American Enterprise Institute

January 28, 2008

[Edited transcript from audio tapes]

12:00 p.m.	Registration and Luncheon
12:30	Introduction:	Peter J. Wallison, AEI
12:35	Keynote Speaker:	Steve Bartlett, Financial Services Roundtable
1:45	Adjournment

Proceedings:

Peter Wallison:  Good afternoon, I’m Peter Wallison and I’m a Senior Fellow here at the American Enterprise Institute.  I want to welcome all of you to what will be a very exciting and interesting talk by Steve Bartlett.  One of the most difficult jobs in Washington is association executive, it seems to me.  Most people looking at it from outside think the head of a group like the American Banker’s Association or the Investment Company Institute has it easy.  There is usually a nice salary and the respect accorded to a player by members of Congress, a strong staff, all the sorts of things that would go with heading a large and important institution.

 But for my observation, association executives are usually a beleaguered lot.  They are generally kept at a short leash by their members.  And since their members are competing vigorously with one another, there is the constant problem of not appearing to favor the large over the small or the Western interests over the Eastern interests or any other number of divisions that may occur in a competitive environment.

 So it is all the more remarkable, I think, that Steve Bartlett has managed to hold together in a single organization the most significant companies in the financial services industry, an industry that is made up of three competitive sectors – banks, securities firms and insurance companies.  Not only is there tough competition among the companies in these sectors, but the sectors are also in growing competition with one another.

 So Steve and his staff have to keep their activities focused on the common interests of all of these groups.  Judging from the growing influence of the Financial Services Roundtable, they have performed this delicate task with extraordinary skill.  I actually witnessed this myself over the last year as a member of the Roundtable’s Blue Ribbon Commission, and you will hear a lot about this from Steve about the Commission.  And it was made up of representatives of over 60 companies.  Its various ask forces enlisted large numbers of others from all three industries.

 Yet with the exception of the last meeting to approve the report, none of the meetings, which took place by conference telephone, took more than one hour.  Yet the report, as you will hear it described by Steve, is a really excellent piece of work.  I hope that all of you have gotten copies of the executive summary of the report which does a pretty good job of summarizing it, but the whole report is a superb piece of work.

 To be sure, the success of the study is attributable in substantial part to the scholarship and hard work of the two main staff people, Greg Wilson and Jim Savan.  But the leadership that gathered the group together, set the general policy direction and pushed through an efficient way for busy executives to work together was all Steve Bartlett.

 Although not an association executive by background, Steve has had plenty of exposure to politics and experience with politics in his background.  He was at one time the mayor of Dallas, a member of the Dallas city council and of course, as we all know, a Congressman from 1983 to 1991.  In Congress, he served on the Banking Committee and was a strong exponent even then of financial modernization. 

 He was a sponsor or principle co-sponsors of eighteen major pieces of legislation.  His biography, I think, you will find more fully described in the materials that you have all picked up, I hope.  So if you will please join me in giving a warm welcome to our speaker today, Steve Bartlett.

 Steve Bartlett:  Thank you very much, Peter, for the warm introduction.  If you don’t pick up or if you missed my biography in the materials today, it will be coming in my family’s Christmas card this next year.  My wife is always amused at it.  It is of particular pleasure to be here today at the American Enterprise Institute for a number of reasons.  I do note that there is a standing room only crowd and not everyone got lunch.  So if you didn’t get lunch and you want to go back and get some and hold it on your laps, that will be fine.  I’m not sure, Peter, what to attribute this standing room only nature of the crowd - 

 Peter Wallison:  They tasted the lunch, I guess.

 Steve Bartlett:  It is either the good food, which is possible, or it’s a slow news day, which given all that has happened, is not that or perhaps you all thought I was here to speak about the new baseball stadium of the Washington Nationals and whether it will open on time. 

 In fact, I think it is in part a tribute to the AEI and the respect with which we all hold AEI.  Since your inception in the 1940s, AEI has become and is indeed the recognized resource for policymakers on a wide range of matters.  Financial Services Roundtable and our one hundred member companies, particularly, appreciate the work that AEI has done in the field of financial services regulation under the leadership of the great and the all-knowing Peter Wallison.

 To the point of the topic today, AEI is in fact on the cutting edge of just about everything.  AEI is known for pushing the envelope, for challenging the status quo, for always reminding us that we can do better.  Or for, in some references I will make during my presentation, for putting inertia if it is at rest into motion so inertia can work for us instead of against us.

 Likewise, it has been my pleasure to have worked with Peter Wallison for some years, longer than any of us can remember.  I recall when I was in Congress, Peter was at the Treasury Department and then at the White House.  Peter Wallison is indeed America’s-- my prepared remarks say one of America’s leading thought leaders.  I would just say he is America’s leading thought leader regarding financial services and other things.

 He was a member of our Commission.  We had to negotiate with him the terms of his service on the Commission since I will say that Peter had an opinion on just about every – not just every page, on every line item.  And his opinion was listened to and respected and I must put in the disclaimer that he reserves the right to disagree with anything in the Commission that he does disagree with or support.  He was listened to and he contributed significantly to the breadth and the depth of the blueprint and did it all within the constraint of one hour meetings at the maximum.

 A year ago today, President Bush addressed the importance of the US financial system at a speech at Federal Hall in New York City.  He didn’t have to go that far, he could have come over here.  But he noted at that time that America’s economic leadership rests on strong and flexible capital markets.  And in his words, to keep America’s economic leadership, American must be the best place in the world in which to invest capital and to do business.

 So the Roundtable’s blueprint for US financial competitiveness is based upon that challenge.  It’s a call to action for legal and regulatory reform, so US financial markets and firms can remain competitive in global financial markets.  US financial markets and firms are facing unprecedented competitive challenges from foreign firms and foreign regulatory regimes.

 How we respond to those challenges reminds me of the old story that we hear all of the time about draining the swamp.  When somebody starts to tell you about the draining the swamp, you can get ready, what they are about to tell you is don’t do anything.  Because the story goes that everybody knows it’s time to drain the swamp, that things are a mess, but no one wants to try it because they give the excuse that you can’t drain the swamp when you’re up to your armpits in alligators.  I cleaned up the reference of the place where the alligators are.

 So the swamp never gets drained, and the alligators get meaner and tougher and more numerous every year.  As the mortgage market crisis continues to unfold, we are all indeed up to our armpits or above in alligators, and some have pretty sharp teeth.  It’s time to recognize, however, that those alligators will just keep getting meaner and bigger and more numerous until we drain the swamp or at least start to reengineer and drain the swamp.

 Perhaps we could not have totally avoided the current turmoil just in that one example of the mortgage market if we had adopted the reforms that are proposed.  I do believe, however, that if some of those reforms had been in effect, there would be fewer alligators around today and even fewer next year. 

 Now in spite of the inertia, the status quo of an object at rest, in spite of the inertia of an object at rest, the Treasury Department in asking for open-ended comments – and I brought a copy and by the way, it took two volumes, of the public’s response to the Treasury Department’s request for comments on the regulatory system.  And I’ve got it here in these two volumes.  Jim Savan and Greg Wilson have read every page and would be able to tell you anything that is in them.

 It contains all of the letters submitted to the Treasury Department in response to its request, some 200 comments, about half of them candidly from the insurance sector of the industry.  But in response to an open-ended question, amazing interest and in fact a sense of urgency for the need to do something; amazing support for principle-based regulation, for prudential supervision, for better coordination; only one that we were able to cite an organization in opposition to that direction as a whole.  It was – bless you with bated breath – it was the Consumer Federation of America, but hope remains eternal.  I am optimistic that they will come around.

 So the consensus has been adopted.  My goal today is to then outline how we can turn this emerging consensus and the current inertia of a body at rest into action.  Inertia is a strong force.  The laws of physics state that under the force of inertia, a body at rest will stay at rest and a body in motion will remain in motion.  It’s time then to overcome the inertia of that body at rest and put financial regulatory reform into motion.

 Now as I outlined the direction that these comment letters, which are pretty comprehensive and have developed a sense of urgency as you saw organizations respond to them, I will develop this and then I am going to open up all kinds of time for questions and answers.  If it’s all right with you, I’m going to use the old Congressional format for questions and answers.  And what that means is if you would like to sort of ask me a question, to stump me with a question, then you can watch me fumble around for the answer.  Or if you want to just go ahead and give me the answer, I can ponder about what the question should have been.  You are free to ask or I am free to refer to any questions to either Peter, who is on the Commission, or Greg and Jim or others.

 Now first, let me expand on why the body politic, the policymakers told us why financial regulatory reform is urgently needed.  We live in a global marketplace and those aren’t just words; that is reality, big headlines, large font, all over.  The United States can no longer presume to be in a leadership position as a matter of divine right.  We face growing competition for business, finance and jobs from firms in countries located around the globe, and that’s good, assuming we choose to compete.

 The Bloomberg-Schumer report documented a number of external factors, the challenges – fast-growing overseas markets, continued business expansion away from the United States and better, better regulatory regimes such as in the United Kingdom.  We can’t control those external challenges, nor should we try, we should encourage them.  But we can respond with our own competitive challenge.

 The fact is that the United States financial services sector is the third largest sector of our domestic economy after only manufacturing and real estate.  Financial services accounts directly for 8 percent of the GDP.  Financial services sector is among the three fastest growing sectors of our domestic economy, with an average growth rate of over 5 percent.  That compares to 3.2 percent average for the economy as a whole.

 Financial services directly accounts for 5 percent of all employment in the United States.  But way more important than any of that, virtually all other jobs are indirectly or directly dependent on a vibrant and competitive financial services industry.  These indirect effects are compelling way more than the direct impact of financial services.

 Financial markets and firms provide consumers, businesses, investors and governments with the means to invest, save, borrow, finance and exchange funds.  Secretary Paulsen called the financial services sector the lifeblood of our economy.  If you build it, live in it, work at it, eat it or drive it, somebody has to finance it.  We choose to think it should be one of our companies, but it will be someone.

 So the Roundtable’s blueprint is the work product, as Peter said, of a 62-member commission.  These commission members are among the most respected executives of the financial services industry today.  And they, together with over 150 industry legal and regulatory experts forming working groups of an hour at a time, met in 30 formal sessions over the course of six months and came up with the same conclusions that the consensus of policymakers, the Treasury Department, asked for, with the exception of Consumer Finance Association, in terms of the urgency and the need for a better, more coherent, principle-based regulatory system. 

 Now we label this blueprint – when we got done, when we started, we had called it a report.  And when we got done, the very last meeting as the commission members sat around and talked about it, we realized it was no longer a report; it was a blueprint for action.  That there was an urgency there that in fact the consensus of the report of somebody ought to do something had been made for us by other commissions.  But the blueprint for action was what was missing, so that is what we did.

 So for example, all of the other studies gone on before and most of the commentators to the secretaries that came later, secretaries’ request for comments, said we ought to have principle-based regulation.  That was about it – that was about the longest comment we could get on principle-based regulation.  So this group wrote down what we think the principles ought to be.

 Principle number one- fair treatment for customers.  And then as we examine that from the hindsight of the mortgage crisis, think about how things would be different had we had a regulatory system based on – number one, fair treatment for customers.  And number two, accountability for management.  So our blueprint was based on the work of those three prior reports, the Committee on Capital reports, Bloomberg-Schumer and the Commission on Regulatory on the regulation of the US capital markets by the US Chamber.

 We didn’t duplicate them – rather we took them and developed concrete steps.  We went so far as to list 68 specific recommendations that either Congress or the regulators could take now today.  When we talk about in questions and answers, I will share with you a little bit about how that is being received on the Hill.   We have six of those where we have prominent members of Congress who have told us at least verbally, which means they haven’t cleared it with their staff yet, that they are willing and indeed eager to introduce it into legislation. 

So how do we move forward?  There is a consensus for financial reform, and that consensus is apparent in the comments letters.  So now the challenge is how do we put the consensus into action?   And the purpose today and has been since the report and will be is, to urge Congress and Treasury to address the challenge by being bold, comprehensive and pragmatic. 

We need to be bold because the challenge is great.  Many features of our regulatory system have not been seriously reviewed for years.  McCarren Ferguson, which is somewhere in the Bible, I think, I think it was the eleventh commandment, was passed in the 1940s.  Investment companies were not in existence until 1940 when they were created by statute. 

 We need to be comprehensive because the challenges we face cut across markets and geographic borders.  We live and work in a global economy.  Boise is connected to Birmingham and Boston, but also to Belgrade and Beijing and Belfast and we need to be pragmatic.  We face a situation like the fellow that was invited to eat an elephant.  He naturally looked at the size of the elephant and thought about the size of his stomach and asked how in the world can I eat an elephant, it’s too big.  His host answered – one bite at a time. 

 So we’re not proposing that we will or have to pass all 68 recommendations by end of session 2008, although that is, of course, the challenge that I put out to my staff.  We are proposing that we can pass some – just pick one, pick a good one.  And in fact it’s interesting, that’s the way we’ve taken it to Capitol Hill.  We’ve taken it to Congressional leaders and said what do you think about Congressional reform, what do you think about regulatory reform?  What do you think about good principles to guide our legislation?  They say – oh, good idea, what can I do?  We say that you can introduce a piece of legislation.  Oh, I don’t know, there are some things in your report that I disagree with. 

 And then my expert lobbyists say very slyly, they say – well, I have a list of 68, let’s go down the list and see if there are any of those 68 that you agree with.  And you know what?  It’s amazing how there always is, because you can’t agree with the concept unless you agree with doing at least one thing about it. 

 So one approach – and I suggest today – trying to take those 68 and reduce them into something manageable.  One approach would be for policymakers to start on three discreet and achievable reforms, which I call the low hanging fruit.  Now it’s not really low hanging fruit, it will be hard.  But each of these three reforms can be achieved in 2008, although they won’t be easy.

 The three reforms that I would pull out of their list of 68 are: one, principle-based regulation; two, prudential supervision; and three, optional national insurance charter.  These same reforms, as well as the others in the blueprint – I just slipped that by, you all come back to the optional national insurance charter in a minute.  These same reforms and others listed in fact are among the roundtables and our board of directors is telling us that they want to make those reforms and the reform of this commission job one in terms of moving forward on a legislative and a policy agenda. 

 Let me start with principle-based regulation.  The need for principle-based financial regulation was first identified by Bloomberg-Schumer.  In March of 2007, Secretary Paulsen issued his challenge to consider whether principle-based regulation was appropriate for the United States.  In our blueprint, we went a step further and identified six guiding principles – fair treatment for customers, competitive and innovative financial markets, proportionate risk-based regulation, prudential supervision and enforcement, options for serving customers and management and the responsibility of management.

 And when you think about it for a moment, how can any policymaker be against any of those principles or having principles at all?  Let me cite from just a few of the 25 letters of support filed with the Treasury.  The Chamber Center for Capital Markets Competitive says it is critical that the US move away from its prescriptive rules-based and gotcha approach to regulation and enforcement and adopt a more principle-based regulation. 

 The Managed Funds Association stated this flexible approach fosters the development of a cooperative, not combative, regulatory relationship.  Acknowledging that principles must also include outcome-based rules, SIFMA concluded that a more principle-based approach should provide firms with the flexibilities to respond appropriately to new market developments.  The Roundtable has drafted a piece of legislation that will seek introduction of those principles. 

 Second: prudential supervision.  Prudential supervision goes hand in hand with principle-based regulation.  Prudential supervision encourages constructive and ongoing engagement between firms and their regulators to ensure compliance.  And that’s the goal of the regulatory community, to ensure compliance with both principles and rules.  Firms and regulators can address and correct issues in a timely and effective manner to achieve common objectives.  Prudential supervision can encourage regulated firms to bring matters of concern to supervisors rather than to resort to immediate enforcement actions.  Prudential supervision contemplates that regulators will then correct those practices.

 Now prudential supervision is not new, it’s not radical.  It is the norm in the banking regulation, but it’s just taking root in securities regulation through SEC’s consolidated supervisory entity program for the five largest securities firms.  Typically prudential supervision is not at all at use in a state-based insurance world.  So both principle-based and prudential supervision was endorsed in these letters by SIFMA.  You wouldn’t have seen that just 18 months ago.  The Chamber, ICI, the Institute of International Bankers, to name a few, likewise we have drafted regulation. 

Now new optional charters.  Let me talk about the need for these new charters for serving consumers better in the future.  Our blueprint advocates three new financial charters, one national insurance charter, a national securities charter and a new universal financial services charter.  Support for those charters was less robust by the comments outside of insurance charter, which was quite vigorous, robust and compelling.  But that’s because the other charters – and there was some support – has just begun to be heard from.

Of these, the federal insurance charter is the furthest along.  The arguments in favor of an OFC can be boiled down to two.  First, the current state-based system is uncompetitive.   As Bloomberg-Schumer report, Bloomberg-Schumer remember who the Schumer is of Bloomberg-Schumer, an optional national insurance charter would benefit the competitiveness of both domestic and international firms.  A single charter would give US companies a uniform regulatory platform from which to operate and serve their customers nationwide, as well as globally.  Second goes to the heart of serving all consumers, one of the key principles outlined in the Roundtable’s blueprint.  As the OFC Coalition noted, today’s balkanized regulatory system results in significant delays in bringing products to market and stifles innovation that would assist consumers and retirement needs. 

So the OFC was endorsed by Bloomberg-Schumer and by the US Chamber Report.  One of the letters filed with the Treasury Department in support of OFC was signed by a coalition of multiple trades.  This was the insurance charter signed by the Roundtable, of course, Agents for Change of 5,000 insurance agents from around the country: The American Bankers’ Association; the American Bankers’ Insurance Association; the ACLI; the AIA; the Council of Insurance Agents and Brokers of Financial Services Forum; The Life Insurances Council; the National Insurance of Independent Life Brokerage; and the Reinsurance Association of America. 

The momentum is clear and the urgency is there.  One letter of support of OSC caught my eye.  It was filed by an independent insurance agent, not my brother in law and I don’t even know who it was; an independent insurance agent from Ohio who holds multiple state insurance and securities licenses.  I have to say we hear this a lot at the Roundtable from independent insurance agents.  He noted that every state has a different set of rules that seldom made sense.  He then stated the obvious.  A federal charter that sets the same standards for everyone would mostly benefit consumers.  They would have better products and an assurance that reasonable enforcement keeps agents honest.  The agents, the consumers, the organizations, the policymakers – the consensus is built. 

Reform bills for the first time has been introduced in both Houses of Congress on a bipartisan basis.  It is an uphill struggle?  Yes.  If a secret ballot vote in the US House and the US Senate were taken tomorrow, I can tell you it would pass two to one in both Houses and maybe more.  Members of Congress understand it because they hear from their constituents that in the case of Oregon, for example, it takes something over 18 months and sometimes as long as three years to get approval for a product that has already been approved for your brother in law in Washington, the state next door, from the same company and sometimes even from the same agent from two different licenses.

So in closing, I want to urge the Treasury Department and the Congress that don’t, to let the force of inertia work for us rather than against us with inaction.  The industry has spoken in agreement in support of principle-based regulation, in support of prudential supervision and in support of optional federal insurance charter.  These three reforms alone can be achieved in the near-term.

At the outset of my remarks, I quoted President Bush on the need for competitive financial markets.  In the spirit of bipartisanship, let me close by quoting another president.  Even though he was not addressing the same financial market issues, his words of admonition apply equally today to these competitive issues. 

President John F. Kennedy said things do not happen, they are made to happen.  And Peter, that is why I came to AEI, because it is AEI that has been making things happen for a long time and the policymakers in this room that can make these things happen.  He also said there are risks and costs to action.  Of course – somebody might get mad at you, but they are far less than the long-range risk of comfortable inaction.

Ladies and gentlemen, let me suggest that we can overcome inertia and make things happen to improve the regulation of our financial markets in the name of serving consumers better and maintaining our competitiveness in an increasingly global economy.  Let me also suggest that we cannot afford the comfortable inaction that JFK spoke of.  Thank you very much.

Peter Wallison:  Steve, do you want to take questions from there?

Steve Bartlett:  I will take questions from here.

Peter Wallison:  Okay, just a little bit on ground rules.  We would like you-- we have a microphone and we would like you to wait for the microphone and then would you state your name and affiliation and then really ask a question.  We don’t mind statements, but there should be a question associated with them.

Steve Bartlett:  Like don’t you agree.

Peter Wallison:  Exactly.  Since Burt Ely is here, I always give Burt the first question.  Burt?

Bert Ely:  Bert Ely, a banking consultant.  Steve, thank you very much for being here today and for all the work that has gone into this.  In just the last couple of weeks, we have seen a tremendous amount of turmoil in Europe, first the Northern Rock situation playing out and then a minor little trading loss at Societe General.  And out of that has come a cry in Europe for ending fragmented regulation. 

And as I gather it, there seems to be some sense there that if Europe had a different regulatory structure, if the world had a different financial regulatory structure, that somehow we wouldn’t see situations like Northern Rock or Societe General.  How do you see those incidences and that attitude feeding back into the Roundtable’s recommendations?

Steve Bartlett:  Yes, we haven’t had a chance to test this Societe General, but we have tested out Northern Rock, among policymakers, the news media and legislators and regulators since it happened.  And the consensus is quite clear is that Northern Rock happened, the regulators determined it, they found it, they solved it, they resolved it, they dealt with it pretty quickly and in a comprehensive way.

And in fact, in the United States, in all fairness for every one Northern Rock, we have had half a dozen of our own issues under the rules-based system that we’ve had.  So in fact, a principle-based system will not make rules go away.  We are still going to have rules and we should, they will be based on consistent principles.  And they will not make missteps go away, that’s why you have regulators is to correct the missteps. 

There will be problems ten years from now, there are problems today.  But the problems are less under principle-based and under prudential supervision because you can see them quicker, you have a more comprehensive approach so the regulator gets a look at the entirety of the endeavor, and then you can deal with it based on a principle base.

So I have not seen any erosion of support for principle-based regulation or prudential supervision because of Northern Rock.  In fact, it has somewhat increased because we have had problems of our own on our own system.  As you talk to both Europeans and US companies, and I hesitate to say US companies, because in the financial services world, US based companies clearly exist, but most companies of any size, if you are going to be successful, you have to be successful in the global marketplace.  So you have US based companies.

But most US based companies are quite aware of the UK system, of the system of more of a universal regulation and of a principle-based regulation.  And they find it to work better, they find it to be far more consumer friendly, so it helps consumers, and they find it to identify problems earlier and deal with them more forthrightly. 

So of the companies that operate under both systems, they almost universally privately say, and some of them publicly, that the UK system is way ahead of ours.  Now the market speaks with its feet or with its money, so you see the various outflows of capital towards Europe and other systems where the regulatory structure is more comprehensive, more secure, more principle-based.  And that is exactly what is happening.  That is why you see all of the statistics that these other commissions cited a good bit of, of the capital outflow overseas because money is fungible and it can move with an electronic push of the button.  So I think Northern Rock demonstrated the need for prudential- based regulation and prudential supervision and told us that we need to get with the game.

Peter Wallison:  Yes, sir?

Paul Wanakot:  Paul Wanakot, the University of Maryland.  You didn’t say much about incentives and it seems to me one of the problems in the current situation is that people had all sorts of crazy incentives, brokers to make more and more loans, people to underestimate risk assuming that somebody two years down the road would face some music.  If you are talking about a regulatory system, it seems to me one of the things that you should really emphasize is the incentive structure.  I wonder if you would comment on that?

Steve Bartlett:  Yes, thinking about the mortgage market, and I get to look in the mirror and think a lot about what went wrong over the last several years, principle-based regulation – first of all, let me start with what went wrong.  The competitive marketplace works very well.  It has enormous incentives to serve the market that the market is asking for, and that is what happened in the mortgage market.

But what it has to be coupled with is a regulatory structure for safety and soundness and for fair treatment of consumers that then puts some limits on it.  Let me use a trucking example.  Price deregulation for trucking worked very well, but it had to be coupled with a new set of safety and soundness standards for maintenance for trucks, otherwise you end up with an unsafe condition.  And that is, in essence, an analogy of what happened in the financial services market.

Principle-based regulation and comprehensive charters would put in those safeguards in the regulatory structure so that the competitive marketplace can compete for consumers, but the regulators would be able to look at the whole of the enterprise.  Mortgage brokers is one of the things that was left out.  As everyone here knows and Capitol Hill knows and they are going to pass legislation for a universal, a uniform national standard for licensing mortgage brokers. 

So that was completely left out because that was somebody else’s job.  It was either the state’s job or it was the AG’s job or it was the FDIC’s job or it was the Federal Reserve’s job or somebody else, but nobody actually took up the mantle of being in charge of regulating or licensing mortgage brokers.  And so in essence, they went unlicensed and unregulated.

In addition to that, each of the regulatory agencies had a piece of the mortgage market, but no one had the whole.  And one of the things that this does, it says create more universal uniform charters and while we haven’t proposed to abolish or consolidate any agencies because that is sort of pulling on Superman’s cape, we have said that as the FDIC proposes a set of regulations.

Those regulations should be consistent with a Congressional determination of principles, and those should be the same principles as the state insurance commissioner of Alabama and the same principles as the Securities and Exchange Commission, so that the principles are consistent.  And only then can you have the rules to be consistent. So with this system would we have avoided the meltdown?  Perhaps, perhaps not.  But it would have been lessened, we would have dealt with it earlier and it would have been of a whole different scale, in my opinion.

Peter Wallison:  Further questions?  Yes, in the back?

Lois Ted:  Hi, I’m Lois Ted and I’m a writer, I write for Business Newsletter.  You said the UK system is ahead of the USA.  In what ways and who is the regulatory system in the UK?  We have the Federal Reserve Bank – I don’t know if that is what – and the SEC.

Steve Bartlett:  We have the Federal Reserve Bank and we SEC and we have the FDIC and we have the OCC and we have state insurance commissioners and we have state banking commissioners and we have the OTS.  We have a whole laundry list of the alphabet soup of regulators and that’s not necessarily – we are not proposing to abolish any of those.

But those agencies write regulations based on their interpretation of their mandate and the statute and the regulations become divergent and they don’t have a consistency.  So we are proposing and actually we proposed a structure, use the existing president’s working group.  Perhaps Congress would choose to give it a new name, but nevertheless, use the existing president’s working group so that all of those agencies can – this Congress will tell them what the principles are and then they write regulations to provide fair treatment for customers.

So the UK has – we also propose universal charters on an optional basis.  So if a company wants to do business in all 50 states and offer multiple products, they can get one charter and be regulated in one place.  And we propose prudential supervision in which the regulators and the regulated entities – and this is exactly what happens in the UK with the financial services authority – so that there is a sense of prudential supervision. 

So that if the regulator comes into a company on a regular basis and says what you are doing here is not consistent with the principles or the regulations and you’re going to have to stop and you’re going to have to do it different and here’s how you have to do it.  The system we have now, at least with the SEC, is much more of a gotcha, much more of an enforcement, much more of enforcement now and then supervise later. 

So the UK has what’s called the FSA, the Financial Services Authority.  They regulate in a comprehensive way, they base it on principles and they provide prudential supervision.  In everybody’s report, in every single analysis that has been done, it is clear that the UK’s FSA system is the system of the 21st century and the system that we have in the United States is a system that was rooted in the 19th century and took hold by the middle of the 20th century, but it’s not suitable for our global economy.

Peter Wallison:  Let me just add something before we take any more questions because this is a very important point about the FSA.  The FSA not only is a comprehensive regulator, but it doesn’t regulate by business sector.  It regulates by business activity so that retail activities are looked at by one group, safety and soundness activities by another group.  But for all of the organizations within the agency’s jurisdiction, that is quite a bit different from anything people talk about here in the United States where we are actually talking a lot about regulating by silo, by banks, by securities firms, by insurance companies.

But in fact, if we are talking about what I think is developing in this country and that is a competitive system in which banks and securities firms and insurance companies are all competing with one another, they should be regulated the way the FSA is doing it.  I think that’s the assumption they made when they structured the FSA.  Sorry for that interruption, but I thought it was important to do that.  In the back?

Michael Johnson:  Hi, my name is Michael Johnson and I’m a litigation partner at Arnold and Porter.  I do a lot of work in the financial institutions sector.  What is the Roundtable’s view on the wisdom and the practicality of potentially moving the accounting underlying capital regulation, which is particularly relevant to banking, but also insurance companies, from the backward looking historical framework that underlies GAP to a forward looking market value-based system.

Steve Bartlett:  The Commission felt so strongly about the convergence of GAP and international financial accounting standards that they made that one of our principle regulations of the report.  They actually called it one of the eight low hanging fruits that can be achieved quickly and would have a huge positive impact. 

The SEC co-terminus with the release of our report declared that European companies that used international financial accounting standards would be allowed to do so and should no longer be required to convert over to GAP when they get to the United States, a major step forward.  And now you have to then pose the question of why would we adopt – and by the way, we supported that, so that’s a good thing.

But now you step back and you say why would we tell US-based companies that they are not allowed to have the same choice as a London-based company?  Another reason, it creates another reason why a US-based company would choose to move to London or to elsewhere in Europe.  So our companies and executives were – let me tell you, they didn’t say that they individually, their companies would all go out and choose IFSR over GAP, but they did say that IFSR has some advantages in terms of transparency and understanding and productivity for the companies, and GAP has some advantages also.

And that what you want is you want to have a marketplace, be able to determine which is the best system and then have regulations insure transparency and full disclosure and an understanding of which system you are using.  So we made as one of our major tenets that the SEC and the Congress should move to the next step and that is to allow companies that do business with the United States to have the choice between GAP and international financial accounting.

And I will tell you that was, in the discussions that we had at the Commission level, that was passionately felt by the executives because they believe, and they are right, that accounting should provide transparency, disclosure and give the investors and all of the stakeholders a clear understanding of what the company is doing.  And if that is best done by international financial reporting system, then that’s what it should be.  If it’s best done by GAP, then that is what it should be.  But it shouldn’t be narrowed down into where US-based companies have to use GAP even though international standards are better.  So it’s a very strongly felt.

Peter Wallison:  Okay, right up here in front with Alex Pollock.

Alex Pollock:  The great Alex Pollock.

Peter Wallison:  You are still going to have to introduce yourself, Alex.

Alex Pollock:  I am Alex Pollock of AEI.  Steve, you so rightly pointed out that among the alligators all swimming around us are some pretty big ones from the impressive mortgage finance bust that we have.  There are also some alligators which are the various political responses to that bust.  How would you take the principles from the report, which you so clearly articulated, and apply them to the various political ideas we are now seeing with respect to what to do about sub prime and other mortgage problems?

Steve Bartlett:  Well, as you know, we have been very active in the sub prime debate, and so we are debating it on both fronts.  First, the sub prime debate itself, we hold ourselves as a trade association and as our companies, we hold ourselves to the standards of the principles that we have articulated.  So when we go to the Hill, we advocate sub prime or prime mortgage reform, if you will, that is consistent with consumers should be treated fairly, so we start with that one.

We hold ourselves and the legislation that comes through, much of the legislation in the House, by the way, is based on these principles.  Some is not, there are some elements that are not.  The Senate is a little further away.  The cost and burdens of financial regulation should be proportionate to the benefits to consumers.  So consumers should get a choice and the burdens of regulation should be proportionate to the risks.

Or number six, management should have policies in place to enable a financial services firm to operate successfully and maintain the trust of consumers.  So we start with the sub prime debate and the mortgage debate by applying the principles to it.  We then go to Congress and we say, and this has been a successful approach and we say think for a moment how much, what kind of a different situation that we would be in, a different and better situation, had the tens of thousands of individual regulations written by dozens – or hundreds, if you count all of the states – of separate regulators.  If those had been written in a comprehensive way based on regulations, then perhaps much of this mortgage crisis would never have happened.

Now I don’t know how you prove that, but wouldn’t have happened had the world been different.  But it seems to make some sense and it resonates on Capitol Hill.  With fears, I guess most people had with the mortgage meltdown, that that would cause Congress to not consider principle-based regulation.  In fact, it’s been quite the opposite among Congressional leaders.

Now then you have to get – the next step is you have to get past the fear factor, the political fear factor.  Oh my gosh, if I say something that seems to be in favor of something the industry is in favor of, then my constituents are going to punish me.  That has not happened, but that is a fear that is held pretty strongly by Congressional staff and less strongly by the members themselves.  And so we just work through that fear one at a time. 

That’s why we’ve been so active at having the message of an optional federal insurance charter brought to the Congress by insurance agents that are dealing with their constituents, with their constituents and consumers ever single day to say this is what your constituents want.  They want to be able to go to one company and one agent and buy a property and casualty policy on their vacation home in West Virginia or for auto insurance for their teenage son or their twenty-year old son going to college in Philadelphia.  That was a personal example, by the way. 

The first thing that happened up here, my personal life when I got up here, before I even bought a house, I called my agent in Texas and said okay, I’m here now and I have still got my son with the average driving record for a 22 year old.  Actually, he was above average.  He’s going to be in Texas, but my one daughter is in Atlanta and he’s going to be moving to Philadelphia, I’m up here now, we’ve got a vacation home in New Mexico and I’m about to buy one in West Virginia.  So I still want you to handle all of my business.  He said to get yourself another agent – in fact, get yourself about seven more agents.

Because that’s the way the structure is set up.  I say could you just handle my son with the driving record and he laughed out loud.  So it’s the consumers that are being hurt.  It’s the consumers that were hurt in the mortgage crisis.  So we are proposing a way that Congress can allow consumers to be protected and also have their lives better off so they will be able to finance their lives the way they want them to be financed. 

Henri Jateau:  Hello, I am Henri Jateau with the Embassy of Switzerland.  Thank you for setting up this event, very interesting.  My question relates to how the Roundtable sees the relationship of the financial services supervisor with the institute in charge of the managed policy.  I mean, you have referred to the FSA a few times.  When he is a critic to the FSA, that it’s too much cut off from the Bank of England, to the effect that the FSA may not be equipped to properly face crisis relating to the whole market.  And on the other way around, the monetary authority doesn’t have the insight into the main actors of the markets to better grasp the market crisis as a whole.  Should a financial service authority related to the authority in charge of the monetary policy?

Steve Bartlett:  We discussed that somewhat, but we didn’t, as a commission, see a need to change or to separate the Central Bank from the regulatory.  That works well for us on our system and our Commission did not see a reason to change that.  So we think that will continue, and there are some good arguments for that – not overwhelming, there are good arguments on the other side, but there are arguments that could be made for it.

But what is more important is to be certain that the principles that the Federal Reserve is relying on in promoting its regulations are the same principles that the FDIC is relying on and the same principles that the state insurance agents are relying on or other regulatory agencies and that they don’t become separate.

Now I have to say that Secretary Paulsen has done quite a remarkably good job with a limited statutory authority in the President’s Working Group.  And in lobbying this on Capitol Hill, it is amazing to me how well known and well respected the President’s Working Group is on Capitol Hill.  And that tells me that there is a – I mean, just think about the name.  I mean, when was the last time that the Congress would support something called the President’s Working Group?  That’s why I said a minute ago that I suspect they want to change the name of it.

But leaving that aside, there is a hunger on Capitol Hill for some coherence in our regulatory structure, so we chose the President’s Working Group as the center repository of coordinating the responses.  But we did not see a need to change this.  And by the way, I have to commend the Embassy of Switzerland.  Just as we were publishing this, the Ambassador was kind enough to invite me to a dinner at the Embassy.  And without disclosing any of the secrets, such as which wine did we drink and such as that, there were people from Switzerland and from the Central Bank, as well as from the US, SEC, Federal Reserve and other agencies.  And so I decided in the middle of this very kind and gentile dinner, I decided to throw principle-based regulations out onto the table and the fight was on, as you might imagine. 

I did hear from one of the agencies – and prudential supervision – but from one of the agencies that said oh, of course, that would, as they say in embassy speak, in the diplomatic speak, they say that’s a very interesting idea, but I just can’t imagine how it would work.  Say this was a US regulator – I can’t imagine how it would work because we have to have rules.  And so you’d either not have rules or the rules would somehow get jumbled.

And the Europeans corrected him.  It was really kind of neat.  As I say, the fight was on as we would say in East Texas, but the Europeans corrected that and said no, principle-based actually does work.  You start with the principles and then you still have regulations.  And one of the early criticisms that I heard of this as you all probably have heard, it seems to be long gone by now, is that oh my goodness, you have to have rules.  Of course you have to have rules, but the rules should be based on some well thought out set of principles.

The UK has their own regulations, but the regulations are consistent within one another.  We proposed in here, by the way, a five-year transition period, so each agency would then – they do two things.  First of all, any new regulation they would promote, they would have to put through the test of how it applies to these principles and then have some kind of a mechanism, unspecified because we are not foolish, but some kind of a mechanism to kind of run it past their other regulators in the President’s Working Group so they would at least talk about it.  We didn’t propose they have to get approval, but they would at least have to have some conversation about it.

And then secondly then put them on a five year phase to take all of the existing regulations and examine them 20 percent a year and say this one no longer has any support in statute under the principles and so we’re going to have to change it or this one meets the principles just fine.  It will be an amazing, an extraordinary effort to look at our hundreds of thousands of pages of rules in the Federal Register from the prism of the principles of fair treatment and management accountability.

Peter Wallison:  Any other questions – way in the back?  Pat, that is you. 

Pat Callahan:  I almost thought Peter wasn’t going to allow me to ask a question because I represent the consumer’s perspective. 

Steve Bartlett:  So do I, so we are on the same –

Pat Callahan:  Well, wait until you hear my question.  Pat Callahan with American Association of Small Property Owners.  The question is what happens when something goes wrong?  Where does the individual turn when they are the victim of wrongdoing or criminal activity?  The OCC is a disaster, Securities Arbitration is woefully inadequate and in fact if you get bounced back and forth between the banking and the securities area and you are still out your funds – I was wondering if you would consider either one of two options.

One, allowing something like the Conference of State Bank Supervisors or the State Attorney Generals to enforce what may be a federal standard.  We do this in the environmental area, so there is precedent.  Or go for something like the call center that the FHA has in Oklahoma City which is very, very effective.  The only problem is that it only applies to FHA loans.

Steve Bartlett:  Well first I would stipulate that I disagree profoundly that the OCC is a disaster.  I think they are doing good work and in fact they have made significant progress and improvement and providing a great deal more today than just five years ago.  And I would use one case in point of the company that – an attorney general, mentioning no names, but from New York, called a press conference to announce he was filing a case against this company – and mentioning no names – but it was in Memphis because of a consumer complaint that he got from somebody in Houston.

And before he could file the complaint, that afternoon at a press conference at 10:00, the OCC had called the company and said fix it and they fixed it.  But of course the lawsuit still got filed.  So I think the OCC is actually quite effective.  Any agency can be more effective, but I think it is quite effective.  I think it would be more effective if it were given the mandate to do more.  I think in large part the OCC has responded because they see the need and they have operated within whatever statutory mandate that they have had. 

Secondly is I think that these principles, by adopting principles and then prudential supervision, you create a much faster and more certain and comprehensive way of resolving, for example your example, consumer complains.  Because then the regulatory agencies have a requirement to set up something to respond to consumer complaints and they have to do it within a set of principles that outlined by statute.  So I think you get far better treatment of consumers.

And third is you get better treatment of consumers assuming that you have a regulatory structure in place with them by allowing the marketplace to offer products that consumers want to buy.  So if, to use my example of Oregon, if a guy wants to buy a life insurance policy from his company in Oregon, the same policy that his brother in law told him was a great policy in the state of Washington, then from the same agent who has to be registered in both states for no particular reason, he should be allowed to buy that policy and then use the regulatory structure to insure transparency and all of those things.

But it’s not like it’s a worse policy in Portland than it is in Seattle. So I think you let the competitive marketplace work for the consumers, but you also then provide for a structure that these agencies can have if they were given this coherent mandate for treating the customers fairly, as we say in our principles.

Peter Wallison:  I guess we have time for one more question in the back over there, Karen? 

Jacqueline DeLorean:  Jacqueline DeLorean, a reporter with Thomson.  With respect to the transition to the international financial reporting standards, the recommendation in the blueprint, as I understand it, is to allow US issuers to use it.  So would that then also mean that the Roundtable supports an optionality system that you could use one or the other until convergence occurs?  The second part of this question is, is there some kind of a consensus on a date certain to the transition? 

Steve Bartlett:  We propose five years; we proposed a five-year transition.  I’m sorry, no we didn’t either.  I take it back, I was thinking of another subject.  We didn’t propose a certain date, we want to be sure that the convergence is long enough to be able to work, but you have to get started.  So I don’t think we addressed the specifics.  Peter, did we?

Peter Wallison:  I don’t recall that.

Steve Bartlett:  I have heard the – I suppose I have heard objections to the convergence or objections to the optionality made based on – well, the transition would be too short.  And since nobody has proposed how long the transition would be, I’m just not sure how to deal with that.  I think we should set the transition once we decide to do it.  That is number one.  As far as the transition, it should be whatever it takes to set out and then business will accommodate.

As far as the convergence, right now what seems to be more likely is an option that US companies should get the same option as companies in Germany or in the UK, but it has to be done with full disclosure and transparency to the investors.  Investors that read GAP accounting or international financial accounting, they know the difference and that’s why they are reading them.  And so I think the investment community can figure that out and already are figuring that out. 

It’s just that they are not allowed – some companies aren’t allowed to use it at their base in the United States.  So we think that you ought to use optionality, perhaps they’ll converge one day, perhaps not, but it doesn’t really matter as long as it is fully disclosed to the investors, which is our proposal.

Peter Wallison:  Okay, I guess that brings us to 1:30 and I want to thank all of you for coming and I want to thank Steve for an excellent presentation.

Steve Bartlett:  Thank you very much.

[End of Presentation]