May 16, 2021

Too Big to Fail, or Too Trifling for Oversight?

But over the last several months, executives from more than two dozen financial companies and their trade groups have paraded into the Treasury Department, the Federal Reserve and other government agencies to try to persuade top regulators that they are not large or risky enough to threaten the financial system if they should ever collapse.

Big insurers like the Mass Mutual Financial Group and Zurich Financial Services; hedge funds like Citadel and Paulson Company; and mutual-fund companies like BlackRock, Fidelity Investments and Pacific Investment Management Company have all been making the rounds, according to documents filed by the regulatory agencies.

What they are all hoping to avoid is being designated “systemically important” by a council of financial regulators. That would require them to face stricter federal oversight and keep more cash on hand, which they fear would erode profits.

Jeffrey A. Goldstein, the Treasury undersecretary for domestic finance, finds the arguments so familiar that he has opened some meetings by asking the firms if they would like to designate themselves as systemically important. “I can’t recall a firm that came in and said yes,” he said.

Hedge fund managers, for example, normally pride themselves on being Masters of the Universe. But armed with PowerPoint presentations and financial studies, representatives from some of Wall Street’s most powerful funds, including D.E. Shaw and Company, Elliott Management and Caxton Associates, met with Federal Reserve staff members earlier this year to make one point: We’re too small to matter.

The hedge funds insisted their activities would not threaten the financial system because they control $1.7 trillion in assets, a drop in the bucket next to the $21.4 trillion overseen by the global mutual fund industry, according to documents they filed with regulators that cited figures from 2010.

Two insurance giants took even stronger steps. They unloaded savings banks they owned as a preemptive strike against tougher federal supervision.

Regulators involved in the determination process say they are skeptical. “It is as if they are the Sisters of the Charity,” said one government official who has participated in meetings with financial companies. “They present themselves as if they don’t do anything complicated. They are playing a very interesting strategy game that nobody believes.”

It’s no secret that big banks with more than $50 billion in assets — Bank of America, Goldman Sachs, Citigroup, Wells Fargo, among others — are automatically part of the club. But a wide variety of financial companies that are not banks are trying to avoid membership — or at least reduce their burdens. Besides the big insurers, hedge funds and mutual fund companies, major commercial lenders like General Electric have revved up their lobbying efforts.

There have also been a few surprises, like Boeing, I.B.M. and Caterpillar, which operate large finance businesses for their customers. Student lenders like Sallie Mae, auto finance companies like Ford Motor Credit and even quasi-government enterprises like the Federal Home Loan Banks have raised concerns about the designation process.

Deciding which firms should be deemed “systemically important” is at the heart of a package of new financial rules that aim to prevent a repeat of the recent financial crisis. But the lack of specific criteria from regulators so far has created uncertainty about who will get tagged.

More clarity may come later this summer when regulators are expected to put out a more detailed proposal. Criteria like size, how connected the firms are to each other, and overall risk levels will be more carefully defined.

Then, after regulators analyze the data, the designated companies will be notified and given a chance to argue why they do not pose a major financial threat. This means final determinations will not be made until the middle of 2012, at the earliest. That, of course, is just fine with many of the companies involved.

Article source: http://feeds.nytimes.com/click.phdo?i=686a8d4e81c327b01ce1049244e14e85

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