Karl Rove and Fox News have pushed the conspiracy theory that an Office of Financial Research created by the Senate financial reform bill would "peer into" everybody's checking accounts, credit cards, and financial transactions. However, the OFR would simply collect and analyze data about potential risks to the financial system, and the proposal has been endorsed by Republican Sen. Bob Corker, as well as numerous economics and finance experts, including six Nobel laureates in economics.
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Rove, Fox News push conspiracy theory that financial reform bill lets government spy on "everybody's checking account"
Rove on Fox News: Bill "creates a new office" that can "go through everybody's brokerage account and everybody's checking account and everybody's credit card and everybody's financial transactions." From Rove's April 21 appearance on Fox News' On the Record:
ROVE: But you know what? This is stuffed with a lot of things that are going to -- that are going to become apparent over time that are going to be problems for Democrats. You may not know about this. It creates a new office and gives it a half a billion dollars a year and a huge start-up for computer systems in order to monitor every financial transaction in the United States and to use that data to arrive at policy recommendations about sensible regulation.
So they're literally going to have the capacity to go through everybody's brokerage account and everybody's checking account and everybody's credit card and everybody's financial transactions and collect -- sweep that information and then analyze it.
And do we really -- I mean, I remember when people got really upset when we were taking a look in the Bush administration at sweeping the electronic communications of suspected terrorists abroad. Now we're going to be empowering an agency and giving it half a billion dollars a year to peer into our brokerage accounts and our IRAs and our SEPs and our banking accounts and our -- all of our financial accounts and sweep that information in order to do with it whatever they want to do to arrive at, quote, "sensible policy recommendation." Doesn't sound to me like a smart thing to do in this environment and this climate.
Rove in WSJ: "Office of Financial Research" would "gather information on individual financial transactions." From Rove's April 22 Wall Street Journal column:
There are other potential pitfalls for Democrats in Mr. Dodd's bill. One is a provision that would create an Office of Financial Research that would receive half a billion dollars a year to gather information on individual financial transactions so government bureaucrats can analyze the data and suggest policy changes. I suspect Americans don't want a new bureaucracy sweeping their brokerage and bank accounts for information.
Doocy: "There's some scary stuff in there that would worry all of you if it does pass." On April 22, Fox & Friends aired a clip of Rove's On the Record appearance, which co-host Steve Doocy introduced by stating that "[t]here's some scary stuff" in the bill "that would worry all of you if it does pass":
DOOCY: Last night on the Greta van Susteren show, Karl Rove was on and he has actually been looking at the 1,400 pages of this bill. Remember, in Washington they don't read the bills. Karl did.
BRIAN KILMEADE: (co-host) We've got to pass them first.
DOOCY: There's some scary stuff in there that would worry all of you if it does pass. Watch this.
Fox Nation: "Massive Gov't Takeover! Feds to Monitor Checking Accounts, Credit Cards?!" On April 22, Fox Nation posted the following headline and provided video from Rove's appearance on On the Record:
OFR would "monitor emerging risks to the economy"
Office of Financial Research would collect data and conduct research to "monitor emerging risks to the economy." The Senate Banking Committee's summary of its proposal states that the bill creates an "Office of Financial Research" to collect data and conduct analysis "to identify and monitor emerging risks to the economy":
Technical Expertise: Creates a new Office of Financial Research within Treasury to be staffed with a highly sophisticated staff of economists, accountants, lawyers, former supervisors, and other specialists to support the [Financial Stability Oversight Council's] work by collecting financial data and conducting economic analysis.
Make Risks Transparent: Through the Office of Financial Research and member agencies the council will collect and analyze data to identify and monitor emerging risks to the economy and make this information public in periodic reports and testimony to Congress every year.
Regulators suffered lack of information about financial industry during crisis
National Research Council: U.S. "currently lacks the technical tools to monitor and manage systemic financial risk with sufficient comprehensiveness and precision." Summarizing the results of a November 2009 workshop on "Technical Capabilities Necessary for Regulation of Systemic Financial Risk" -- attended by "[m]ore than 40 experts representing diverse perspectives" -- a National Research Council report stated that "It was widely acknowledged at the workshop that the United States currently lacks the technical tools to monitor and manage systemic financial risk with sufficient comprehensiveness and precision." The report further said, "Many workshop participants stated that neither the regulatory system nor individual firms currently have adequate data to monitor and regulate systemic financial risk."
Tarullo: Crisis showed we "could not fully measure the extent to which financial institutions and markets were linked." Daniel K. Tarullo, a member of the Board of Governors of the Federal Reserve System, stated in a February 12 Senate Banking Committee hearing that "government regulators and supervisors had insufficient data to determine the degree and location of leverage in the financial system." Tarullo also stated that "[o]ur ability to monitor the size and extent of maturity transformation has been hampered by the lack of high-quality and consistent data on these activities" in the "so-called shadow banking system." He added:
More generally, the crisis revealed that regulators, supervisors, and market participants could not fully measure the extent to which financial institutions and markets were linked. A critical lesson from this crisis is that supervisors and investors need to be able to more quickly evaluate the potential effects, for example, of the possible failure of a specific institution on other large firms through counterparty credit channels; financial markets; payment, clearing, and settlement arrangements; and reliance on common sources of short-term funding.
NYT: Lehman used "alter ego" to hide risk from regulators in lead-up to collapse, financial crisis. An April 12 New York Times article reported, "In the years before its collapse, Lehman used a small company -- its 'alter ego,' in the words of a former Lehman trader -- to shift investments off its books," which might have "obscured its financial condition before it plunged into bankruptcy." The Times reported that the "alter ego" "appeared to be an independent business" but that "its board was controlled by Lehman, which owned a quarter of the firm," and that "[n]one of this was disclosed by Lehman." From an April 12 The New York Times article:
In the years before its collapse, Lehman used a small company -- its "alter ego," in the words of a former Lehman trader -- to shift investments off its books.
The firm, called Hudson Castle, played a crucial, behind-the-scenes role at Lehman, according to an internal Lehman document and interviews with former employees. The relationship raises new questions about the extent to which Lehman obscured its financial condition before it plunged into bankruptcy.
While Hudson Castle appeared to be an independent business, it was deeply entwined with Lehman. For years, its board was controlled by Lehman, which owned a quarter of the firm. It was also stocked with former Lehman employees.
None of this was disclosed by Lehman, however.
Entities like Hudson Castle are part of a vast financial system that operates in the shadows of Wall Street, largely beyond the reach of banking regulators. These entities enable banks to exchange investments for cash to finance their operations and, at times, make their finances look stronger than they are.
Mendelowitz and Liechty: Bernie Madoff "was able to perpetrate this very long running fraud, in part, because officials did not have good data." In February 12 congressional testimony, John Liechty and Allan Mendelowitz, founders of the Committee to Establish the National Institute of Finance, stated that Madoff "reported consistently high earnings based on a purported complex trading strategy that made ample use of derivative transactions. He was able to perpetrate this very long running fraud, in part, because officials did not have good data on the network of counterparties to derivative transactions." They also stated that when deciding the fate of Lehman Brothers, the government "did not have the data needed to fully understand the counterparty relationships linking Lehman to the system, nor did they have in place the capacity to analyze such data to form a clear picture of the consequences of the alternatives they faced."
Additionally, Liechty and Mendelowitz said that with respect to AIG, "Officials were apprised of the scale of the problem, but they faced two key problems that were evaporating trust in the market: the growing uncertainty over how to value these CDS [credit default swaps] and the fact that they had no way of understanding the Domino risks, i.e. the risk that the failure of one firm (AIG) would cause a cascade of failures throughout the system. Facing these uncertainties, government officials felt they had no choice but to provide massive government assistance to prevent AIG from failing."
OFR has bipartisan support, as well as the endorsement of numerous experts in economics and finance
Creation of agency has been endorsed by Republican Sen. Bob Corker (TN). The New York Times reported on March 11 that "[b]y standardizing financial instruments and reporting mechanisms," the OFR, which "has sometimes been referred to as the National Institute of Finance," would "give regulators a broader view of the health of participants in the financial markets and the potential for problems to spread." The article further stated that "[t]he new agency, which was also endorsed Wednesday by Senator Bob Corker, Republican of Tennessee, would have no policy responsibilities but would instead collect and analyze data, building models to assess relative risks and predict how one firm's problems might affect others." Indeed, at a March 24 Chamber of Commerce Summit, Corker stated of the Senate financial reform efforts: [transcript from Nexis]
When you think about the fact that we had a chairman of the Fed, Ben Bernanke -- who I respect, I might add -- but when you think about the fact that leading up unto this crisis he was telling people a month out, two months out that everything was wonderful leads you to believe that we don't have the appropriate information in this country to understand the types of unweighted risk that people have as it relates to derivatives and other vehicles.
And so one of the great additions that really hasn't been talked about much in the media is this National Institute of Finance that would actually be able to accumulate data, turn it into information on a daily basis so that regulators actually understand if there are areas in finance that are out of balance.
Agency has been endorsed by numerous Nobel laureates, financial industry representatives. The New York Times reported that the Committee to Establish the National Institute of Finance is "made up of current and former financial executives, statisticians and economists, including six Nobel laureates in economics":
A group called the Committee to Establish the National Institute of Finance -- made up of current and former financial executives, statisticians and economists, including six Nobel laureates in economics -- has been lobbying for such an agency for much of the last year.
Allan I. Mendelowitz, a former director of the Federal Housing Finance Board who was a founder of the group, said in an interview that regulators were unable to assess expanding risk in the recent crisis in part because they relied on independent contractors, like the credit rating agencies, for data.
Along with several professors of economics and finance, representatives of the financial services industry, including Morgan Stanley and Bank of America, are members of the Committee to Establish the National Institute of Finance.
John Liechty: Agency is "the least controversial part of the whole title." During a February 12 Senate Banking Committee hearing, Liechty and Mendelowitz stated that a National Institute of Finance would "improve the efficiency and effectiveness of financial regulation" and "reduce the likelihood of systemic crises and costly institutional failures." They also stated that "we have ample evidence that the recent crisis was due in part to a lack of appropriate data an analytic tools." A National Institute of Finance was proposed by Sen. Jack Reed (D-RI) in February. According to the Banking Committee, the Office of Financial Research "is very similar in key respects to the proposed Institute [of Finance]." Liechty has reportedly said that the Office of Financial Research "retains most of the authority in the Reed bill. We are the least controversial part of the whole title. You can't do systemic risk regulation without gathering the appropriate data."
Conservative media have previously peddled conspiracy theories about privacy violations to attack legislation
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Echo chamber: Health IT falsehood goes from Limbaugh to WSJ's Moore and Fox, back to Limbaugh. The Wall Street Journal's Stephen Moore and Fox News anchors Bill Hemmer and Megyn Kelly promoted the falsehood -- which first appeared in a Bloomberg "commentary" by Betsy McCaughey and was subsequently promoted by Rush Limbaugh and Matt Drudge -- that the economic recovery bill included a provision that would, in Moore's words, "hav[e] the government essentially dictate treatments." Limbaugh later took credit for spreading this story.