On May 21, the new Treasury Secretary, Jack Lew, made his first appearance in that role before the Senate Banking Committee to testify on the annual report of the Financial Stability Oversight Council (FSOC), one of the new bureaucracies created under the Dodd-Frank Act to validate the official narrative that the reason the 2008 episode of the ongoing financial crisis occurred is because the FSOC and some of the other features of Dodd-Frank were not in place.
This must have been one of the lessons the Obama people learned from President George W. Bush's administration, which claimed that the reason the country was attacked on 9/11 was that there was no Department of Homeland Security.
The FSOC, composed mostly of the heads of the many agencies that are supposed to regulate financial institutions, is in turn supposed to identify potential threats to the stability of the U.S. financial system with the help of another new creation of Dodd-Frank, the Office of Financial Research (OFR). Other provisions of Dodd-Frank calls for the Treasury secretary to serve as chairman of FSOC, to submit an annual report to Congress and to testify annually before the congressional banking committees on the report.
From the point of view of the administration he represents, Lew's appearance was successful, because he delivered the messages he wanted to and when strategy called for it, he ragged the puck.
Committee Republicans and a couple Democrats took advantage of the occasion, as they usually do when a Treasury secretary or Fed chairman appears before them, to talk about Topic A. In this instance, that is the investigation into admitted improprieties committed by the IRS in administering provisions that are supposed to govern the determination of which organizations are granted tax exemptions.
When senators identify issues that are likely to make news, they tend to attack these topics serially and often repetitiously. The following are observations regarding the most significant questions senators raised:
1. Topic A.
Lew constructed his case that in no case did he know of any improprieties, a new commissioner is in place and he has given full support to the investigation about to be conducted by the Inspector General.
For their part, Republicans managed to put the administration on the defensive, and they bolstered their argument for appointment of a special counsel when Sen. Michael Crapo, R-Idaho, announced at the end of the hearing that he had just returned from the hearing on the IRS and learned that the interviews Lew had cited in support of his contention that there is no evidence of political intervention by the administration were not conducted under oath. This allows Republicans to charge that the administration cannot be trusted to, in effect, investigate itself, so a special counsel must be appointed. It was fairly decent political theater.
Remarkably, two Democratic senators, Robert Menendez, D-N.J., and Jeff Merkley, D-Ore., jumped on Lew over what they contend was an unauthorized nullification of the law requiring exempt organizations to engage "exclusively" in exempt activities, not just "primarily," another instance in which Lew first ragged the puck, then punted it.
2. Too Big to Fail.
The trade press has reported that the administration sided with the banking industry on this issue, but I see the message as mixed. Aside from the tussle over Topic A, Lew had one of his worst moments when he was roasted by Sen. Elizabeth Warren, D-Mass., for the administration's covert opposition to an effort led by Sen. Sherrod Brown, D-Ohio, to legislate the breakup of the "too big to fail" banks.
However, Lew looked strong when he responded to a pointed question about a letter from nine finance ministers complaining about the cross-border application of U.S. capital rules. Lew responded that the ministers didn't know what they were talking about and that the United States must lead the G20 toward higher standards and not succumb to pressure to accept weak standards in the name of maintaining the competitiveness of the largest U.S. banks.
Another strong point for Lew was when he cited the savings and loan crisis in support of his argument for strong capital regulation, a departure from the administration line that the crisis came out of nowhere in 2008 and ate the homework of all the financial regulators.
Lew then looked weak when Warren pressed him as to why the largest banks have grown 30 percent in the five years since the 2008 episode, and he responded that this was because they had acquired failing banks. This answer is unlikely to stand up well to fact checking and follow-up as to the condition of the too big to fail banks themselves and why they were selected as winners rather than losers.
3. Libor replacement.
Menendez demanded to know what the administration is doing to replace the flawed Libor standard on which millions of interest rate contracts are based. This was a case where Lew stalled, admitting that the problem is as serious as Menendez charged, but acknowledged as well that the authorities have found no answer. This goes down as another awkward moment for Lew, but he gets some consideration for the fact that he is brand new in the job of running the Treasury and the FSOC.
Lew is scheduled to make the same report to the House Financial Services Committee on May 22. Because of the unwieldy nature of that committee and the fact that the Senate had first crack, this hearing is less likely to make news, but some unscripted moments could occur.
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