FSOC Wrong-Way Regulation Costs. (You pay.)

The financial crisis of 2008-09 let everyone know that the government considered
some banks “too big to fail.”So the Federal government bailed them out using money
that came from taxes – money from you!

The Dodd Frank Act was supposed to end taxpayer bailouts. It didn’t.

Please Keep Me Informed

MSGP advocates for common-sense financial regulation reforms. We’re on the side of Main Street businesses, workers, savers and investors.

In fact, Dodd-Frank made it even worse.

FSOC now has the power to decide that some non-bank financial companies are “Systemically Important Financial Institutions” or “SIFIs.” Not just banks, but any enterprise FSOC names.

So that means it is not just the biggest banks that could get bailouts – any SIFI could.

Who pays? You do! (See the pattern?)

FSOC can directly affect your financial interests. You’re going to wind up paying for FSOC.

Why and how?

Anytime there is a web of regulations and regulators-regulating-regulations-and-other-regulators you’re sure to find bugs in that web.

That is what is happening with FSOC.

The costs of FSOC – costs to privacy, to your freedom to control your investments, and the increased costs called administrative overhead are going to be passed on to you. You’re going to pay for everything, because, at the end of the day, banks won’t and investment funds can’t.

And the one overriding cost? Your financial freedom.

Yes. Your financial freedom is at stake. FSOC’s layered regulation
will amount to regulating your savings and investment choices.

FSOC wants to regulate non-banks such as asset management
firms (including their activities and products) as though they were
banks. Same thing goes for regulating insurance companies.The
problem? Banks, non-banks and insurance companies are simply
not alike.

Let’s look closely at the fundamental differences between asset management firms and banks.


An asset management firm is a company that manages investments for people. It invests your savings the way you say you want that money invested.

The money they have is your money. The firm is your “agent.” For example, a mutual fund company pools investors’ money to buy stocks, bonds, and various other investments. An asset management firm acts on behalf of its clients. Each individual client gets the gains and bears the losses on her portion of the fund’s investments. That means that the investment manager has no choice but to pass on any new costs to you. After all, whatever the investment manager has is really its clients’ money.


Banks are completely different than asset management firms.

A bank owes its customers their deposits, dollar for dollar, on demand at all times. Every penny you have in a bank is your money, and the bank has to be able to pay it back to you any time you want.

How does a bank stay in business? Besides charging you fees for checking accounts and such, banks make their money by lending money and charging interest on loans.

Fine and dandy. But that money is your money! That means that banks risk your money with their loan business. And the bank uses its investors’ deposits as the basis for making multiple loans. That’s called “leverage.” The bank bets that its borrowers will pay their loans back – although there is always a risk that some will not. In addition, under certain conditions, the bank’s depositors may want their money back, but the bank may have it loaned out for a longer period of time.

That risk is why regulators require banks to keep money in reserve – a “capital cushion” based on “capital standards” – and impose other regulations on what banks do.

Banks use your money, and therefore basically borrow what you own and lend it out many times over. It’s a good business, but it is also a risky business!

Once again, investment funds are different. You are never entitled to the full amount you invested, only to whatever its value turns out to be after being invested as you directed. And those returns may be gains or losses. You agreed to take that risk when you invested in the fund. You were probably making a long-term investment to grow your savings – and history teaches that you made a very good decision.


Insurance companies are different from banks.

Unlike bank depositors who have a right to demand that the money they deposit be returned immediately, insurance policy holders don’t.

Your insurance policy pays out when an insured event happens. That’s why you bought the policy. The insurance company pays according to your policy agreement.

Since getting paid under your insurance policy requires that you suffer a loss – death, an accident, or a burglary, for example – you are probably not eager for insured events to happen. You certainly do not choose to have those bad things happen to you! So it is not rational to talk about a “run” on an insurance company like there can be on a bank. That would mean everyone had chosen to have bad luck – and all at the same time. That’s just not how the insurance business works. Insurance companies invest for the long-term to cover events that are probably a long way off – that’s not like banking. And insured events do not happen all at once. So insurance companies do not face risks of failure that are similar to a bank’s. And that, in turn, means that even the largest insurance companies are much less of a risk to our financial system than any mid- to large-size bank.

Let's Recap:

There is a reason for regulating the capital levels of banks. Their business risk is such that, they run the risk of failure if their lending bets don’t pan out – putting their ability to repay you your deposit at constant risk.

Banks are deeply interwoven with other elements of our financial system. That means a risk to certain very large banks can, under rare conditions, create risks to the whole system. But that is not true either of mutual funds and their managers or of insurance companies. Some of them are big, but they are not banks and do not create the risks that banks do.

The fundamental differences between banks and both asset managers and products as well as insurance companies underscore a simple fact: It makes no sense for FSOC to treat them all alike. FSOC is treating apples like oranges. FSOC is wrong-way regulation, plain and simple. Sadly, it doesn’t stop there.

What FSOC has done – and is doing. FSOC believes that it has the authority to decide that certain financial products – say, a large mutual fund – and activities should be subjected to added layers of regulation. FSOC believes it can decide which ones and why. And FSOC is fast at work doing just that – applying wrong-way regulation.

FSOC is using its wrong-way regulation power to designate non-bank financial companies for an added layer of regulation by the Federal Reserve.

And appealing FSOC’s designation? First stop … FSOC! FSOC is umpire, player, and coach rolled into one! This points to a staggering problem: FSOC has virtually unlimited power because it can designate just about anything as a risk to the nation’s financial stability. Then the Federal Reserve steps in and regulates it in whatever way it chooses. That means the Federal Reserve gets to manage those non-bank financial businesses through its power of “supervisory regulation” in order to increase financial stability. Here’s the problem: You don’t have to continue very far down that road until you get to a centrally planned economy, at least in America’s important financial services sector – and that’s a long way from the entrepreneurial energy that made America great. Sound alarmist or absurd? How many absurd-sounding news stories have you seen about government run amok? It always starts slowly and out of sight.

Then it gets really bad.

You pay. Yes, every cent of every bit of cost has to come from your pocket. And there’s no alternative.