U.S. regulators have labeled insurer American International Group Inc. and General Electric Co.’s finance arm as potential threats to the financial system, designations that bring stricter government oversight.
The Financial Stability Oversight Council on Tuesday announced the two companies would be the first to be designated "systemically important." As a result, they must increase their cushion against losses, limit their use of borrowed money and submit to inspections by examiners. They will be under the supervision of the Federal Reserve.
The companies did not challenge the designation. A third company, which wasn’t named but appears to be Prudential Financial Inc., was granted a hearing on its proposed designation.
AIG received a $182 billion taxpayer-funded bailout during the financial crisis, the largest for a single company. It has since repaid the bailout.
The government guaranteed up to $139 billion of GE Capital’s debt during the crisis. GE Capital issued about $51 billion in long-term debt and around $17 billion in short-term debt with government backing. The company issues a broad range of loans for consumers and companies. It had struggled during the financial crisis due to mounting defaults and losses on loans in areas like credit cards, commercial real estate, heavy equipment and home mortgages overseas.
Members of the council, a group of top regulators, include Federal Reserve Chairman Ben Bernanke and Treasury Secretary Jacob Lew.
Nonbank financial firms include insurers, hedge funds, mutual fund companies and private equity firms.
The council last month proposed that several companies, which it didn’t name, be tagged as potential threats. AIG, GE Capital and Prudential said at the time that they were among the companies. Newark, N.J.-based Prudential said last week it had requested a hearing before the council to contest the proposed designation.
A Prudential spokesman declined comment Tuesday.
"Today the council has taken a decisive step to address threats to U.S. financial stability and create a safer and more resilient financial system," Lew said in a statement. He said the group will continue to review companies for possible designation as systemically important.
It was the most significant step yet by the council, which was created by the 2010 financial overhaul law to help prevent another financial meltdown.
In order to make the designations final, the council had to vote a second time on each company, with at least two-thirds of the 10 voting members agreeing. Lew, the council’s chairman, had to be among the two-thirds.
New York-based AIG said in a statement that it "did not contest this designation and welcomes it."
Representatives for GE Capital couldn’t immediately be reached for comment.
AIG sold guarantees on mortgage securities that forced it to pay billions of dollars after the subprime mortgage bubble burst in 2007. 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.
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