As the first superintendent of New York State’s Department of Financial Services, Ben Lawsky has not just had to lead the agency, he has also had to help define DFS’s place in the regulatory arena of banking and insurance.
“If other regulators are doing a good job in a particular area and we’re just a little old state regulator, we’re never going to be able to bring the kind of resources to play in those areas that are already being taken care of, so we tend to… and I think the governor tends to, concentrate on areas where there is not as much focus and there might be problems,” explained Lawsky in a sitdown with City & State at the newspaper’s recent State of Our State conference in Albany. “If everyone is playing in right field, second base, shortstop and they’ve got the infield covered, but no one’s in left field, we’ll go play in left field.”
Since DFS was formed in October of 2011 through a merger of the New York State Banking Department and the New York State Insurance Department, Lawsky and his team have zeroed in on a number of practices that have been either ignored or inadequately pursued by other regulators, such as force-placed insurance, anti-money laundering enforcement and the rapidly growing practice of private equity firms buying annuity companies. In delving into these areas, DFS has aimed to spark what Lawsky calls a “healthy competition among financial regulators.”
“In the run-up to the financial crisis, for many years we had a system where it was a competition to see who could have the lightest touch as a regulator, and rather than create a race to the top for better regulation, which I think healthy competition does, another form of unhealthy competition can exist which creates a race to the bottom, who can be the least effective,” Lawsky said. “I think post-financial crisis that has changed quite a bit… but I still think there are areas of, for lack of a better term, complacency.”
Despite only being a year and a half into its existence, DFS has already scored some significant victories in consumer protection. For example, investigating the practice of force-placed insurance—where banks are allowed to take out an insurance policy on behalf of a homeowner who has failed to maintain the insurance mandated by the terms of their mortgage—DFS revealed that rather than seeking out the most favorable policy for homeowners already struggling with great financial difficulties, banks were actually seeking out high priced policies, because the force-placed insurers were kicking back a large portion of those premiums to the banks in the form of commissions. By exposing this abuse, DFS was able to get the nation’s two largest force-placed insurers to agree to major settlements with the state, including restitution for homeowners, and to reform the way the industry operates.
Another DFS investigation uncovered that the U.K. bank Standard Chartered had helped Iran, Libya and other nations launder at least $250 billion and obscured tens of thousands of transactions in violation of U.S. sanctions against those countries. As a result, DFS ended up winning a $340 million settlement from the bank and opened the door for the U.S. Treasury Department to assess the bank an additional $327 million in penalties.
For Lawsky, a former assistant U.S. attorney who prosecuted terrorism cases, pulling back the curtain on this type of malfeasance was particularly important. “No matter how bad financial shenanigans are they don’t have the potential catastrophic consequences that money laundering by terrorists, for example, could allow,” Lawsky said.
Most recently, DFS succeeded in bringing about a settlement earlier this month in the long-standing dispute between Bank of America and the bond insurer MBIA over mortgage-backed securities. The $1.7 billion settlement, which relates to Bank of America’s purchase of Merrill Lynch and Countywide Financial during the financial crisis, cancels out all of the litigation between the companies, keeps MBIA solvent, and makes BoA an equity investor in MBIA’s holding company and a major lender to the insurer.
“This is an example where the regulator was helpful in reaching a settlement that is actually good for business,” Lawsky said.
Now Lawsky is taking aim at the area of so-called “shadow insurance,” a practice where insurance companies shift assets to other entities in order to exploit looser reserve and oversight requirements in other states or countries.
“This is something we’re watching and it’s growing and it’s becoming more complex,” Lawsky said. “It’s not transparent enough and our worry is that’s another area where you could have a blow-up and we’ll all sit around two, three, four years from now and say ‘Why didn’t anyone blow the whistle on this back then when everything was fine and dandy?’ At DFS one of things we try to ask ourselves is, ‘Is this something we’re going to regret five years from now not having said that is a really bad idea?’ ”
Despite his earnestness to protect the public and curb abuses in the banking and insurance industries, Lawsky is careful to heed the criticisms of those who argue that regulation can stymie economic growth and impede job creation.
“Yes, there’s a cost of regulation, but there’s also a cost to a lack of regulation, and at certain times we take actions that may slow business down or may it a little harder at times, but you also have to ask what the cost of another financial crisis would be,” Lawsky said. “In this last one, what did we lose? Millions of jobs, trillions of dollars in savings to Americans? So there’s a cost on the ledger as well and I think the key is just to be thoughtful and weigh those costs carefully and realize that as regulator you don’t have a monopoly on the truth. Just because we have a good idea, we also need to talk to a lot of different people, including the industry and other stakeholders, to decide we’re right, before just saying ‘I know the answer’ and regulating willy-nilly.”
Continued Lawsky, “Regulators need to be humble and realize that you always have to balance the unintended consequences of what you’re doing versus what you think is the right thing to do.”
Superintendent Lawsky joined City & State for its “Newsmakers” series of one-on-one discussions as part of the newspaper’s State of Our State conference. The event, held on May 7 at Taste in Albany, was co-sponsored by McKenna Long & Aldridge, The Business Council, The Parkside Group, Con Edison, New York Affordable Reliable Electricity Alliance, and New York Gaming Association.
Tags: Bank of America, Ben Lawsky, City & State, Department of Financial Services, Insurance Department, MBIA, Merrill Lynch, newsmakers, Standard Chartered, State Banking Department, State of Our State