WASHINGTON — The Financial Stability Oversight Council today reversed its designation of GE Capital as a “systemically important financial institution” (SIFI), a key decision with strong financial and political implications.
Amongst other implications, it is likely to end the effort by Republicans in Congress, especially in the House, to rein in the FSOC this year, although the effort was unlikely to succeed.
The FSOC acted GE reduced the potential liability of its financial services arm by divesting more than $150 billion.
By divesting the SIFI designation, GE Capital will no longer be directly overseen by the Federal Reserve Board as the regulatory arm of the FSOC. The designation involved rigorous federal regulation on top of all other regulation, and imposed additional capital requirements on GE Capital.
The divestiture is part of the effort by GE chairman Jeffrey R. Immelt to pull GE away from non-manufacturing assets.
GE was designated because the government aided it during the financial meltdown that began in 2007.
GE sought to diversify into the financial industry under prior management in the 1990s, investing heavily in the credit card, mortgage loan and private equity lending business.
Amongst the acquisition it divested was the old Life Insurance Co. of Virginia. It renamed it Genworth and invested in, among other things, insuring mortgages. It divested Genworth during the financial crisis. It is now one of the largest factors in the long-term care insurance businesses, but has been struggling mightily in the current low-interest rate environment that is plaguing the insurance industry.
All of these acquisitions ultimately made it one of the nation’s largest financial firms, and got into deep financial waters as these investments declined steeply in value. It also made investors view it as a risky financial stock rather than as a mundane manufacturer of sophisticated airplane engines and electrical turbines worldwide. GE is also divesting most of its consumer businesses, including washing machines and kitchen appliances.
Financial firms have also been hard-hit by the recent turmoil over Brexit.
In a note to investors by Washington Analysis, a Washington-based buy-side investment analytical firm that advises institutional investors, Ryan Schoen played up the political implications. He pointed out that the FSOC statement included comments from Treasury Secretary Jacob Lew that pointed out the decision “demonstrates that the FSOCl’s designation of nonbank financial counterparties is a two-way process.” Schoen said that this “speaks to much of the criticism of Republican legislators, who often claim that no guidance or roadmap has been provided to designated entities seeking a rescission of a nonbank SIFI designation.”
Schoen acknowledged that Washington Analysis “has long been skeptical of legislative efforts to create a new system for designating institutions as nonbank SIFIs, today’s announcement significantly reduces the urgency of such proposals, such as the bill offered by Rep. Blaine Leutkemeyer, R-Mo.
Leutkemeyer is among a number of right-wing members of the House Financial Services Committee who have repeatedly sought to severely limit federal involvement in insurance regulation. Leutkemeyer and Rep. Jeb Hensarling, R-Texas, chairman of the Financial Services Committee, have held repeated hearings and called to task numerous Obama administration officials over the administration’s initiatives to oversee insurance, including the new fiduciary standard rule.
It also comes against the background of the administration’s filing of an appeal last week of MetLife’s successful challenge in U.S. District Court of MetLife’s designation last year as a non-bank SIFI. The decision leaves only American International Group and Prudential Financial as non-bank SIFIs. Oral arguments in the U.S. Court of Appeals for the D.C. Circuit of the MetLife decision is expected in September or October, and a decision by early next year.
Schoen also discussed the next-step in the designation process. He said that he did not expect the FSOC “to act in the foreseeable future to designate new entities as nonbank SIFIs.”
He did note, however, that the FSOC’s 2016 annual report listed a host of risks to the financial system and serves as a forum for the administration “to paint in broad strokes as it outlines the major regulatory priorities for each of the Council’s member regulators.”
Schoen noted that, “As has been the case for the last few years,” asset managers [BlackRock and Fidelity, among others] were highlighted as areas of systemic risk, “though the Council largely deferred future regulation of the industries to their primary regulators,” i.e, the Securities and Exchange Commission.
The FSOC has also said it will await a final decision in the MetLife case before deciding whether to ask to be de-designated. AIG has not commented on its plans. Moreover, Prudential has noted that the FSOC annually re-determines whether it considers a non-bank a SIFI.
MetLife, however, has also made clear it plans to proceed with a restructuring aimed at de-risking the company because it has acknowledged that even if it wins the current case, the FSOC could still re-designate again after altering the evaluation process if the Appeals Court says it can proceed to re-designate MetLife based on a revised evaluation process that conforms to the intent of Congress.
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