The Fed signals a light touch on insurance

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.