..by Biz Bluetree
How much government regulation is too much? ..or is it good for our own good?
US regulators on Friday named insurer Prudential Financial (PRU) to its list of “too-big-to-fail” institutions, the third non-bank placed under a tighter regulatory regime to reduce risks to the financial system.
The Financial Stability Oversight Council “determined that material financial distress at this company — if it were to occur — could pose a threat to US financial stability,” the agency said, stressing that there were no signs at the moment that Prudential had any trouble, according to a story reported on Yahoo Finance.
On July 3rd, Prudential Financial filed an appeal against its potential labeling by the Financial Stability Oversight Council, FOSC, as a non-bank “systemically important financial institution” in its 11th hour – one day before the deadline of its 30-day window to notify the FSOC that it intended to legally challenge the designation.
Prudential opposed regulators’ attempting to tag it as SIFI arguing it was not too big to fail.
GE Capital (GE) and American International Group, Inc. (AIG), two other companies that received the designation along with Prudential did not contest the labeling. Certain large banks, including Goldman Sachs Group Inc (GS) and Citigroup Inc (C) automatically received SIFI designations.
According to Sarah N. Lynch of Reuters, Prudential requested a closed door meeting with the FSOC, which is a new risk council comprised of a body of regulators created by the 2010 Dodd-Frank Law, whose SIFI tag would subject Prudential to stricter oversight by federal banking regulators as well bring the added scrutiny of the U.S. Treasury Department and the Federal Reserve.
The SIFI designation also comes with higher capital requirements and other costly rules.
The FSOC, tasked with policing for systemic risks in the marketplace is chaired by Treasury Secretary Jack Lew and is comprised of the country’s top federal financial regulators. It “is a relatively new federal body that is testing its legal powers”, wrote Lynch. So, in deciding to appeal the labeling, Prudential waded neck deep into uncharted legal waters.
Although the hearing was not public, many lawyers were expected to watch the process closely.
Alice Joe, executive director of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, said the challenge shows frustration with how regulators are applying bank-centric rules to non-banks:
“If Prudential is designated, it will be a slippery slope for all other large insurance companies. Their business models aren’t designed to put up capital, so there will be a major transformation of the industry taking place”.
Could Metlife (MET) be next?
Paul Atkins, a former Republican commissioner at the U.S. Securities and Exchange Commission who is a critic of the FSOC, said earlier that he believed Prudential does not meet the criteria to be a SIFI and he was pleased that the firm fought back.
“The FSOC is a travesty,” said Atkins. “The process is antithetical to a democratic society – no transparency, no rule of law, no accountability.”
Atkins also predicted that Prudential’s appeal could end up in court, which has not happened, noting there is already an outstanding lawsuit challenging the constitutionality of the FSOC’s broad powers, but did not say by whom. However, he also said that Dodd-Frank limits the grounds on which companies can challenge an SIFI designation.
An un-named Treasury spokeswoman said about the Prudential Financial decision:
“The Council has developed a robust process for evaluating whether a non-bank financial company should be subject to Board of Governors supervision and to enhanced prudential standards.”
[Perhaps a typo prevented this quote from communicating enhanced prudent standards.]
In what seems unrelated to Prudential’s SIFI saga, a story in Streetinsider.com Friday reported that Goldman Sachs downgraded Prudential Financial from “Conviction Buy” to “Buy”.
Analyst Christopher Giovanni claims to prefer Metlife:
“We remove PRU from the Americas Conviction List and move into MET, which we see as more attractive to the incremental investor given better leverage to rates and more favorable valuation. However, we reiterate our Buy rating and increase our 12-month price target to $95 [up from ($87], implying 21% upside. While shares have been strong ytd (+48% vs. S&P 500 +21%) we continue to view PRU as one of the best opportunities in the space as its VA book trades at a discount vs. peers despite a better risk profile and favorable cash flows that will release capital as sales slow”.
Shares of Prudential Financial closed at $78.69 Thursday, with a 52-week range of low $48.17 – high $83.67.