Most of the media’s energy and focus over the past few months has been on 2010’s Affordable Care Act and its problematic roll-out, with its ensuing intended and unintended consequences. Flawed analysis led to flawed legislation and flawed outcomes for the health care industry and millions of Americans.
Another pillar of President Obama’s first-term agenda was 2010’s Dodd-Frank Act, which has not received the analogous broad-based attention that it deserves. Just as with the Affordable Care Act, a thorough analysis of this flawed financial legislation would fill volumes, but one case study of the failings of Dodd-Frank is how it has changed the landscape for insurance companies.
Making it easier for Americans to get affordable, high-quality medical care was a noble mission, but a legislative solution rooted in further displacing private markets and injecting more federal government involvement in health care has led us to where we are today: an industry in chaos and people suffering as a result. So too Dodd-Frank’s good intentions are running into the roadblock of reality and yielding equally unsatisfying results.
One admirable goal as expressed by President Obama as he signed Dodd-Frank into law was “to put a stop to taxpayer bailouts once and for all.” But, it is not the anti-too-big-to-fail elixir Americans were promised. Quite the opposite—it has further enshrined too-big-to-fail.
The framers of Dodd-Frank looked at the big failures and near failures of the crisis (AIG, Washington Mutual, Lehman Bros., Bear Stearns, etc.) and concluded, without marshalling convincing supporting evidence, that special regulation by the Federal Reserve of large, so-called ‘systemic’ financial institutions was the solution. The appointed designator is the newly created Financial Stability Oversight Council (FSOC), which has ten voting members, most of whom are the heads of other federal financial regulators.
The criteria for designating non-bank financial institutions “systemically important” to the financial system are—in characteristic Dodd-Frank style—imprecise. The FSOC may designate any company if it “determines that material financial distress at the [company] or the nature, scope, size, scale, concentration, interconnectedness, or mix of the activities of the [company] could pose a threat to the financial stability of the United States.”
In July, FSOC made its first two such designations: GE Capital and AIG. GE Capital, as a savings-and-loan holding company, was already regulated by the Fed, but FSOC wanted to be sure that the company had no escape from the Fed’s grip. FSOC likely felt obligated to designate AIG to reaffirm the government’s seat-of-the-pants $182 billion decision that AIG could not be permitted to fail during the crisis.
Five years after AIG’s implosion, the Fed still refuses to come clean about why it concluded that a massive bailout was the only solution. The Fed released more than 900 pages of internal emails through the Justice Department earlier this year on its decision to bail out AIG, but completely redacted all the details regarding the basis for this important decision. One of the key government decision-makers during 2008, Sheila Bair of the Federal Deposit Insurance Corp. (FDIC), in her book on the financial crisis, verified the lack of substantive analysis behind decisions like AIG: “..the lack of hard analysis showing the necessity of [the bailouts troubles] me to this day.”The designation only makes permanent the government’s demonstrated commitment to keep AIG and other failed entities alive—in other words, it codifies too-big-to-fail.