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Portfolio > Asset Managers

FSOC eyes SIFI process revisions

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Washington – The Financial Stability Oversight Council (FSOC) said Monday it will review the process it uses to designate financial companies, especially non-banks, as systemically important financial institutions (SIFI). The agency is under pressure from companies and their supporters in Congress to keep the number of institutions designated as SIFIs to a minimum.

In that light, it also said it will grant MetLife’s request for an oral hearing into its preliminary designation as a SIFI, and said it also “continued” its discussion regarding how the asset management industry should be overseen in light of concerns that some asset managers could constitute a threat to the financial system. If designated, MetLife would be subject to oversight by the Federal Reserve Board.

Asset managers and the Securities and Exchange Commission (SEC), whose chairman is a member of the FSOC, have argued that the SEC is adequately overseeing asset managers and additional oversight. i.e., by the Fed, is not necessary.

Regarding asset managers, the FSOC statement said that it “discussed areas of focus and potential risks, as well as processes for seeking input and evaluating information.” As part of the discussion, the FSOC also said it heard an update on asset manager risk management policy initiatives by the SEC.

The decision to grant the hearing was made just one day after MetLife announced in a securities filing that it will challenge its designation as a SIFI.

The decision by MetLife to seek further review was expected. In early September, Steven A. Kandarian, MetLife chairman, president and CEO, said that the company “strongly disagrees” with the decision to designate MetLife, implying MetLife would challenge its Aug. 8 preliminary designation as a SIFI.

Under the rules, the FSOC has to schedule an evidentiary hearing within 30 days, and notify the company within 60 days after that whether the decision to designate the company will be affirmed.

If designated, MetLife would be the third insurance company so designated. The other two are American International Group (AIG) and Prudential Financial. GE Capital has also been designated as a non-bank SIFI.

The decision to examine revisions to the processes it uses to designate systemically important financial institutions was expected, because the FSOC has become a prime target of conservative members in Congress as an example of government overreach. Behind the scenes, the FSOC is a target because criticism of designation is a fertile ground for politicians seeking to generate campaign contributions from deep-pocket financial institutions that don’t want the additional scrutiny oversight by the Federal Reserve would bring.

That is so even in the face of the attention being paid to the claim by Maurice “Hank” Greenberg, former chairman and CEO of AIG and a large stockholder, that the federal government treated AIG differently when it was forced to bail out the company in Sept. 2008. It was the fallout from the need by the federal government to bail out AIG that led to creation of the FSOC as a means of providing a mechanism for preventing the kinds of abuses that led to the 2008 financial crisis.

In fact as the FSOC was meeting, Henry Paulson, Treasury Secretary during the Bush administration, testified in Federal Claims Court in Washington during the trial on Greenberg’s claim. Paulson played a key role in the decision to have the Federal Reserve acquire a 79.9 percent in AIG as a means of bailing it out.

Paulson acknowledged in his Monday testimony that the terms of AIG’s bailout in were “punitive” and “harsher” compared with the assistance other financial institutions received at the time. Paulson also acknowledged that political considerations played a role in the Treasury/Federal Reserve decision to apply “punitive” terms to AIG. Paulson testified that AIG had become a “lightning rod” for public outrage that needed to be dealt with.

He also testified that the takeover was punitive because the Bush administration felt that it was the only way it could get Barack Obama and John McCain, who were running for president to succeed Bush at the time, to refrain from making the decision to bail out AIG a political issue during the campaign.

Nevertheless, he did so, he testified, because a bankruptcy of the insurance giant would have been “catastrophic” for the economy. Paulson has also said the same thing in testimony before congressional committees.

And, today, former Treasury Secretary Timothy Geithner testified that he had described an AIG bankruptcy as an unacceptable option and that the company represented a “systemic risk” in September 2008 that required government intervention. Geithner was president of the New York Fed at the time and became Treasury secretary when the Obama administration took power. In both jobs, he played a key role in the AIG bailout.

However, criticism of the FSOC is strong. Rep. Scott Garrett, R-N.J., recently sent a letter seeking a stay of execution for MetLife that was signed by other conservative members of the House. Garrett is chairman of the Capital Markets Subcommittee of the House Financial Services Committee, and a member of the FSC’s Republican leadership.

The letter argued that the FSOC policy toward insurance companies is to “designate first, then ask questions later.” The letter specifically argued that insurers “didn’t get the public analytical effort” that the asset management industry did in the FSOC’s “rush” to designate firms as SIFIs, leading to disparate treatment of insurers.

Moreover, Rep. John K. Delaney, a Democrat who represents a conservative-leaning district in Maryland, has also become a prime critic of the FSOC. He issued a statement following the MetLife designation expressing concern about the “process behind the designation, particularly regarding the lack of communication and transparency,” and also introduced legislation in July that would shift the authority to designate non-banks to the courts.

The bill, H.R. 5180, the Financial Stability Oversight Council Improvement Act, would address “transparency” in the SIFI designation process. Rep. Delaney said it would do so by having the FSOC “focus on the riskiness of the underlying activities at these entities, including how they are structured and capitalized.” It would also give the courts, which lack the FSOC expertise, the final say in determining whether an institution is designated a SIFI.

See also:

New York eyes IUL product

5 ways regulation is affecting the annuity industry

Fed to study insurance reg rules

Inside the New York Fed: Secret recordings and a culture clash


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