'Systemically Important Financial Institutions' Named By U.S. Regulator In Crackdown

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WASHINGTON -- The U.S. government on Monday preliminarily designated at least three financial companies as having the potential to pose a grave threat to the financial system, the first time regulators have used post-financial crisis authority to crack down on companies that have previously escaped federal attention.

AIG, the bailed-out insurance giant; Prudential Financial, the life insurer and asset manager; and GE Capital, the $530 billion lender responsible for a bulk of GE’s profit in recent years, all confirmed that the panel of regulators known as the Financial Stability Oversight Council has proposed to tag them as being so-called systemically important financial institutions, or SIFIs.

The designation, if finalized, may not amount to much in the short term, analysts and officials have said, because the rules detailing heightened oversight and limits on activities that the selection entails are unfinished. But over time, the SIFI tag is likely to constrain the companies’ abilities to take excessive risk or otherwise engage in activities that may threaten the health of the nation’s financial system.

The Federal Reserve would be responsible for policing the companies. The Fed and the Federal Deposit Insurance Corp. would be charged with forcing the companies to develop detailed plans -- called living wills -- that spell out how the companies would be wound down under the bankruptcy code should they near insolvency.

Authorities “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,” said Jack Lew, treasury secretary. Regulators did not identify the companies or indicate the number that were selected.

The companies now have 30 days to decide whether to contest the designation, and an additional 30 days to challenge the label in a hearing. After that, regulators have 60 days to come to a final determination.

Officials said the designations represent an evolution in how authorities oversee the financial system. Instead of simply focusing on banks, for example, officials are now focusing on activities that businesses engage in. This should enable regulators to spot the buildup of risk in various pockets of the economic system that eluded them prior to the financial crisis.

Rep. Jeb Hensarling (R-Texas), House Financial Services Committee chairman, criticized regulators for designating some companies as “too big to fail,” signaling to market participants that these companies would never be allowed to fail due to their importance.

The SIFI designation is largely a response to the near-meltdowns of AIG and GE Capital during the financial crisis from 2007 to 2009. AIG required more than $180 billion in commitments from American taxpayers to protect it from insolvency after disastrous bets that homeowners wouldn’t default on their mortgages, while GE Capital heavily relied on government funding programs after losses raised questions over its viability.

Both financial crisis developments, during the late summer and early autumn of 2008, surprised regulators and policymakers, who vowed never to be caught off guard again.

The 2010 law overhauling financial regulation known as Dodd-Frank gave authorities the power to tag companies as systemic. But the panel charged with doing so, the Financial Stability Oversight Council, or FSOC, took roughly two years to get to this step. Treasury officials said they had hoped to name the companies last year.

Much of the council’s time involved whittling down the list of potential SIFI companies. Regulators also have been preparing for possible challenges to the designations.

All three preliminary designations were expected by analysts and market participants. The companies had said officials had been weighing slapping them with the systemic tag. Tim Geithner, former treasury secretary, had mentioned AIG and GE Capital as examples of the kinds of companies that one day would be known as SIFIs.

Prudential said it is considering contesting the designation. Russell Wilkerson, GE Capital spokesman, said the company received the notice from FSOC and was reviewing the details. AIG said simply that it had received the notice.

The restrictions that may be imposed on the companies include limits on their borrowings and dividends to shareholders. They also may have their pay schemes subject to government rules.

The Fed is weighing how to apply to insurers and other non-bank financial companies the standards it has proposed for banks.

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Daoud Kuttab: Kerry's Financial Plan for Palestine Unlikely to work

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During the Israeli reoccupation of major Palestinian cities in 2002, the Israeli army took over the building that was housing Al Quds University's Educational Television station, of which I was the director at the time. After 19 days, Israeli soldiers withdrew from Ramallah, leaving behind destroyed equipment. Some of the equipment destroyed had been donated by the US government.

A similar problem occurred in 2011 when Israeli special troops raided Wattan TV and Al Quds Educational TV, confiscating the transmitters and destroying computers and other equipment, again some of which had been purchased with a grant from the "American people".

In both cases, when US officials in Jerusalem and Washington were informed of the destruction of the equipment, they chose to quietly purchase replacement equipment rather than chastise Israel for its unprovoked act of destruction. No statement was made and there was no public attempt to hold Israeli accountable.

I recall these rather minor cases this week because of the initiative by US Secretary of State John Kerry's plan to invest about $4 billion in the Palestinian economy.

To be fair, Kerry said that this would not be a US-only investment but that other major world powers would chip in to cover this fund. The US secretary of state also stated that this economic investment will not replace the political process, but will be parallel to it.

Forty-six years of continuous Israeli occupation that the world community called in 1967 "unacceptable" and scores of peace offers later, it should not surprise people if Palestinians are not totally enthusiastic about the US initiative.

Despite these assurances, it is hard not to be sceptical about this typical American approach to attempting to solve problems by throwing money at it. It should be reminded, also, that Kerry's suggestion followed statements by Israel's prime minister, which are called Israel's "economic peace" offers.

Palestine, whose population is rather small and mostly educated, does not have an economic problem like highly populated countries with an uneducated populace. As various international studies have repeatedly stated, the biggest cause of Palestine's economic troubles is the existence of a foreign military occupation that controls the movement of people and goods and that has a colonial philosophy that considers Palestinian lands "fair" territory for its own population to settle in and where to enjoy unique privileges.

The World Bank and other international agencies issued report after report saying that restriction of movement of people and goods causes the economic woes in Palestine.

Politically, Palestinians are almost certain that such a financial initiative will lessen, rather than increase the Israeli desire to make the hard decisions that include withdrawal from the areas it has occupied since 1967. In addition to the political difficulties, Israel will have a major financial loss if it no longer controls the borders of Palestine and keeps its population totally dependent on it for goods and services.

Furthermore, many worry that Kerry's financial "bribe" is aimed at keeping the Palestinians from pursuing political aims.

Palestinian troubles with the donor mentality are current. It has not been a long time since the US and a few other Western countries abruptly cut off major funding that was committed to Palestine for political reasons.

When the Palestinian leadership decided to go to the UN to seek recognition as a state, the US Congress immediately took measures to cut off aid to the Palestinian territories. Even an important UN agency such as UNESCO was punished by the US, which cut its annual contribution to this agency, to the amount of $60 million.

What would happen if after receiving this large investment, or part thereof, the Palestinian government decides to go to the International Court of Justice? Will the US and its partners again abruptly pull out their investment?

Financial support to areas that are suffering under occupation are important to strengthening the resolve and allowing its population to resist constant pressure to emigrate.

But the declaration of such a large fund does not reflect a serious effort on the part of the Obama administration to end the crisis, despite declarations to this effect.

If Israelis are shown two options, they will opt for economic peace, which causes them no political pain, rather than the political process that will produce major internal opposition.

The time has come for serious decision making in the Middle East. The US administration must have the courage to come up with a strong and fair peace initiative and to follow up on it with the weight of the US presidency, and then declare publicly which party to the conflict is the obstacle peace. That, and not some financial initiative, should be the main preoccupation of the US government.

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