GOP Reg Plan Mostly Ignores Insurance

A House Republican financial regulation plan unveiled last week would require congressional authorization for aid to troubled non-bank financial institutions such as American International Group, but would not disturb state insurance regulation.

Much of the GOP regulatory reform scheme would mirror the reforms expected to be unveiled by the Obama administration next week by creating a "market stability and capital adequacy board."

The proposed board would have the authority to monitor the interactions of various sectors of the financial system, and identify risks "that could endanger the stability and soundness of the system."

However, such a board would not have independent enforcement or supervisory authority over individual non-bank firms–as the Obama administration proposals are expected to require.

The plan seeks to ensure that "taxpayers are never again asked to pick up the tab for bad bets on Wall Street while some creditors and counterparties of failed firms are made whole." It also seeks to end the "the government's practice of picking winners and losers" by insisting that insolvent firms "be permitted to fail rather then become wards of the state."

The Republican proposal also calls for actions that would "restore market discipline" so that financial firms understand they face consequences for imprudent business decisions.

The regulatory reform proposal, outlined by minority members of the House Financial Services committee, addresses AIG-like situations by establishing a new chapter of the bankruptcy code to deal with resolving insolvent non-bank institutions.

A draft document outlining the Republican plan does not mention insurance, as does the proposed Obama administration plan also obtained by National Underwriter.

The proposal, however, if enacted, would impose strong barriers to the type of action the Federal Reserve Board took last September to bail out AIG.

Specifically, it would narrow the Fed's authority under section 13(3) of the Federal Reserve Act, which currently provides the Fed with nearly unlimited powers during periods the Board of Governors deems "unusual and exigent."

This was the authority the Fed used to provide AIG with $85 billion in cash on Sept. 15, 2008 in return for 79.9 percent of its stock.

The plan would require the Treasury Department to sign off on all actions taken by the Fed as part of its "unusual and exigent" authority and allow Congress to block such bailouts through a resolution passed within 90 days of such action.

The new chapter of the bankruptcy code established to deal with institutions such as AIG would have the authority to "facilitate coordination between regulators and the courts to ensure technical and specialized expertise is applied when dealing with these complex institutions," the Republicans explain in their paper.

Under the plan, bankruptcy judges would also have the power to stay claims by creditors and counterparties to prevent runs on troubled institutions.

It calls for "refocusing" the Federal Reserve Board on its monetary policy mandate by relieving it of its current regulatory and supervisory authority, and making it more transparent and accountable to taxpayers by enabling the Government Accountability Office to conduct more extensive audits of the central bank.

The plan would transfer the Federal Reserve Board's regulatory and supervisory authority to the Federal Deposit Insurance Corporation, including the authority to oversee bank and financial holding companies.

It would also merge the Office of the Comptroller of the Currency and the Office of Thrift Supervision.

Regarding monetary policy, the draft document says that "to send clear signals to markets," the plan would require the Fed to have "an explicit inflation target."

The Republican's proposed market stability and capital adequacy board would be chaired by the Secretary of the Treasury and comprised of outside experts as well as representatives from the financial regulatory agencies responsible for supervising large, complex firms.