurs, it would be a good idea for the Republicans to keep in mind that they are in the majority in the House, and that means they share in the responsibility to make policy proposals. When Barney Frank, D-Mass., was the ranking Democrat, he delighted in tormenting the Republicans for their failure to agree, even among themselves, on how to proceed with housing finance reform.

Thus, there is peril for the Republicans in raising the profile of this issue unless they have a sounder political and policy footing beneath them than they have so far demonstrated under the current House leadership.

4. Living wills of "too big to fail" banks. After she finished helping to rehabilitate the witness on the IRS scandal, Waters brought up the subject of the living wills provision of Dodd-Frank, which comes under the jurisdiction of the FDIC and the FSOC. Lew responded by claiming that the administration has made "great progress" on this, but he remarked that "We're not hopefully going to have a test of these anytime soon."

As I parse the sentence, it appears to raise the question of whether the administration is continuing to keep the zombie banks afloat through extraordinary means. His advisors on the FSOC staff and at the Treasury, including those at the Orwellian-named Office of Financial Stability, may not realize that if another episode of the financial crisis should break out, perhaps because of the challenge the Fed faces in managing quantitative easing and the swaps programs that support European banks in order to delay recognition of exposure to the weakness of the global banking system, the administration is vulnerable to a scandal potentially much more serious than the one at the IRS, due to the failure of this and previous administrations over the past four decades to do anything to contain the growth of megabanks with abundant political capital but very little financial capital.

Looking broadly at the outlook for Lew's stewardship of the Treasury during the second Obama term, it looks like he's getting a short honeymoon from the Congressional Republicans who control the House, albeit clumsily, and are preparing for another assault on control of the Senate.

Because of the clout he enjoys with the White House, analogous to that enjoyed by Secretaries Regan and Baker in Republican administrations, Lew has the potential to be a strong Treasury Secretary. Whether his record will surpass the indifferent, not to say disastrous, records of those earlier leaders, depends on how well he manages the fiscal and banking crises that have festered in this country over at least the last 50 years.

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