A lens inside the Beltway

"Bart Naylor" "Financial policy reform"How sophisticated is the Wall Street lobby?

Spending more than $2 million a day, Wall Street counts as one of the most active industries in the nation’s capital. Where does the money go? Here’s one small but instructive example.

The Prime Group recently emailed questionnaires to Washington policy professionals asking them to rank potential arguments regarding the merits of naming large insurance companies “systemically important.” Respondents earn $50 for the ten minutes it might take to complete the form.

As part of the 2010 Dodd-Frank Wall Street Reform Act, the nation’s major financial institution regulators, known formally as the Financial Stability Oversight Council, chaired by the Treasury Secretary, will name certain firms as “systemically important.”

These firms aren’t formally banks, such as Bank of America, or JP Morgan, which are designated as “systemically important” by virtue of their bank status and size. Instead, these special “systemically important financial institutions,” or SIFIs, may be insurance firms such as MetLife, Inc and Prudential Financial Inc.

The 2008 financial crisis demonstrated that certain firms outside of traditional banking proved so large and interconnected that their failure has the potential to trigger fatal repercussions throughout the economy. Insurance giant AIG, for example, made so many ill-fated bets with unregulated insurance-like contracts called credit default swaps that the government decided taxpayers should bail it out with $160 billion. (Arguing that the bailout was insufficiently generous, a leading AIG shareholder is now suing the US government.)

Ordinarily, a company might be thrilled that the government officially names it “important.” Presidential candidate Mitt Romney disingenuously claimed during a debate that such a legal designation constituted “the biggest kiss that’s been given to New York banks I’ve ever seen.”

Contrary to Romney’s inaccurate assertion that SIFI designation means only that a firm would be bailed out if it faltered, designation as a SIFI comes with new regulation that the firms may loathe. Explained the Deloitte Center for Financial Services, “Meeting the additional people, data, technology, time, and capital demands required of SIFIs is likely to be expensive.”

And so, it appears, someone, somewhere, is preparing the ground for potential SIFIs to spurn the “biggest kiss.”

The Prime Group questionnaire asks respondents to rank arguments that both support and devalue SIFI designation. Here’s one: “If one of the largest insurance companies — like MetLife or Prudential — were to fail, taxpayers would have to bail them out so they need to be more carefully regulated.”

Another argument respondents are asked to consider: “It is to be expected that the large insurance companies will say they take no excessive financial risks, but that is the same thing Lehman Brothers said right up until they collapsed.”

On the other side, here are some arguments being tested against designation: “We can afford to let large insurance companies go bankrupt because their failure would not bring down any other firm in the financial system.” And, “The federal government should not impose additional regulations on non-bank financial companies until it performs a thorough cost-benefit analysis.”

Wall Street knows that Washington policy professionals will determine the debate’s outcome. Between leading regulators and influential members of Congress, some firms will be designated as SIFIs while others left free of federal oversight.

How clever to field-test the rhetorical weapons ahead the contest – and how telling that Wall Street influence and inside-the-beltway machinations are poised determine the fate of such policy with minimal input from the American public.

 Bartlett Naylor is Public Citizen’s financial policy reform advocate. You can follow him on Twitter at @BartNaylor.