AIG, Prudential Named Systemically Important by Panel
American International Group Inc. (AIG), Prudential Financial Inc. (PRU) and a unit of General Electric Co. (GE) were identified by U.S. regulators as potential risks to the financial system in a step toward putting the firms under tighter government scrutiny.
AIG and Prudential, in statements issued yesterday after a meeting of the Financial Stability Oversight Council, said they were notified of the proposed designations. Russell Wilkerson, a spokesman for GE Capital, said in an e-mail that his company also received a notice.
The council didn’t identify the companies it decided should be subjected to heightened Federal Reserve oversight. AIG, Prudential and GE Capital had previously said they were in the final stage of review.
“The council took another important step forward by exercising one of its principal authorities to protect taxpayers, reduce risk in the financial system and promote financial stability,” Treasury Secretary Jacob J. Lew said in a statement.
Prudential, the second-largest U.S. life insurer, said it is evaluating whether to appeal the decision. AIG previously said it wouldn’t oppose such a ruling.
The vote marks the first time the council, which is led by Lew and includes Fed Chairman Ben S. Bernanke, has designated companies systemically important, meaning they could pose a risk to the broader financial system if they were to fail. The panel was created by the Dodd-Frank law three years ago to help prevent another financial crisis.
Shares of AIG increased 0.6 percent to $45.03 at 10:06 a.m. in New York, Prudential gained 0.8 percent to $70.14 and General Electric rose 0.1 to $23.67.
Designated companies have 30 days to appeal. The council’s final vote will take place after the companies have a chance to challenge. The council, or FSOC, doesn’t release company names until the final designation is made, in part because of “the potential for market participants to misinterpret such an announcement,” according to the council’s rules.
“The number of firms that will be affected is very limited,” Stephen Myrow, managing director at Washington-based ACG Analytics Inc., said in a phone interview. “Those firms had plenty of time to prepare for the consequences.”
Myrow, a former Treasury official under the George W. Bush administration, said “it’s too optimistic to think that we’re going to prevent future crises, but the goal is to mitigate the consequences of those.”
The panel’s decision was criticized by the chairman of the House Financial Services Committee.
The council’s move puts taxpayers at “greater risk of being forced to fund yet another Wall Street bailout,” Jeb Hensarling, a Texas Republican, said in a statement. “Designating any company as ‘too big to fail’ is bad policy and even worse economics.”
AIG Chief Executive Officer Robert Benmosche told the council in November that the insurer wouldn’t oppose designation. Regulators are working to prevent a repeat of 2008 bailouts such as AIG’s by subjecting some firms to added oversight. AIG received a rescue that swelled to $182.3 billion after bets on housing soured amid the financial crisis. The insurer finished repaying the U.S. in December.
GE Capital, based in Norwalk, Connecticut, is a savings-and-loan holding company regulated by the Fed. It had $538 billion of assets at the end of last year, making it larger than all but six U.S. banks, Fed data show. It sold $32.1 billion of bonds in the U.S. last year, more than any other company, according to data compiled by Bloomberg.
General Electric CEO Jeff Immelt pledged to shrink GE Capital after its access to credit dwindled in the wake of Lehman Brothers Holdings Inc.’s 2008 bankruptcy. He has since exited businesses such as Irish mortgage lending and sold Canadian real estate holdings.
Immelt cut GE’s dividend for the first time since the Great Depression and tapped Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) for a $3 billion investment to stabilize the company as the finance unit struggled. GE Capital sold $59 billion of bonds backed by the Federal Deposit Insurance Corp. and tapped the Fed’s Commercial Paper Funding Facility to issue $16 billion in short-term debt.
MetLife Inc. (MET), the largest U.S. life insurer, wasn’t included in the final stage of review with AIG, Prudential and GE Capital because it was already regulated by the Fed due to its size and ownership of a deposit-taking institution. The New York-based insurer sold its deposits to end the oversight, and said it could eventually be named a systemically important financial institution, or SIFI.
U.S. insurers are overseen by state regulators. The Fed hasn’t yet written final rules for oversight of non-bank SIFIs, so it’s not clear what the designation will require, Ed Mills, an analyst at FBR Capital Markets, wrote in a research note. The Fed will probably tailor the regulations to insurers, rather than using rules written for banks, he said.
Dodd-Frank puts bank-holding companies with more than $50 billion in assets, such as Bank of America Corp. and Wells Fargo & Co., under increased Fed supervision. It gives the council the responsibility to decide which non-bank financial companies warrant heightened Fed supervision.