In a further example of “mission creep”, the Financial Stability Oversight Council (“FSOC”), another spawn of Dodd-Frank, charged with responsibility to oversee and regulate…everything with a dollar sign in front of it, is now proposing to designate certain non-banks as systemically important financial institutions, or “SIFI”. The honorees of this designation are American International Group (“AIG”), Prudential Financial and GE Capital. This effectively means that they are “TBTF” or too big to fail – at least as long as our government is run by folks like Henry Paulson, then Treasury Secretary, who in 2008, made sure that AIG got a U.S. taxpayer bailout paying it dollar-for-dollar on its obligations, so it could honor the billions of dollars of counterparty debt owed to his alma mater, Goldman Sachs, and other big Wall Street investment houses. In other words, rather than being forced into bankruptcy [proving that it wasn’t too big to fail], AIG – an insurance company – was suckled on the government’s bailout teat, along with all of the Big Banks.
Now it appears that two other big money companies will have the implicit guarantee of the federal government. And what’s more, regulation, the federal government’s raison d’être, will be further entrenched under the guise of protecting the American public from itself.
In an illuminating article about the FSOC’s latest action is found in a recent Morrison Forrester article here. Herewith, some snippets:
Does saying it’s so make it so? A continuing question about the nonbank SIFI process is whether it amounts to a self-fulfilling prophecy. In other words, does the act of designating a company as a nonbank SIFI effectively make the company “too big to fail”? We do not know for sure, but the designation process sends an obvious message that the FSOC believes that the failure of a designated nonbank SIFI could pose a material risk to the financial system. How the markets will react to this message remains to be seen. To be sure, the markets will watch closely how these designations affect the companies’ financial and performance metrics, including stock prices and funding costs. In addition, the FSOC’s action is sure to add further fuel to the ongoing political and public policy debate over “too big to fail” and the impact of Dodd-Frank regulation on the financial markets.
Regulating the companies—easier said than done? The Dodd-Frank Act specifies in broad terms the consequences of nonbank SIFI designation, including new Federal Reserve Board oversight and supervision, regulatory capital standards, stress-testing and liquidity requirements, counterparty exposure restrictions, as well as regulation of proprietary trading and private fund activities under the Volcker Rule, to name a few specific elements. But the challenges that the federal regulatory agencies will face in implementing and administering these requirements will be formidable, inasmuch as the three companies in question have widely divergent balance sheets, asset portfolios, business and operational profiles, and capital structures that may not lend themselves to a uniform regulatory framework. Among other things, the balance sheets and capital structures of consolidated insurance enterprises such as Prudential and AIG may not easily adapt to bank-like capital requirements, and the federal regulatory superstructure will have to take into account the presence of longstanding and possibly inconsistent state-level insurance financial and solvency regulation. These and many other substantive and operational supervisory and regulatory issues will have to be carefully addressed by the Federal Reserve Board.
In sum, the FSOC’s actions yesterday were not surprising or particularly enlightening, but are an important step in the scheme of systemic financial regulation. And, for the regulators charged with implementation of the FSOC’s actions, as well as the firms tapped for nonbank SIFI designation, the fun now begins.
Conclusion. Whew! That’s a relief. It’s great to know that the Treasury Department, of which the FSOC is a part, will be watching the non-banks as closely as they were watching the bank-banks during the 2005 – 2007 financial crisis, when money was handed out like party favors, and loan underwriting decisions were based on whether the borrower could fog a mirror.
