Prudential Is Plotting Its Escape From Fed's Tough Oversight

  • Insurer may benefit from Trump picks taking over risk council
  • MetLife’s 2016 legal victory also likely to help company

Prudential Financial Inc. is laying the groundwork to escape the government’s label that it’s too big to fail, a move that would dramatically reduce federal oversight of the largest U.S. life insurer. Bloomberg's Jesse Hamilton reports on 'Bloomberg Markets.' (Source: Bloomberg)

Prudential Financial Inc. is laying the groundwork to escape the government’s label that it’s too big to fail, a move that would dramatically reduce federal oversight of the largest U.S. life insurer.

Prudential is preparing to push a federal watchdog -- the Financial Stability Oversight Council -- to remove it from a list of nonbanks that regulators concluded would threaten the financial system if they collapsed, said two people familiar with the company’s plans.

With business-friendly officials appointed by President Donald Trump taking over FSOC, the Newark, New Jersey-based company sees an opening, said the people, who asked not to be named because a final decision hasn’t been made. And the Treasury Department is expected to release a report as soon as next month criticizing how the government has gone about designating companies such as Prudential, which could provide momentum for the insurer to get out.

Another factor helping Prudential is rival MetLife Inc.’s legal victory last year overturning its label as a systemically important financial institution, or SIFI.

The creation of FSOC -- and granting it power to flag companies as so big and interconnected that their failure could imperil the economy -- was one of lawmakers’ key responses to the 2008 financial crisis. But the council, which is led by the Treasury secretary, has been controversial from the start. Republican lawmakers say its decisions are opaque and arbitrary, while companies have griped over designations or had to sell businesses to exit the government’s grip.

Under the Dodd-Frank Act, big banks such as JPMorgan Chase & Co. and Goldman Sachs Group Inc. automatically received the systemic-risk label but the number of nonbank companies designated by FSOC has been falling in recent years, with Prudential and American International Group Inc. the only two remaining. The label brings tough oversight by the Federal Reserve and a series of difficult supervisory exercises, such as stress tests and the submission of strategies for how the companies can be safely wound down in a bankruptcy.

Lobbying Mnuchin

Prudential quietly began its exit campaign as soon as Trump’s Treasury secretary, Steven Mnuchin, arrived on the job in February, sending him a welcome letter contending that its status as a SIFI wasn’t appropriate, the people said.

“We expect that ultimately we may not wind up as a SIFI,” Mark Grier, Prudential’s vice chairman, told shareholders in a May conference call, adding that Washington is “moving in the right direction” on the topic of nonbank designations. “Exactly how we get there, I’m not quite sure.”

Prudential has “long maintained” it shouldn’t have been labeled risky in the first place and only got to that point through “flaws” in the council’s process, the company said in a Thursday statement to Bloomberg News.

“We support the administration’s thorough review of the FSOC determination and designation process and look forward to reviewing the Treasury report upon completion,” the statement said.

‘Extraordinary Change’

Prudential could get the ball rolling by sending a letter formally requesting FSOC rescind its risk label, though Treasury says such petitions must typically demonstrate a company has made “an extraordinary change that materially decreases the threat the nonbank financial company could pose.” Prudential may have an easier time when Treasury conducts an automatic annual review of its designation.

A firm needs the Treasury secretary and at least six additional FSOC members to agree to rescind its risk label, as happened last year with General Electric Co.’s financial arm, GE Capital, after it shrunk and exited most of its financial-services operations. Other FSOC members include the leaders of the Fed, the Securities and Exchange Commission and the Office of the Comptroller of the Currency.

The voting balance at the council is shifting in Prudential’s favor, as Trump appointees are increasingly replacing agency heads who were holdovers from the Obama administration.
 
Fellow mega-insurer MetLife sued to escape its label, and in March 2016 a federal judge ruled in its favor. While the Obama administration appealed the decision, it remains to be seen how committed Trump’s Justice Department is to pursuing the case.

‘Thorough Review’

In April, the president directed Mnuchin to launch a “thorough review” of FSOC’s designation methods, with a particular focus on making its approach more transparent and giving firms a better chance of getting out. MetLife has asked a federal court to hold off on ruling on the government’s appeal until Treasury completes its review.

In another development that could benefit Prudential, the Fed and the Federal Deposit Insurance Corp. decided last month to give it and AIG an extra year to file their so-called living wills -- the complex and labor-intensive plans in which each firm plots its route through bankruptcy. Jaret Seiberg, an analyst with Cowen & Co., interpreted that as a sign that the agencies are “likely to lift the systemically important designations from Prudential and AIG” before the new deadline.

— With assistance by Benjamin Bain

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