Legal Commentary

Systemic Risk, the Fed, and ?Regulatory Casuistry?

By Kenneth Anderson

With an eye to Ben Bernanke?s upcoming testimony to the Financial Crisis Inquiry Commission during the two days of hearings on ?too big to fail? ? in other words, systemic risk ? the WSJ has an editorial in today?s paper raising various questions about the basis on which the Fed, the FDIC, and other agencies concluded that AIG, Bear Stearns, Wachovia, and others qualified as ?systemic risk? exceptions allowing for extraordinary actions ? i.e., bailouts.

I follow the systemic risk discussions pretty closely, as part of a current writing project, but I realized that I had not been tracking the FOIA requests surrounding some of the US government actions ? in part because the government doesn?t seem to be much interested in responding to them.  The general point of the FOIAs is to try and get an understanding of what particular government agencies, and the Fed and FDIC in particular, believed constituted systemic risk, along with an account of how the concept was applied in practice in 2007?2009.  The conclusion of the editorial is, I think, right in the question it poses:

Two years after the bailouts and more than a month after President Obama signed into law new authority for the government to prevent ?systemic risk,? Washington still won?t tell us what this term means. Releasing the history of 2008 would at least allow us to know what regulators thought it meant at the time, with lessons for the future.

I agree that the question takes on more importance given the new legislation that confers even more discretionary authority on the Fed to address questions of systemic risk.  What the Fed understands by that term as applied in particular circumstances ? which is to say, as a concrete regulatory term, and not just as a matter of a conceptual economic term ? is far from irrelevant.  Call it (maybe!) the ?regulatory casuistry? of systemic risk, how it gets worked out as a practical term in a run of particular circumstances.

(A useful discussion of the term as a regulatory concept is in Steve Schwarcz?s Georgetown law journal article from midway through the financial crisis, ?Systemic Risk,? parts of which are being incorporated into a book Steve and I are doing on financial regulatory reform; the FOIA requests remind me that the concrete ways in which agencies interpret an abstract term that grants them a great deal of discretionary authority matters a lot, and not just the abstract concept denoted by the term.)

Full post as published by The Volokh Conspiracy on September 01, 2010 (boomark / email).