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  • Dodd Bill Could Mean Trouble for USAA

    Sen. Christopher Dodd insists that his financial reform bill is aimed at Wall Street companies. But USAA, the well-known financial-services company for members of the U.S. military and their families, is worried that it will wind up caught in the Dodd bill dragnet.

    In a rare move, USAA CEO Joe Robles recently sent an email to each of its members, asking them to contact their representatives in Washington and urge them to make a certain change to the Dodd bill. Specifically, Robles hopes to amend the portion of the bill known as the “Volcker Rule” so that it won’t affect USAA.

    As the USAA website notes in a follow-up blog, the Volcker Rule “gives regulators the discretion to limit and prohibit certain investment activities of financial services companies, like USAA. In particular, this bill directs regulators to prohibit government insured depository institutions from engaging in ‘proprietary trading,’ whereby a company trades for its own account.”

    According to Robles:

    If unchanged, the bill would:

    • Prevent USAA from managing the association’s portfolio as we have for the past 87 years.
    • Jeopardize our ability to continue offering many of our competitive products.
    • Limit our ability to return money to our members. Last year, USAA returned $1.2 billion to our members in the form of distributions, dividends, and bank rebates and rewards.

    In short, under the Dodd bill, USAA could forget about making investments that offer the prospect of a healthy return.

    Robles would apparently be content if an exception for USAA can be carved out. But as Heritage’s David John has pointed out, there are much bigger problems with the Volcker Rule. It would do nothing to improve the stability of the banking system today — and it would have done nothing to prevent the 2008 financial crisis, or even lessen its impact. As John notes, none of the major financial firms that had to be rescued were in trouble because they had engaged in proprietary trading.

    The real problem with Bear Stearns, Lehman Brothers and AIG was the way they and their investment products were interconnected to every other significant world financial institution. The Volcker Rule would do nothing to reduce that interconnectedness.

    The Rule would, however, restrict the size of U.S. banks. But as John points out, far from improving their financial health, imposing size restrictions through fiat “would simply mean that they would be unable to finance large investments by major corporations without teaming up with other financial institutions. This additional complexity and cost would make it harder for U.S. financial institutions to compete with major European and Asian banks.”

    USAA is surely on to something with its concern about the Volcker Rule. But this debate is bigger than any one institution. It’s about a huge bill (1,408 pages) with scores of provisions that would hurt consumers and the economy — and make future bailouts all but certain. And as the USAA case underscores, it’s about the law of unintended consequences.

    Posted in Economics [slideshow_deploy]

    19 Responses to Dodd Bill Could Mean Trouble for USAA

    1. James Cruce, Gainesv says:

      As a 3rd generation USAA member of 25 years I am greatly concerned about anything that interferes with USAA's ability to return profits to it's members. USAA should be allowed to operate just as they always have. They have shown throughout their history that they truly can be trusted for great investment advice as well as the cheapest high quality car insurance.

      This is just another example of the unintended consequences of BIG GOVERNMENT interference. Maybe they should adopt the Hippocratic Oath: First Do No Harm.

    2. Stephanie Auslander, says:

      Dear Mr. Gallagher:

      It may help to read S-3217 (as I have) and to determine what the bill actually portends for USAA. Here is the bill.


      USAA is an unincorporated reciprocal interinsurance exchange. Rather than hewing to its ur-intent, which is highly economic auto/home insurance for military officers – USAA has ballooned into a sui generis unincorporated financial services holding company.

      Rather than returning about $8 billion of dividends to the two million or so subscribers who somewhat involuntarily now furnish USAA's capital, General Robles has now got himself trapped in something of a economic death spiral. He can’t repay the departing members the balances in their subscriber accounts without recruiting and more and more subscribers who will tolerate having their dividends expropriated.

      Now, out of the clear blue sky, comes S-3217 which will shut down USAA Federal Savings Bank (Section 317) and compel conversion of this novel de facto commercial bank to a formally instituted and highly regulated commercial bank [sic]. And because the two million subscribers to the unincorporated exchange now constitute a novel unincorporated national insurer operating on the same order of magnitude as Chubb – USAA’s perhaps inappropriate ownership of a bank has put General Robles and his novel insure squarely in the path of new FDIC regulation.

      And on top of this now comes national insurance supervision (section 502) – thank you AIG.

      Simply put – USAA and General Robles have no chance of passing muster under real regulators who will replace the highly compliant paper tiger known as the Texas Department of Insurance.

      So wither goest General Robles’ business model?

      USAA’s Attorney in Fact, Laura M. Bishop, is the executor of the $13 billion trust granted to her by USAA’s subscribers: she runs the reciprocal. Ms. Bishop must begin to grapple with the fact that her fiduciary duties to the two million subscribers to the unincorporated insurance exchange clearly trump General Robles more flexible opportunistic loyalties to the other 5 million so-called members – who are basically walk-in off the street customers. Anybody may open an account at USAA Federal Savings or USAA’s mutual fund operation.

      So the real question is what Ms. Bishop, the fiduciary, and Ms. Kristi A. Matus, USAA’s CFO, and Ms. Debra L. Werland, USAA’s Chief Actuary are going to do.

      One thing for sure: these three women better start digging out – and fast. General Robles death spiral can only worsen.

      I suggest that these three talented women organize an approach to Zurich Financial with a request that Zurich replace the subscribers capital which is now being held hostage in General Robles death spiral. That way, the subscribers can get their money back – now. Another entity which might quickly grasp the tasks pertaining to the execution of a trust is Morgan Guaranty Trust Company. The last person one wants running $13 billion which has lost its way is Milo Minderbinder. Laura M. Bishop may have the greatest personal stake in solving this horrific problem which is cropping up like a bad Tornado on the horizon

    3. Michael Woodson says:

      Every service member and his or her dependents eligible for USAA ought to write their representatives on this point. USAA is of immense help to service personnel and their families. I've never met a dissatisfied USAA member, only persons who once wished they could be part of it. And now, current and former NCOs and enlisted can be.

    4. LibertyAtStake, Alex says:

      Oh, oh … USAA insures my house and my cars. It's personal now! :)

      [For a light hearted take on our present peril]

    5. J.C. Hughes, Texas says:

      This is what Justice John Paul Stevens, and more than likely his replacement, would call "good policy"? There was a darned good reason the nonpartisan convention in Philadelphia adopted the constitution that we still enjoy today. And now we're experiencing the very abuses of government overreach our founders' tried to stop. The more these Beltway politicos interject themselves into private financial markets, the states' and the peoples' welfare will continue to falter. This congress and administration are so completely backward on the most basic economic principles. Even I see this and it's not my line of work. So much for Justice Steven's faith in such a self-serving representative body.

    6. controllerman, Az. says:

      Excuse me!! but is'nt Dodd a first class crook like Frank, Obama and the rest of the phonies running the show!?

    7. John, Fredericksburg says:

      USAA is absolutely the best. Been with them for Home, Auto insurance since late 80s at least and I don't want them to change inparticular if it is being changed because of this horrible banking regulation.

      Yea, it is DEFINITELY personal now!!

    8. Randall Holland, Ari says:

      All of my representatives are republicans and they are all voting "no" already. Maybe I should send a message to Obama but he won't listen.

    9. Ric, Minnesota says:

      The people in government make decisions to create a catastrophe and never take the blame and find a scapegoat to make more regulations and rules to hurt consumers and businesses alike. I would appreciate if legislators would quit showing what ignoramuses they are every time they do something they is so brilliant. We, as a people, are happiest when government does nothing. We will not be able to count on that with this administration. They are doing everything to destroy business and nothing to create jobs.

    10. Bob McKenna, Florida says:

      It should be pointed out that this is but one of the unintended consequences of the Volcker Rule, and it will have a negative impact on our military veterans, and active duty and reserve members of the military (and their families), the majority of whom are insured with, bank with, and invest with USAA.

    11. Jill, Ledyard, CT says:

      From a big picture perspective, this seems to be another example of punishing success and encouraging failure. From a military family's standpoint, I agree it feels personal.

    12. Normca says:

      Levin to Goldman Sachs – I am going to lambaste you today, but ask you to match last year's campaign money tomorrow. Just take my drilling; its an act.

    13. john a. wagner III, says:

      as a member of usaa since '67, i have enjoyed having one of the lowest cost home/auto insurance packagews in the usa. i would hope that gen.robles will contact ms stephanie auslander of san antonio, tx. to listen to some of her astute ideas concerning usaa's future. i would also hope that sen levin, mccain, and dodd would really look in the mirror tonite and decide if they really have the best interests of the people of the united states in their hearts, or as usual, just waxin' politic!

    14. Stajack, Lawton, OK says:

      Ms. Auslander,

      Don't blame USAA for a bad congressional bill. USAA didn't receive a TARP bailout, but they're being treated as if they did. I've been a satisfied USAA customer for 31 years. There are plenty more like me. Just leave us alone.

    15. LAURA N.SMITH says:

      I have already written my two senators from Tn. Both voted no on this bill in Washington. My Congressman is a democrat and I have not written to him yet but I can. This bill is wrong and it expands Federal authority and the Federal Reserve powers far beyond what they should have. It would also allow the Federal Reserve to act without Senate and Congressional approval. This by passes the checks and balances in our current constitutional system. We may need some oversight but not this. I definitely agree with your position and will do what I can to help USAA. Thanks Laura Smith

    16. Janet Smith says:

      I donot wish to see USAA impacted by the current Wall Street Reform Bill. I have been with USAA for years and they have always met my needs. I will write my senators and congressman in regards to this issue. I will help any way I can. Thanks, Janet Smith

    17. Al Wunsch, Fl says:

      Just to add to those above, I am a satisfied member of USAA since 1962. This company has always provided great service for its members and does not need this irresponsible congress and Obama admin to ruin yet another institution. I prefer that the republicans vote 41 against in the senate ad nausiam until we get a new congress.

    18. dave, dayton says:

      I have been with USAA for over forty years. They have always been an exceptional company, especially for service memebers. Only once can I remember them not paying a dividend, some hurricane wiped out half of Florida. I do not want the government messing in my auto insurance, nor in any banking I do with USAA. How do you get that point across to people who won't listen to the voters.

    19. J.C. Hughes, Texas says:

      As a long time USAA member, I too find congress' transgression repugnant and personal. My message to them is "keep your dirty corrupted hands off my bank!". And though I'm no relation, private firms such as Goldman Sachs need to pull a Howard Hughes as they're being lambasted by disingenuous congressional ideologues.

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