To those in the life insurance industry who weren’t paying attention, on Sept. 9 the Federal Reserve Board — in the most precise terms — outlined an extremely limited role in overseeing insurance companies.

“We don’t want to be in the business of regulating insurance companies the way state insurance commissioners do, which is trying to preserve the franchise for the benefit of the policyholders,” said Daniel Tarullo, Fed governor most directly involved in regulatory activities. “Our purpose is a different one, which is assuring on a consolidated basis the safety and soundness of large financial institutions.”

Tarullo added that he would “draw a distinction” between the creation of capital standards for traditional core insurance activities on the one hand and an assessment of systemic risk on the other. Through his testimony, he was seeking to remove federal encroachment on insurance regulation as a political issue in advance of critical mid-term elections, where control of the Senate is at stake.

Tarullo said the Fed will not give up any of its political capital to bring insurers under federal control, although it has concerns about the viability of the life insurance business going forward. Whatever gives members of Congress (MOCs) political cover — that is getting state insurance officials, who are concerned about loss of power, off their backs — is fine with the Fed.

It also sought to ease pressure on the Obama administration by addressing the concerns MetLife has raised with MOCs about its preliminary designation last month as a systemically important financial institution (SIFI), and by reassuring MOCs about why the Federal Stability Oversight Council designated MetLife.

Tarullo touched all the bases by saying the Fed would support raising the threshold for SIFI designation from the current $50 billion to $100 billion. This would ease the concerns of smaller insurers, both life and property/casualty, over whether federal regulators have them in the crosshairs for SIFI designation.

To the relief of MOCs feeling heat from state interests, Tarullo implied that the Fed will not engage in mission creep to seek total oversight of the insurance industry. Tarullo’s comments in general were meant to communicate Fed recognition that it understands that Congress will use it to provide political cover for an insurance regulatory system that wants the federal government to be there only when things go wrong. This demonstrates quite a change from 2008, when the Fed was blindsided as Congress adroitly used both it and the Obama administration for political cover during American International Group’s spectacular failure.

Moreover, former Fed chairman Ben Bernanke was required to submit sworn testimony several months ago in a Federal Claims lawsuit that Maurice “Hank” Greenberg filed against the federal government. The lawsuit alleges that the federal government’s methodology in handling the bailout of AIG amounted to an attempt to “steal the business.”

In his sworn testimony, Bernanke said that, “AIG’s demise would be a catastrophe” and “could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income and jobs.”

Neither the Fed nor Treasury played a role in the blowup prompted by the disclosure that executives at AIG’s Financial Products unit were owed huge bonuses; none whatsoever. However, they were forced to take the heat when the Treasury Department determined that the bonuses were owed by contract, and the contracts had to be honored.

All of this is because the Fed was barred from overseeing insurance holding companies under a 1999 law engineered by the same people who were leading the criticism of the administration and the Fed: Republican members of Congress. This included John Boehner, who led the Republican effort to push the bill through Congress, and Jeb Hensarling, who, as an aide to Sen. Phil Gramm, R-Tex., wrote the provision in the bill.