Firms 'too big to fail' will get more oversight, say feds
Federal regulators propose labeling some massive financial firms as potential threats to the financial system that need stronger protections against catastrophic failure and stricter government oversight.
Then-Office of Management and Budget Director Jacob Lew speaks with reporters at a Monitor Breakfast in Washington, DC. Feb. 17, 2011. Mr. Lew, now the secretary of the Treasury, will head a council deciding which major insurers, hedge funds, mutual fund companies, and private equity firms are 'systemically important' and thus need to increase their cushion against losses, limit their use of borrowed money, and submit to inspections by Fed examiners.
Michael Bonfigli /The Christian Science Monitor
WASHINGTON
Federal regulators have proposed that a group of firms that aren't banks be deemed potential threats to the financial system that need stricter government oversight.
Big insurers American International Group Inc. and Prudential Financial Inc., and General Electric Co.'s finance arm GE Capital, said they are among the firms. The near-collapse of AIG in 2008 helped trigger the financial crisis and it received a $182 billion federal bailout that it has since repaid.
The Financial Stability Oversight Council on Monday didn't name the nonbank financial firms because they have 30 days to notify the council that they're contesting the proposed designation. The council didn't say how many firms it wants to designate as so big and interconnected that their potential troubles could imperil the financial system.
In its statement, AIG didn't say whether it intended to challenge the designation. Prudential said it is considering whether to request a hearing before the council to contest it. GE Capital spokesman Russell Wilkerson said the company is "reviewing the details."
Nonbank financial firms include insurers, hedge funds, mutual fund companies and private equity firms. Those deemed "systemically important" would have to increase their cushion against losses, limit their use of borrowed money, and submit to inspections by Fed examiners.
The regulators' council, which includes Treasury Secretary Jacob Lew and Federal Reserve Chairman Ben Bernanke, took the action in a closed meeting. It was the most significant step yet by the council, which was created by the financial overhaul law to help prevent another financial meltdown.
The council will have to vote again to finalize each designation. If at least two-thirds of the 10 voting members agree, the council would formally put the designated firm under the Fed's supervision. Lew, the council's chairman, would have to be among the two-thirds.
"Today, 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," Lew said in a statement.
New York-based AIG sold guarantees on mortgage securities that forced it to pay billions of dollars after the subprime mortgage bubble burst in 2007. The government's $182 billion bailout was the largest for any single company in the financial crisis.
AIG was intertwined with the financial system through its sale of mortgage-related investments to big Wall Street banks, which themselves eventually received bailouts.
The federal thrift agency had regulated AIG. But the company's mushrooming business involving complex investments called derivatives was run out of London and elsewhere. That business fell through the regulatory cracks.
Rep. Jeb Hensarling (R) of Texas, chairman of the House Financial Services Committee, said in a statement the council's action amounted to labeling the firms as "too big to fail." Hensarling, a vocal opponent of the financial overhaul law, said the designation of firms will become "a self-fulfilling prophecy" by giving them market advantages over their competitors.