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.