Posted on 08 Nov 2010
Not all companies that make up the financial services industry are created equal...that is the message coming from firms seeking to distinguish themselves to avoid being subjected to tougher regulation and to ensure their competitors are.
At the heart of the regulation passed earlier this year is that those firms classfied as "systemically important" would have to comply with additional rules and submit to oversight from the Federal Reserve.
Life insurers, hedge funds and asset managers want to be exempt from this. On the other side, outside groups as well as some from within the financial-services industry are lobbying to have these very firms and others subject to the new regime.
The Independent Community Bankers of America, a major trade group for community banks, in a letter fingered General Electric Co.'s GE Capital for inclusion "because of its substantial relationships with other bank holding companies," as well as insurance companies, hedge funds, private-equity funds, asset managers and money-market mutual funds. It singled out private-equity firms Carlyle Group, KKR & Co.'s Kohlberg Kravis Roberts & Co. and Blackstone Group LP by name in the same letter.
"The events that led to the worst financial crisis in our nation's history certainly support our view that many companies that are part of the 'shadow banking industry' need to be subject to enhanced supervision and regulation," the group said.
Private equity doesn't belong in that group, shot back Blackstone spokesman Peter Rose. "We do not trade, we have no leverage at the parent-company level, our investments are clearly disclosed and transparent, our investors are with us for the long term," he said. "Therefore there is no possibility of a, quote, 'run on the bank.' "
The Private Equity Growth Capital Council, which represents 32 well-known private-equity firms, wrote regulators its own letter arguing for exclusion. One argument: Its members are relatively small "compared to large banks, insurance companies, broker-dealers and advisers to registered investment companies."
A spokesman for GE Capital declined to comment other than say the company is waiting to see how the council defines its criteria and which companies it decides to name.
Under the financial-overhaul legislation, known as Dodd-Frank, any interconnected bank holding company with $50 billion or more in assets is automatically designated as systemically important. Whether others make the list is up to the discretion of the new Financial Stability Oversight Council, which is made up of the nation's top regulators. The timeline for the council's decision remains unclear, and it is being deluged with mail while it deliberates.
Such firms must comply with new rules, notably more-stringent capital, risk-management and leverage standards. Policy makers created this regime for the biggest, most interconnected firms in an attempt to avoid a repeat of the American International Group Inc. debacle, in which the insurance company's bets on the mortgage market went unchecked by regulators and cascaded through the financial system. AIG eventually had to be bailed out by taxpayers.
In an Oct. 21 meeting of more than two dozen financial-services companies, New York Life Insurance Co. spelled out its reasons why life insurers should escape the systemic label, according to people familiar with the meeting. Other big life insurers at the meeting included Hartford Financial Services Group Inc. "The Hartford is participating in the dialogue through its trade associations," a Hartford spokeswoman said.
Those and other life insurers sent the Financial Stability Oversight Council a letter via the industry's main trade group, the American Council of Life Insurers, laying out in 14 pages the industry's argument why it should excluded. Essentially, they argued, their products and investments are diverse and conservative, and generally not interconnected with other firms, and the companies' core businesses are tightly regulated at the state level.
One person familiar with the meeting said Treasury officials told participants that the Council would decide on an institution-by-institution basis.
Jaret Seiberg, a financial policy analyst with MF Global's Washington Research, says the firms have reason to be worried. "The life insurers are the natural next target after GE Capital," he said. Life insurers "are large, they control a lot of assets and the collapse of a major life insurer, however unlikely, could really roil the economy."
Lobbyists and analysts believe regulators may end up including more firms than strictly necessary because they don't want to leave out any that might become a problem.
It is a concern outside groups are seeking to encourage. "The [council] should err on the side of over-inclusion in its determinations," Americans for Financial Reform, a consumer advocacy group, urged. The group named GE Capital and Prudential, along with large private-equity and hedge funds, as firms that "merit obvious and immediate consideration."