Ready to Testify on Financial Stability, Lew Is Likely To Be Grilled on IRS Scandal
Pity the Financial Stability Oversight Council. It's likely this will be the second year in a row where testimony about the council, established after the financial crisis, turns into a grill-a-thon on the scandal du jour.
Last year, then-Treasury Secretary Tim Geithner found himself answering questions on banks' manipulation of a benchmark interest rate known as Libor. This year, Treasury Secretary Jack Lew is set to deliver the FSOC's annual report just a week and a half after it was revealed that the IRS, which is part of Treasury, had singled out conservative groups for extra scrutiny.
Lew, who was confirmed by the Senate in February, will appear before the Senate Banking Committee on Tuesday and the House Financial Services Committee on Wednesday to discuss the report, which was released nearly a month ago. As Treasury secretary, Lew chairs the FSOC, an interagency council created by the 2010 Dodd-Frank financial reform law and tasked with identifying and responding to threats to the country's financial stability. The law requires the council to submit an annual report to Congress.
"Given the evolving scandal at the IRS, at least one of the hearings could turn into a circus focusing on the IRS and affording little attention to the report and FSOC's work," analysts at investment firm Keefe, Bruyette & Woods said in a note to clients last week. If history is a guide, when Geithner delivered last year's FSOC report, Libor received 66 mentions at the House Financial Services Committee hearing, compared with the 23 Dodd-Frank received. It's not a perfect comparison, though, since Libor is more directly related to financial stability than improper behavior at the IRS.
Lew has already spoken publicly about the IRS scandal. In a statement released last week, he said, "After reading the Inspector General's report issued yesterday, it became clear that the IRS needs new leadership to restore public trust and confidence in the Agency. As the President noted, this type of misconduct at any agency, but especially the IRS, is inexcusable and unacceptable. And I will not tolerate it."
He also appeared on Bloomberg TV's "Political Capital with Al Hunt" on Friday. Lew told Hunt that he didn't know the details surrounding the IRS's actions until they emerged publicly on May 10. "When I learned about it - from the moment I learned about it, I was outraged. The Secretary of the Treasury, as a citizen, it is a matter of the highest priority that the IRS be beyond suspicion in terms of its integrity," he said in the interview.
Beyond the IRS scandal, the nearly-200 page annual report, which centers on seven themes including housing finance, reference interest rates like Libor, fiscal imbalances and risks from foreign economies, contains plenty of fodder for lawmakers and their staffs willing to wade through the pages.
Expect attention to be paid to the pace of Dodd-Frank implementation, as well. Regulators have missed many of the deadlines for writing the rules required under the law. According to law firm Davis Polk & Wardwell, which tracks the law's implementation, just over 37 percent of rules with deadlines that have passed have been finalized. Lew was pressed on this at a House Appropriations subcommittee hearing last month and vowed that "as chairman of FSOC, I made clear from literally my first hour as secretary that it was a matter of urgency to me that we get this done." He then pointed out that the council's role is to convene regulators, not write the rules itself.
It does, however, have the authority to designate nonbank financial firms as systemically important, subjecting them to stricter supervision. At the April 25 FSOC meeting, Lew said, "In an executive session, we discussed the Council's continued analysis of nonbank financial companies. It is critically important that the Council take the time to get the analysis right, and we expect to vote on designations of an initial set of nonbank financial companies soon." Lawmakers may ask Lew how the council plans to make those designations, and just how soon.
Other potential areas for questioning include whether some banks are still "too big to fail" and how to address that, FSOC transparency, money market fund reform and the Volcker Rule, part of the Dodd-Frank Act that has yet to be finalized but will ban banks from making speculative trades with their own accounts. These issues were also raised during Geithner's testimony last summer.
Here's a list of the signatories to the 2013 annual report:
(Treasury Department)
