1) The FIO was created in the wake of the financial crisis, as part of the Dodd-Frank Act. It has since been active on two fronts: as a source of information about the insurance industry for the U.S. Department of the Treasury and other branches of government, and as a representative of the insurance industry in international negotiations.
2) The FIO has had a challenging first decade. Since its launch, insurers have been concerned that the introduction of a new federal body, like all bureaucracies, is the camel’s nose in the tent, which would eventually lead to attempted expansion of its scope. Today, even though many have come to accept the FIO—provided it does not attempt to exceed its authority—there are still efforts to abolish it.
3) In the past, government restrictions of the free market with involvement in insurance have proven inefficient and anticompetitive. Should the FIO advance legislative attempts to address “affordability and accessibility” of insurance, it will likely contribute to the disruption of an efficient private market closely regulated at the state level.
(Bloomberg) — The U.S. Treasury Department is sending a message to states and cities that the billions in aid from the American Rescue Plan should provide relief to residents, not their governments’ debt burdens.
The department on Monday released guidance on how state and local governments can use $350 billion in funding from President Joe Biden’s $1.9 trillion rescue package. The funds are intended to help states and local governments make up for lost revenue, curb the pandemic, bolster economic recoveries, and support industries hit by Covid-19 restrictions. In a surprise to some, these funds can’t be used for debt payments, a potential complication for fiscally stressed governments that had already etched out plans to pay off loans.
Illinois Governor J.B. Pritzker had suggested using some of the state’s $8.1 billion in aid to repay the outstanding $3.2 billion in debt from the Federal Reserve’s emergency lending facility and to reduce unpaid bills. Illinois was the only state to borrow from the Fed last year, tapping it twice. On Tuesday, Jordan Abudayyeh, a Pritzker spokesperson, said the administration is “seeking clarification” from the Treasury on whether Illinois can use the aid to pay back the loan from the Fed.
The rule could also affect New Jersey, which sold nearly $3.7 billion of bonds last year to cover its shortfall during the pandemic. Assembly Republican Leader Jon Bramnick, a Republican, in April had called for Governor Phil Murphy, a Democrat, to use some of the federal aid to pay down the state’s debt.
Support urgent COVID-19 response efforts to continue to decrease spread of the virus and bring the pandemic under control
Replace lost revenue for eligible state, local, territorial, and Tribal governments to strengthen support for vital public services and help retain jobs
Support immediate economic stabilization for households and businesses
Address systemic public health and economic challenges that have contributed to the inequal impact of the pandemic
The Coronavirus State and Local Fiscal Recovery Funds provide substantial flexibility for each government to meet local needs—including support for households, small businesses, impacted industries, essential workers, and the communities hardest hit by the crisis. These funds can also be used to make necessary investments in water, sewer, and broadband infrastructure.
Concurrent with this program launch, Treasury has published an Interim Final Rule that implements the provisions of this program.
The steep losses at Archegos come as a council of top U.S. regulators known as the Financial Stability Oversight Council is already scheduled to meet on Wednesday to discuss hedge-fund activity during the pandemic-triggered crisis. The meeting is the first for the risk council during the Biden administration, which has pledged to scrutinize financial weaknesses revealed by the pandemic-triggered market tumult from March 2020. The council is made up of the heads of the Treasury Department, Federal Reserve and other agencies.
Mr. Dweck, the consultant, pointed to a case that many on Wall Street are hearing echoes of this week: Long-Term Capital Management, a massive hedge fund that blew up in 1998. Firms learned the full extent of the hedge fund’s problems only when government officials summoned them to Long-Term’s offices to pore over its records, he said.
“The upshot is, you’re going to have stuff like this happen,” Mr. Dweck said.
The government deducts tax and other revenues from net cost (with some adjustments) to derive its FY 2020 “bottom line” net operating cost of $3.8 trillion. o From Chart 4, total government tax and other revenues decreased slightly by $49.4 billion (1.4 percent) to about $3.6 trillion for FY 2020. This net decrease was due primarily to a $51.6 billion decrease in individual tax revenue, compared with an offsetting decrease and increase in corporate and other tax revenue, respectively. o Together, individual income tax and tax withholdings, and corporate taxes accounted for about 88.8 percent of total tax and other revenues in FY 2020. Other revenues include Federal Reserve earnings, excise taxes, and customs duties.
There are rumors that the Biden administration is thinking of a 15% minimum tax on companies with book or accounting income (“GAAP” income) of $100 million or more. This proposal tends to bubble up on the national policy agenda off and on with unfailing regularity. For example, in April 2019 Senator Elizabeth Warren raised a similar proposal in the early days of her presidential campaign and the Joint Committee on Taxation, as far back as 2006 examined Treasury’s advocacy of such a tax. Sadly, this was tried once and was a failure. In 1986, the corporate minimum tax was amended to include an adjustment for book-tax differences, being applied from 1987 to 1989 before it was not renewed.
There are many pitfalls associated with the idea of taxing book income. For starters, companies that meet the threshold will try and minimize GAAP income to pay lower taxes. One could argue that is desirable as we often suspect that companies today inflate GAAP income to look better to their shareholders. Tying tax rates to book income would imply that earnings management, or attempts to artificially inflate GAAP earnings, will now incur a real cash outflow cost in terms of higher taxes. However, the usefulness of GAAP earnings would be severely compromised and if distorted by tax related maneuvers, will give managers and speculators even more fuel to spin narratives to justify wild valuations. One can even imagine a world where stock return volatility driven by uninformative earnings numbers might drive away uninformed investors from equity markets.
Spending by consumers who make less than $60,000 a year jumped by more than 20% in the week ended Jan. 10—the week after the U.S. Treasury Department began electronically sending stimulus payments of $600 per adult and $600 per child for individuals with adjusted gross incomes under $75,000—according to the research group Opportunity Insights’ tracker of figures from Affinity Solutions, which collects consumer credit- and debit-card spending data.
One reason regulators might be stymied is a lack of political will to limit trading by small investors. When Robinhood temporarily blocked its customers from trading GameStop shares during the frenzy, a cry went up about market access. The big losses those little guys inflicted on some hedge funds by bidding up the stock was seen as a democratization of the market. Any effort to derail that could be criticized as protection for Wall Street.
“Most people believe that middle-class people, working people, should be able to take their chances on the stock market,” Rep. Maxine Waters (D., Calif.), who leads the House Financial Services Committee, said in an interview.
The consensus among regulators so far is that the episode didn’t expose major problems with the market’s plumbing. The Treasury Department said Thursday that regulators believe the market’s “core infrastructure was resilient.” The department said the SEC is reviewing “whether trading practices are consistent with investor protection and fair and efficient markets,” and is expected to release a report on the factors that influenced it.
Treasury Secretary Janet Yellen convened a meeting with the nation’s top regulators Thursday, who are continuing to review whether recent volatility in popular, so-called meme stocks, and brokers’ responses to it, “are consistent with investor protection and fair and efficient markets,” according to a Treasury Department statement.
Yellen met with the heads of the Securities and Exchange Commission, Federal Reserve Board, Federal Reserve Bank of New York and Commodity Futures Trading Commission to discuss the functioning of financial markets and practices of both investors and brokers in recent weeks.
“The regulators believe the core infrastructure was resilient during high volatility and heavy trading volume, and agree on the importance of the SEC releasing a timely study of the events,” according to the statement. “Secretary Yellen believes it is imperative to uphold the integrity of these markets and ensure investor protection.”