Tag Archives: senate banking committee

The Painstaking Saga Behind NARAB

On Jan. 9, I had the pleasure of sharing spontaneous drinks and dinner with José Andrés, Washington’s first and only international celebrity chef.

He had just launched China Chilcano, the latest in his burgeoning empire of restaurants, only three days old at the time, and was only a month away from opening yet another concept. He asked how I was doing, and I told him I’d had a great week—that a bill I’d been working on for literally 23 years at the Council (NARAB, attached to the TRIA extension), was passed by the Senate just the day before.

About then, another well-wisher approached José and congratulated him on his latest achievement. “Meet my friend Joel,” he says to the guy. “He’s either the best lobbyist I’ve ever met—or he’s the [worst].”

Rightly or wrongly, I’ve been majorly associated with NARAB (“National Association of Registered Agents and Brokers”) in its multiple iterations since the early 1990s. It’s not the biggest thing I’ve worked on by any stretch—the Terrorism Risk Insurance Act, the Affordable Care Act and Dodd-Frank are all far more important to the nation, our member firms and your clients. But NARAB has been the most painstaking.

We’ve snatched defeat out of the jaws of victory on so many occasions that it almost seemed preordained we’d lose again when TRIA failed in December. Facing implacable opposition to NARAB from retiring Sen. Tom Coburn, R-Okla., then-Majority Leader Harry Reid, D-Nev., pulled the plug on TRIA and adjourned the Senate for the year—astonishing all of us who’d worked so hard on the legislation.

Much of the blame at the time went to Coburn, as he was the only announced senator down the stretch with a “hold” on the TRIA/NARAB legislation, but the truth is more complicated, as there was considerable liberal discontent with the legislation. That’s all water under the bridge now.

Within a couple days of the disaster, House Speaker John Boehner, R-Ohio, and incoming Senate Majority Leader Mitch McConnell, R-Ky., both released strong statements saying they would put TRIA passage on the “early” priority list for January. Both kept their word.

Congress convened Jan. 6. The House bill passed in December was re-enacted Jan. 7, and the identical bill cleared the Senate Jan. 8. President Obama signed the bill into law Jan. 12. This followed critical leadership on the issue from Chairman Jeb Hensarling, R-Texas, of the House Financial Services Committee, and Sen. Richard Shelby, R-Ala., the new chairman of the Senate Banking Committee.

Now the work can begin to actually create NARAB—an interstate licensure clearinghouse for nonresident producer licensure. Decades of compromises to get the legislation to the finish line will now become complications you’ll hear about in the coming months. The governance of the body will come principally from state insurance commissioners and the National Association of Insurance Commissioners. Funding problems will emerge because no federal dollars or borrowing will be allowed. And there will be disagreements about the standards for NARAB membership.

The basic deal is this: Any producer first has to be properly licensed in his or her own state. Then on a purely optional basis, he or she can apply for membership in NARAB and meet whatever requirements are established. The applicant can then check off the states in which he or she needs a nonresident licensure, paying the applicable state fees. That all sounds really simple, but we’re sure in practice it will be akin to giving birth to a live squirrel.

The protracted lobbying effort initiated in 1992 by the Council’s forerunner organizations (the National Association of Casualty and Surety Agents and the National Association of Insurance Brokers) seems disproportionate. At its core, NARAB is simply an administrative mechanism to facilitate nonresident producer licensure. But since its inception NARAB has been caught up in the push and pull of the broader debates over federal-vs.-state insurance regulation. Many colleagues of mine are putting their children through college in this continuing war of attrition.

My own children, meanwhile, are nonplussed by the history of NARAB, but here it is anyway. First it was a purely federal option, as a part of now-retired Rep. John Dingell’s, D-Mich., insurer solvency legislation, which would have created an Optional Federal Charter for insurers. That went nowhere. Then we spun it off as a stand-alone and waged a lonely battle for years, culminating in the “NARAB 1” title of the Gramm-Leach-Bliley Act of 1999. To sneak it through Congress over the opposition of then-Sen. Phil Gramm (for months, my colleagues referred to me as “Dead Man Walking” on the assumption that Gramm would prevail), we had to dumb down the provision. If a majority of states passed reciprocal licensing laws, there would be no NARAB. So a majority of states did so, which was welcome. But it wasn’t enough.

In the past decade, the coalition of NARAB supporters has grown substantially, with other producer organizations and the NAIC itself moving from a position of opposition to strong support over the years. In that decade, NARAB passed the House on at least six occasions (I lose count), both as a stand-alone measure and as part of other reforms.

As we now move to implementation issues, I will pause to give thanks for the many in Congress who made this happen. Most recently, our champions and authors were Rep. Randy Neugebauer, R-Texas, Rep. David Scott, D-Ga., Sen. Jon Tester, D-Mont., and now-retired Sen. Mike Johanns, R-Neb. We can’t thank them enough. And I think back to the 1999 Gramm-Leach-Bliley debate, when Rep. Sue Kelly, R-N.Y., and the late Sen. Rod Grams, R-Minn., fought so hard for NARAB.

I guess it’s easier to be gracious in victory, but we wish all the best for Sen. Coburn, who did everything he could to beat NARAB. I regarded him as an obstinate SOB for many months, but he always acted out of his own federalism principles. He retired from the Senate when his cancer recurred, and we have high hopes he can beat it. Because he’s just that obstinate.

This article first appeared in Leader’s Edge magazine.

Is the Fed Going Soft on Big Banks?

In a Senate Banking Committee hearing earlier this summer, Sen. Elizabeth Warren (D-MA) and Federal Reserve Chairwoman Janet Yellen played their parts brilliantly. They acted out a time-tried political science convention, that legislators and journalists are judged on results while bureaucrats and professors are judged on rules.

At issue is Federal Reserve Board enforcement of its statutory obligations under Section 165 of the Dodd-Frank Act, to see to it that JP Morgan has orderly resolution plans in the event of failure. Broadly stated, that section of the Dodd-Frank Act empowered the Fed to impose “prudential standards” on bank holding companies with assets of at least $50 billion if an institution’s failure could affect “the financial stability of the United States.” The section also required the Fed to report its determinations annually to Congress.

The hearing demonstrated the limits of our current system and the need for interactive finance, by which I mean rewarding institutions and individuals with financial or strategic advantage for revealing information that details risk. Interactive finance will provide indispensable liquidity to crucial markets that currently see little trading. More importantly, interactive finance addresses the core challenges of concentrated market power in banking and of sclerotic market administration — of which Fed efforts to manage orderly resolution of JP Morgan are but a single, frightening circumstance.

The issues are crucial not just for our economy as a whole but for insurers, in particular, because they are such large investors in securities offered by major financial institutions. The investments generate a high percentage of the insurance industry’s operating profits but expose it to catastrophic losses. For instance, in mortgage-backed securities, insurers hold more than $900 billion in commercial and multifamily real estate mortgages, according to the Mortgage Bankers Association’s Q4 2013 report. (That’s $343 billion in commercial and multifamily mortgage debt plus $567 billion in commercial mortgage-backed securities, collateralized debt obligations and asset-backed securities.) The Federal Reserve tallies life insurance companies’ holdings of residential mortgage-backed securities (RMBS) at $365 billion as of the end of the first quarter, 2014.

In that wonderfully well-acted hearing, Sen. Warren asked Chairwoman Yellen if JPMorgan could sell its assets without disrupting the economy and impelling a taxpayer bailout. Warren also asked: Where are those reports the Fed is to provide annually?

Warren was raising a key question: Is the Fed forbearing, being lenient on JPMorgan and other huge financial institutions?

Congress enacted Dodd-Frank in July 2010, and this March the Federal Reserve Board published 100 pages of rules and regulations implementing Section 165. That is a gap of 33 months. Congress has yet to see any Federal Reserve reports, but for a wholly lacking 35-page document, Warren asserts.

It’s possible that market administration is so complicated that it simply takes inordinately long to articulate and implement regulation and to report outcomes to Congress and the public. But the Warren-Yellen exchange revealed vastly more, specifically what appears to be a Federal Reserve policy to forbear on implementing its statutory obligations under Dodd Frank 165 in connection with JP Morgan and orderly resolution.

In the hearing, Sen. Warren expressly asked Chairman Yellen, “Can you honestly say that JPMorgan can be resolved in a rapid and orderly fashion…with no threats to the economy and no need for a taxpayer bailout?” And, “Are you saying the plans [for resolution] are not credible, and you’re asking them to change their plans?”

Yellen never really indicated that JPMorgan has any credible plan in place for its orderly resolution or has submitted any since 2012. Instead, she articulated process, iteration and feedback. Dodging Warren’s direct questions, Yellen essentially said that complexity drives inconclusiveness and explains the lack of annual reports to Congress. Yellen used the word, “feedback,” five times in her replies.

Both Yellen’s circumlocution on JPMorgan resolution and its outsized concentration are but symptoms of market and market administration sclerosis, which Warren is trying desperately to treat.

Absolutely brilliant performances by each woman. No question about it. As a legislator, Warren underscored that she wants results. As a regulator, Yellen adhered to processes and rules and the Federal Reserve Board’s traditional discretion in so weighty and complex a matter.

Requests for clarification from the Federal Reserve Board for this article elicited no further information about the important question: Is the Federal Reserve forbearing on implementation of Dodd-Frank 165 bank resolution?

End of story?

No. Two problems remain.

First, what of the JPMorgan resolution elephant in the room?
Why couldn’t Yellen assert simply to Sen. Warren that JPMorgan — with its $2.5 trillion in assets and 3,391 subsidiaries — has credible plans in place for rapid, orderly resolution without triggering a systemic threat or taxpayer bailout?

Could it be “the economy, stupid,” in James Carville’s bald turn of phrase? Monetary policy regulators repeatedly assert they have a very small palette of choices. At a conference of central bankers in Jackson Hole on Aug. 22, Yellen acknowledged that monetary policy makers are grappling with how to determine the best mechanisms to foster growth and to maintain price stability. “While these assessments have always been imprecise and subject to revision, the task has become especially challenging in the aftermath of the Great Recession, which brought nearly unprecedented cyclical dislocations and may have been associated with similarly unprecedented structural changes in the labor market — changes that have yet to be fully understood,” she said. Eleven days earlier, in a speech to a finance conference in Sweden, Fed Vice Chairman Stanley Fischer cautioned of protracted economic slowdown well over a dozen times as he articulated policy-making constraints. “In the United States, three major aggregate demand headwinds appear to have kept a more vigorous recovery from taking hold: the unusual weakness of the housing sector during the recovery period; the significant drag — now waning — from fiscal policy; and the negative impact from the growth slowdown abroad — particularly in Europe,” he said.

In such weak economies, the last thing Yellen or any senior regulator with any sense of self-preservation would do is to acknowledge that JPMorgan cannot credibly assert that it can resolve itself. Milton Friedman and Anna Schwartz’s analysis (1963) that regulators — and not a spending crisis — triggered the Great Depression through monetary policy yet resounds in economic thinking. Hence all of Yellen’s process talk, for it would be incautious to respond negatively to Sen. Warren’s unambiguous questions whether JPMorgan can resolve itself without wreckage or bailout.

In the pantheon of Federal Reserve Board chairs, if one thinks of Fed Chairman William McChesney Martin (1951-1970) for probity, Arthur Burns (1970-1978) for concision, G. William Miller for brevity (1978-1979), Paul Volcker for decency (1979-1987), Alan Greenspan for obscurity (1987-2006) and Ben Bernanke (2006-2014) for agility, Yellen may be laying claim as the Fed’s Rocky Balboa. In winter and early spring, she said weather was the economy’s problem. In mid-summer, she gamely parried Warren’s Ted Kennedy, who was insisting government can do better.

Screenshot-2014-09-23-17.51.33Screenshot-2014-09-23-17.51.04

Second, what of sclerotic market administration? This represents the graver challenge. Warren got no answers or reports. Yellen advertised she cannot or will not enforce Fed rules. All they achieved is good video. Both came up empty.

Citizens voted for change six years and again two years ago. Certainly, voluminous regulation — the rules and regulations on Section 165 fill 100 pages with single-spaced, eight-point type — is a change in a very narrow sense from Bush-Cheney deregulation, outsourcing and selling of public resources and lands. However, such extensive regulation raises regulatory costs and seems to mainly benefit practitioners of crafting and evading the regulations rather than providing broader economic benefits.

Interactive Finance

Technology now affords near-real-time or even real-time market administration, providing the kind of protection that the Fed can’t and removing the JPMorgans of the world as existential threats to the economy. Interactive finance animates the next step to create wealth with the data and meta data. There’s everything to gain and nothing to lose.

Prudential valuation based on credit ratings has had its run. In terms of evaluating securities, the system is so laden with conflicts of interest between the rating agencies and the offering firms that it is amazing it has persisted after having such catastrophic effects in the 2008 asset crisis.

An International Accounting Standards Board/International Finance Reporting Standards draft report is exploring new approaches to risk management generally. And confidence accounting is receiving more traction for its greater transparency and accuracy than traditional, prudential valuation. Its robust explanatory powers support greater prospective certainty and exactness determining value and risk.

But the most promising possibility is interactive finance, which administers markets more efficiently than the incumbent regulatory system, so frustrating to Warren and Yellen alike, and more effectively than the compromised prudential valuation system.

Let’s begin with a shared orientation that information and data are the crucial wealth generation engines of the 21st century. Large search firms like Google and online retailers like Amazon or news and information content providers like Bloomberg and Thomson Reuters necessarily seek to exploit first-mover advantages and deep domain competencies by controlling as much of the data associated with their online businesses as possible. The new wealth in information is no less hoarded than pre-Internet wealth in fiat currencies, art, precious metals, insurance and real estate.
But remember: The markets are liberalized. Better mousetraps beat the world to innovators’ enterprises.

Airbnb is using an overlay of information to disintermediate hospitality and accommodations incumbents, and Uber is throwing hackney licensing for a loop. New entrants Datacoup and Meeco are enabling users to sell their data, even challenging the largest Internet firms in the world. And, because of liberalized markets, more and more innovation and individual and institutional wealth creation with data and meta data will take place.

Marketcore, a firm I advise, is pioneering interactive finance to generate liquidity by rewarding individuals and institutions for sharing information with financial or strategic advantage for revealing information that details risks.

Think of it this way: Interactive finance crowd-sources market participation by rewarding individuals, organizations and institutions seeking loans, lines of credit or mortgages or negotiating contracts with monetary or strategic incentives and rewards. Whether risk takers are a bank, insurance company or counter party, granters define rewards. A reward can constitute a financial advantage — say, a discount on the next interval of a policy for individuals purchasing retail products. The reward can express a strategic advantage — say, foreknowledge of risk exposure for institutions dealing in structured risks like residential mortgage-backed securities or bonds, contracts, insurance policies, lines of credit, loans or securities.

As crucially, transaction credits empower any and all market participants to act as granters of rewards. Individuals, organizations and institutions grant strategic or monetary incentives to counter parties seeking to acquire risks, too.

All this transpires on currently existing broadband, multimedia, mobile and interactive information networks and grids. Interactive finance realizes a neutral risk identification and mitigation system with a system architecture that scans and values risks, even down to individual risk elements and their aggregations. As parties and counter parties crowd markets, each revealing specific risk information in return for equally precise and narrowly tailored rewards and incentives, their trading generates fresh data and meta data on risk tolerances in real time and near real time. This data and meta data can then be deployed to provide real-time confidence scoring of risk in dynamic markets. Every element is dynamic, like so many Internet activities and transactions.

Talk about efficiency!

Crucially, interactive finance constantly authenticates risks with constantly refreshing feedback loops. Risk determination permits insureds, brokers and carriers to update risks through “a transparency index. . . based. . . on the quality and quantity of the risk data records.” Component analysis of pooled securities facilitates drilling down in structured risk vehicles so risk takers, including insurers and reinsurers, can address complex contracts and special pool arrangements with foreknowledge of risk. Real-time revaluation of contracts clarifies “the risk factors and valuation of [an] instrument” and, in so doing, “increases liquidity and tracks risks’ associated values even as derivative instruments are created.”

Through these capabilities, Marketcore technologies connect the specific, individual risk vehicle with macro market data to present the current monetary value of the risk instrument, a transparency index documenting all the risk information about it and information on the comparative financial instruments. Anyone participating receives a complete, comprehensive depiction of certainty, risk, disclosures and value.

Think how readily Chairwoman Yellen could respond to Sen. Warren with information replenished constantly and willingly by market participants and verified by constantly updating feedback loops.
Think how much Sen. Warren could ask regarding transparency. She’d receive a verifiable response, with great confidence.

Interactive finance allows for transparent markets capable of clearing and self-correcting. With interactive finance, legislator and regulator can get results and adhere to rules. Sen. Warren could administer vibrant, efficient, self-stimulating and self-correcting markets powered by information and data-verifying risks and clarifying confidence. Chairwoman Yellen could enforce Fed rules.
Both could get well beyond JPMorgan’s compliance issues to apply their appreciable talents administering information economies, the wellsprings of 21st century commerce and economic growth.