A Senate panel on Covid-relief turned unexpectedly combative on Wednesday as two of the most prominent Democratic women on economic issues—Senator Elizabeth Warren of Massachusetts and Treasury Secretary Janet Yellen—clashed over whether to single out BlackRock and other big asset managers for the most stringent level of regulatory oversight.
During a Senate hearing ostensibly on the government’s economic relief efforts, Warren aggressively pushed Yellen on whether the Financial Stability Oversight Council would consider designating BlackRock as a “systemically important financial institution,” which would subject the asset manager to much stricter supervision by financial regulators.
Yellen said in reply that it was “not obvious to me that designation is the correct tool.” She said that instead of designating BlackRock and other large asset managers as systemically important entities, FSOC had decided to look at activities such managers engage in that might pose threats to the stability of the financial system.
What followed was a tense exchange in which Yellen pointed to the past work of FSOC and Warren demanded that Yellen revisit that work.
Yellen: "It's not obvious to me that designation is the correct tool"
Warren: "Designation is what gives the Fed its increased oversight powers, is that correct?"
Yellen: Yes@SenWarren: "Is BlackRock currently designated so it receives that increased oversight?"
Yellen: No pic.twitter.com/eyh10s3RzK
— AFR (@RealBankReform) March 24, 2021
“Are you currently looking at the designation for companies like BlackRock, $9 trillion companies like this?” Warren asked.
“Like I said, they have looked at this issue.” Yellen began to reply before being interrupted by Warren.
“I understand we have done it in the past,” Warren said. “I’m not asking what the last Secretary of the Treasury did. You are the head of FSOC now. The question I am asking is whether or not it is considering and looking at designation for these large financial institutions.”
“I think it’s important to look at designations for institutions whose failure would propose a material risk,” Yellen began before being interrupted again by Warren.
“That’s why I started my question with does, potentially, a $9 trillion investment company pose some risk to the American economy if it should fail?” Warren asked.
“One needs to analyze what the risk is,” Yellen said. “An asset management company is very different…”
“So how do you analyze what the risk is if you are not actually doing the investigation through FSOC?’ Warren asked.
“Well, FSOC has undertaken such work in the past,” Yellen replied. “And as I said, when it looked at asset managers, it issued a report outlining what it saw as some of the most significant risks…”
“I realize what they have done in the past,” Warren interrupted. “Are you continuing that investigation now?”
“Well, I’m just beginning a work program with the FSOC,” Yellen said, attempting to back away from this heated conversation.
That’s when Warren accused Yellen of making the same mistake regulators made in the run-up to the financial crisis.
“I understand that when the stock market is going up it can be easy to ignore risks that can be building up in the system. That was the mindset of the regulators that led up to the 2008 crash. And that is how taxpayers ended up on the hook for a $700 billion bailout of the giant banks. When the party is going strong, it’s the job of the regulators to take away the punch bowl,” Warren said.
She concluded by saying Congress had given regulators the appropriate tools to deal with systemic risk.
“It is important for you to use them,” Warren said.
She then moved on to a different set of questions without allowing Yellen a chance to respond.
The exchange highlighted a rift between what might be thought of as the populist wing of the Democratic Party—represented by Warren—and the technocratic wing—represented by Yellen. Warren wants Biden’s Treasury Secretary to revisit the designation of Blackrock because control of FSOC is now in Democratic Party hands. Yellen believes that FSOC should not be a political body and trusts the prior work done under the previous administration because it was done largely by non-political staffers.
In short, Warren thinks the FSOC should be more democratically accountable and Yellen trusts in the permanent bureaucratic Deep State. Although as Treasury Secretary, Yellen is a political appointee now, she spent most of her career at the Fed, which may explain her preference for trusting the evaluations of the government’s economic experts.
BlackRock has been pushing companies it invests in to take leftwing stances on climate change and divisive racial politics rooted in Critical Race Theory, a movement increasingly known by the name “Woke Capitalism.” Some critics of BlackRock charge that one of the motivations for this push is to win allies on the left so that the firm can avoid more stringent financial regulation.