The top U.S. financial regulators in charge a decade ago say they were successful in staving off a more catastrophic crisis. But they also have some pieces of advice for whoever tackles the next crisis, whenever it comes.
Key among those is communicating the need for aggressive action to ward off a financial crisis — and how failing to do so could mean even deeper pain for families.
"It's very hard to explain that finance is the lifeblood of the economy," former Treasury Secretary Hank Paulson said. "I mean, we tried to ... but it's a hard case to make, and we were unable to make it."
Paulson spoke Sept. 12 at the Brookings Institution, alongside Tim Geithner, who succeeded him at the Treasury but led the New York Fed during the crisis, and former Fed Chairman Ben Bernanke, who is now a fellow at Brookings. The conference centered on lessons that future policymakers should consider when dealing with a financial crisis, along with the difficulties officials faced at the time.
For example, former Fed Vice Chairman Donald Kohn and former top New York Fed official Brian Sack noted in a paper that Fed economists "chronically underestimated the extent of the financial disruptions and their consequences," making it tough for the central bank to decide the best way forward.
The inaccurate estimates from the Fed and private forecasters call for a "significant rethinking of standard" macroeconomic models, Bernanke wrote in another paper, saying those forecasts should better include the broad economic effects of disruptions in the credit markets.
On the fiscal policy front, former top Obama administration economist Jason Furman said fiscal stimulus can be particularly helpful when the Fed has slashed rates to near-zero levels. Still, he said, policymakers should add triggers in stimulus packages that automatically lead to larger fiscal boosts if the economy becomes dire, rather than relying on going back to Congress to approve more spending.
The panelists had some worries over whether regulators had adequate tools to solve the next crisis. Bernanke, Geithner and Paulson have written that the postcrisis regulatory system is significantly stronger, citing new mechanisms such as the orderly liquidation authority. But Congress also restricted some of the tools they relied on during the crisis, they wrote, pointing to the limits on the Fed's lender of last resort authority as one example.
William Dudley, who retired as New York Fed president this year, said that tool could be critical in shoring up a nonbank firm and that he is disappointed its return for such firms is not being "seriously debated."
He also said regulators should try to ensure their frameworks keep up with an evolving financial system but had a pessimistic take. "I think this is one where you're probably going to fail again and again, but that's the challenge," Dudley said.
At the SEC
Wall Street's securities regulator has rescinded two 14-year-old staff letters that permitted certain investment advisers to rely on recommendations from proxy advisory firms when voting at a company's annual meeting to avoid potential conflicts of interest.
The move was a win for public company executives and other industry participants who have argued that firms such as Glass Lewis & Co. LLC and Institutional Shareholder Services Inc. hold too much power in the proxy process. Issued to ISS and Egan-Jones Proxy Services in 2004, the letters said that investment advisers can "cleanse" their votes from conflicts by siding with a third-party recommendation, such as those made by proxy advisers, wrote Ning Chiu, counsel for Davis Polk's capital markets group, in a Sept. 13 post.
House Financial Services Committee Chairman Jeb Hensarling, R-Texas, applauded the agency's decision, saying in a statement that proxy advisory firms "have shown way too often that they are more focused on pushing special-interest agendas rather than serving investors."
Proxy advisory firms have played an increasingly large role in the operations of a public company. These firms provide data, research and recommendations to institutional investors, especially in regard to votes expected at companies' annual meetings. These recommendations range from deciding on CEO pay packages to approving acquisitions.
Both ISS and Glass Lewis pushed back on the implications that the SEC's move detracts from long-standing practices that have governed their operations. The decision to walk back the letters comes ahead of a November roundtable event that the SEC plans to host to discuss the proxy process.
"The SEC's withdrawal of the letters does not change the law, does not change the manner in which institutional investors are able to use proxy advisory firms, nor does it change the approach that institutions need to take in performing diligence on their proxy advisory firms," ISS General Counsel Steven Friedman said in a statement.
Glass Lewis CEO Katherine Rabin added in a statement that the SEC's decision "in no way changes any law, rule or regulation applicable to proxy advisers and the services they provide to institutional investors."
At the OCC
The Office of the Comptroller of the Currency will be facing a fresh round of lawsuits over its announcement that it will accept applications from financial technology companies seeking a special purpose bank charter. The Conference of State Bank Supervisors said Sept. 12 it would sue, and on Sept. 14, the New York Department of Financial Services filed its own suit. Both groups had sued the OCC when it originally proposed the fintech charter, but a federal court ruled that the issue was not yet ripe for consideration since the regulators had not committed to issuing charters at that time.
Banking regulators teamed up Sept. 11 to clarify that they would be paring back on the issuance of supervisory guidance and will avoid the use of numerical thresholds in future guidance. Responding to Congressional pressure on regulatory guidance, the agencies said guidance would not be interpreted to have the same force and effect of law, adding that they would not pursue enforcement actions based on guidance.
On Capitol Hill
The House Financial Services Committee passed 12 bills on Sept. 13, including one bill requiring the banking regulators to establish a federal standard for data security measures. The bill, introduced by Missouri Republican Blaine Luetkemeyer, would also require the creation of a notification system that responds to any breach or unauthorized access of customer information.
The committee also passed provisions that would require the Federal Open Market Committee to annually adopt up to three reference rules that would guide monetary policy decisions. Other provisions would clarify that the FOMC is responsible for establishing interest rates on reserve balances and for requiring the Fed vice chairman to provide semiannual testimony in the absence of a vice chairman for supervision.