role before it begins designating nonbank firms with sifis. >> what's interesting is while there's a lot of discussion of the process, there's also a discussion that they're looking at 50 different companies. we have a bank centric model. they should start to look at whether or not there are unique characteristics to look at. >> how optimistic are you that enhanced supervision of individual companies will reduce the likelihood of any future financial crisis? >> i'm not optimistic about that given the historical record.

i think it's difficult to anticipate what's likely to happen and what the source of risks may be. in the near teerm, it's likely to be heightened scrutiny and reduction in the likelihood of excess risk taking. over time as merms tend to fade, i think it's likely we will be an environment where the risks will be very difficult to identify and control. >> would you agree that looking at individual companies is a systemic risk for us? >> i think it's preferable to troo to look at activities and you can look at companies involved in that those activities. looking at individual companies is necessary as part of prudential regulation. but i do distinguish that from identifying specific companies as subject to height and scrutiny. and in the case of the insurance industry.

basically federal regulation that could involve an explicit guarantee of their obligations. >> you state the board appears to be creating a one size fits all approach to not work well with nonbanks, spanning diverse industry, you think related to banning. what should the fed have done differently? >> they should be doing a number of things differently. they're a bank regulator. if you look at a manufacturing company. if they use drif tefs to accept raw materials because they need to lock in prices as well as having a financing arm to finance the purchase of finished goods and services.

so when you go to the start of the process congress specifically defines what should be looked at in order to determine what the company that is engaged in the activities. the issue i raised about the use of derivatives to accept goods is specifically not in rank 4k, which congress wrote into law. so then from there, the federal reserve is now expanding out what the regulation should be at the end of the process. so the problem here, and thgs why we raise the issue in terms of rules being taken out of order. if you have a flawed process of review, then that also affects how the regulation happens at the end. and then overlay the historic nature of the fed.

how would naming the snrks upset the competitive landscape and insurance sector. >> there are a couple of reasons. it would be the halo effect. because we have implicit federal backing we're better to buy producting spr somebody like us, if we were named. i don't think that's what is likely to happen. i think the opposite is going to happen. we'll be seen as an insurer you don't want to buy stock in. frankly the capital levels won't be quite as high. so we think those few insurance companies, which will be the largest in the industry probably, will be somewhat punished by the marketplace for

the title resignation. >> now recognizing the ranking member for five minutes. >> first of all, welcome the panelists. especially mr. wheeler whose company is headquartered in the great state of new york. and i want to compliment your many contributions to the economy in providing services for the americans. we really had only two ways to approach a troubled institution. we could let it fail, which we did with lehman. we could bail it out, like with aig. we tried to have other tools to help regulators not only manage large constitutions and make sure they don't fail, but in the event that they did, we would have a way to structure it. like the fdiy.

this did a brilliant job. really managing the committee in a much less disruptive way. so that's what we did ch and during the full-time, we did have a lot of debate over insurance companies and many insurance companies testified. i don't know if you did or not. be many, many ceos and academics testified that insurance was not the problem. that in fact, it had been a rock in our troubled dmik times. most types of insurance activities conducted in isolation would not pose a systemic threat, ai zbrks is an important, and i would say tragic example of how insurance ak at this times could threaten and bring down a great company, a larger organization, and really be a threat to the entire

financial system. so they don't exclude any company for that area. they don't exclude any type of company. the thrust was to make sure we're not shadow areas of a financial institutions thatted a a risk based factor that could do systemic risk to our entire economy. do you agree that a framework that applies broadly and evaluates a number of riskiness measures is preferable to a frame work that categorically excludes some companies. under the definition i'm hearing, aig would have been excluded. it's primarily an insurance company.

so i would really like to ask, how is met life different from aig? and how do you impact on the risk profile? as we know, aig was a very strong international company. so i throw that out to anyone who would like to answer. >> maybe i'll start. what got aig in trouble is not insurance activities. they were not inside a regulated insurance activity. i think the premise of your question makes perfect sense. i think we have to find these areas in the shadows. and if metlife were doing

something deemed risky, that should be regulated by the federal. what i worry about is regulated insurance activity, which is not in our opinion, systemically risky. and it's is already highly regulate regulated. when they think of the activities they should regular lit. that's what they should be focused on. we worry about the fed regulated -- yet being another regulated by the insurance industry. >> could you comment on the fact that your firm acquired a good portion of aig, as i understand it. in 201. what did metlife pay for the acquisition? and did the federal reserve have to approve this transaction? was it government trying to manage risk in the overall

economy? >> during the financial crisis, metlife performed well. and we had to, b even they were we were a bank holding and eligible for tarp money, we did not take it. we were the only large bank holding company that did not. i suppose that's a testimony to how we were managed and our capitol solvency. we're not interconnected with the banking systems. so we were in a strong position. aig needed to start selling assets. we acquired a division for $16 billion. because we're a bank holding company, the fed had to approve that transaction, and it did. that money was yudsed to pay back the treasury. good for the treasury.

good for helping aig get back its feet and showing the insurance industry throughout the crisis. >> my full-time is exired. >> thank you, mr. chairman, you did a good job of explaining the lack of risk with the insurance portion. it's fair to say it's not the problem. it's when they get to the financial services for when they get in trouble. does your company engage in other products? but they don't deal in derivatives or swap credit faults. >> it does not. >> very good. if your judgment, i guess that's a hypothetical question. i'm trying to fight your out what's going with the feds. where do you think this should go, is a better way to put it.

at least putting protections in place to be able to see those groups of folks that are in the business of dealing with those instruments, and then how to separate that out from folks like yourselves who are not involved in that. i'm worried that the bank is thinking if you're being, systemically insufficient. the insurance industry itself, probably not life insurance. probably not systemically significant. this may be others where it's not the case. they should be scrutinized. if insurers get involved in something besides insurance, and could happen. if they get involved in

something else then that's being a derivatives trader or seller or create or or anything else that connects them to the banking sector. that's fair game. it should be krut nized and regular hated. >> you believe there should be rules in place to describe the connectivity between the financial services markets. and if you go over the line, you fall under a category that you should be designated. fair statement? >> yes, i do. >> very good. mr. quaadman. i know the chamber is very concerned about that. one size fits all in your testimony is the way you put it. the the approach that the fetd fed is taking. what is your suggestion for them to look at the regulations and go back and view the existing

rules how they're negatively impacting small folks that don't need to be in this. the rules they put so so far had a dramatic impact. i'm sure you remember. >> number one is they should follow the law. if you look at the test, which is the first stage to see if companies should be considered. congress sort of constructed that as a one-inch pipe. now they're trying to make it a 12-inch pipe. they want to bring in as many companies as possible. where it should be done really sparingly. i think mr. wheeler also made an accident point as well we're also looking at size. size isn't determinetive either. it's important that the marketplace investor and companies need to assess how the system works, how it's going to impact companies and the like by taking rules out of order.

by not following transparency and writing rules. it's impossible to decide that. so one example is vince bom lar tee. he didn't say this is the last play we're going to play in the super bowl. so they are starting at the end trying to work forward. we should really start from the beginning. >> with regards to the rules and the process, are your associations, are you at the able with the discussions that are going on? >> we have commented extensively. we have met with regulators on different forms in the issues. >> are they receptive to your ideas and concerns? >> we brought forth how this impacts non financial companies. there are times with good discussions. there are times when it's very

clear that they're coming at it from a bank approach and not willing to move off of that. >> wheeler. >> i think i would agree. we're very engaged. this is very important to us whether we're having an impact. i don't know. >> we'll know when we get the rule rules. >> thank you. is there anybody in the room from department treasury or the federal reserve? see, that's the problem. they testify first. then they leave. and they don't listen to you. it's a chronic problem with the agencies that refuse to be on the same panel as to those who are regulated.

these departments and agencies should be ashamed of themselves. it deprives you to represent the government. that's why mr. wheeler, i asked the questions that you wanted to ask. and that's the problem with washington. this is why the city is broken. they don't think they have to stick around in order to listen to the people impacted. i would suggest the next hearing we have is put force them to listen to the testimony. there's no reason they should go first. it wasn't until october 1st of 2009 that the fed actually adopted a policy -- are you ready for this? -- requiring written proof of a person's earnings before that person could fill out a mortgage application.

now i would say that's pretty basic. they took an entire year to review everything. a bottom up review of what was necessary. the it took that long to figure out that you don't condone the layer modes that allowed people to do that i just wonder how the fed is going to start to be able to regulate insurance companies. all of you generally agree that the insurance companies generally should not be regulated, but may under certain circumstances -- can you guys help me with this? what would the fed do in -- in messing up metlife?

>> you know -- >> you like that question? >> that's a great question. look, as mr. quaadman said a bit ago, the federal reserve was part of the mandate to regulate the banking industry. so the people who work at the fed, that's their training. that's their experience. they regulate a banking. now metlife bank holding company. and therefore regulated by the fed. and i can tell you, there was a very strong reluctance on the part of the fed to look at us as anything other than a bank. even though, of course, 90% of our businesses is insured. we were frustrated by that. that's probably why i'm here today is because of that experience. so i would also tell you that the federal reserve, i've met a lot of people at the federal reserve, i have yet to meet somebody who had what i would call a sophisticated

understanding of the insurance industry. >> it's a mismatch. >> right. so it worries me. we are already highly regulated by the states. the new york insurance department, you know, and the state of new york is, you know, i would argue the most sophisticated state regulator sophisticated state regulator who regulates us today. and they know what they're doing. >> can i ask a question? the aig i think was in five pieces of the company. did the insurance division ever -- was that ever at rising or were the illinois requirements so profound that none of the policyholders were in peril at any time? professor? >> if you look at aig's total capital and surplus and its insurance subsidiaries, it was substantially positive throughout the crisis.

and the walls were in place that overall, if you aggregate it across those subsidiaries, aig had plenty of capital to meet its obligations to all policyholders. there has been some debate about the extent to which specific subsidiaries may have run into capital shortfalls. that would raise the question how fungible the capital held by aig would be able to make up for the shortfall of the entities that are underfunded. i haven't seen a clear coherent analysis that would document whether any of those sub stid yarryes would have had a crisis that would have required regulatory intervention. overall, there was plenty of money. and the overall system of insurance regulation with strong walls between the subsidiaries and holdings. >> you don't know if those walls

could have been breached? >> they wouldn't have been breached to have money sucked out to support the noninsurance. >> one of the boogy mans of the financial crisis was aig. we touched on this a little bit. maybe again, and i don't mean to pick on mr. wheeler, what is the difference between met life and aig? >> well, i think for purposes of your question. you know, if you look at the subsidiaries, how many of them are engaged in insurance. and how many of them do something else. met life is a small bank we own, which we're in the process of selling, because we don't want to be a bank holding company any more. almost anything we own from the holding company,in the business of insurance. and whether that's pnc insurance

or life insurance, in this country and around the world. aig was in all those insurance businesses as well in the u.s. and around the world. they also engaged in a lot of insurance activity. the one that caused so much attention, of course, was the aig financial products which was a business they ran in london, where they sold credit default swaps on all kinds of securities. and sold them to banks and other financial institutions, and when the crisis occurred, therefore they weren't able to pay. a and, therefore, the banking system was relying on that money. that's the big difference between us. most of the insurance industry looks like met life. they aren't involved in a lot of other activities. >> if you look at aig, wasn't

the credit default swaps and the mortgage bank securities -- wasn't that an investment strategy for aig on the insurance side? >> i think there's something you need to understand here. what financial products did was create and sell derivatives to others. we purchased derivatives from wall street. and i'll talk about why that's okay to do. we have to hold collateral against those positions, they get chewed up every day. lehman brothers, who was a big derivative counterpart of ours, we didn't fail, because didn't lose money, because we held collateral against their derivative positions. we use derivatives in our insurance company to manage risk. and most major financial institutions do. just investing in de ring tifbs

to manage risk doesn't make you systemically important. >> maybe switching gears a little bit, you guys are aware of the three stage process set up by fsoc. do you guys as a group of four pa degree with that three-stage process? do you think it's a good process to go through? anyone disagree with the three-stage process? anyone recommend change for the three-stage process? you guys don't like it? >> it's good to have a process, i think. i think it's more about the substance of the decision making. what we've heard a lot about is, someone said, define interconnectiveness, i think that was on the last panel. they can't, of course, it's judgmental. if you think about the six criteria they're going to use to designate something systemically important -- everything is almost very judgmental.

i'm hoping the fsoc has a robust discussion about those other more qualitative factors. >> just to -- >> that's a great question. congress had a process in place to do this system and the regulators trying to go around that. i think one thing to think about, and i think this gets overshadowed by the general financial crisis, you look back a few years ago, there's a problem with liquidity problems and state and municipal securities, right? that's a $3.6 trillion market. the question you should all be asking the regulators is, could they find a problem with insurance companies with the processes they have set up. you just look at size, you should probably be using a flashlight. >> in general a three-stage process, where you do a broad

screen and work down is sensible. actually having a process wherein the first stage you get the right criteria and the right thresholds, that's very difficult, and i don't think there's sufficient information to evaluate the specifics in the first stage. i'm troubled by the overwriting amount of discretion. if you don't meet the first stage test, you can be advanced through the screen. unfortunately, i don't have any sharp ideas how you would fix this to optimally trade off the specificity that would be desirable versus some degree of discretion. >> would with everyone agree that nonbank financials should be considered? do you all think that's a reasonable area for us to look at? or is anyone on the panel saying, no, we just want to look at banks? >> no, i totally agree that's necessary. >> okay.

>> that we catch these activities and the shadows. >> can be done through exacting standards, it's only used sparingly, but when it's appropriate. >> i'm very skeptical of identifying individual nonbanks as being systemically significant because of disruptions it can create in competition. i wish more attention would be paid to how we might do this, without identifying specific companies, but instead looking overall at areas that could create systemic risks and having some sort of supervisory regime that could deal with that, without labelling companies as systemically significant. which ultimately will translate by the faith and soundness of the federal government. >> i have to say, i don't see a way to do what scott's described. >> ultimately, we need each of these institutions to be able to handle the claims on them. so in the end we have to say, these institutions have enough

capital, enough liquidity, enough safety margins in general. >> my time has expired, i yield back. >> i want to thank all the witnesses for their testimony this afternoon. the chair notes that some members may have additional questions for this panel, which they may wish to submit in writing. the hearing record will remain open for 30 days for members to submit written questions. this hearing is adjourned.