-- This article was written by Ronald Orol of The Deal
Responding to a deregulatory Republican bill, top Democrats on Capitol Hill late Thursday issued a statement suggesting that a decision by a council of regulators to remove a "systemically important" designation for a unit of General Electric (GE) proves that legislation written in 2010 to limit future financial crises is working.
"The council's action shows that 'systemically important' firms have a clear choice between stricter oversight or reducing their threat to taxpayers and financial stability," said Sen. Sherrod Brown, D-Ohio, and Rep. Maxine Waters, D-Calif., in a statement.
Brown is the highest ranking Democrat on the Senate Banking Committee and a potential vice presidential pick for presumptive Democratic presidential nominee Hillary Clinton. Waters is the top Democrat on the House Financial Services Committee.
Their comments come after the Financial Stability Oversight Council voted Tuesday to remove the "Systemically Important Financial Institution" or SIFI label on GE. The de-designation, which was announced publicly Wednesday, means that GE will no longer be subject to costly and time-consuming government regulation, including tough capital and liquidity rules.
The FSOC and its designation authority was created by the Dodd-Frank Act, legislation crafted in the wake of the 2008 crisis. Regulators were granted the ability to impose a package of restrictions on large "nonbank" financial institutions like GE after they failed to identify and oversee significant risk building up before the crisis at mega-insurer American International Group (AIG). AIG's U.S. and international operations were regulated in the period prior to the crisis by the Office of Thrift Supervision, a small, now-defunct regulator whose primary responsibility was U.S. savings and loan banks.
GE, under the oversight of its CEO Jeffrey Immelt, had taken steps over the past 14 months to divest a breathtaking $180 billion in financial assets in a series of deals that ultimately convinced regulators in Washington that it was no longer a potential risk to the U.S. and global economies.
And the top Democrat lawmakers used the de-designation announcement as an opportunity to criticize GOP legislation introduced last month that includes a provision that would repeal the FSOC's authority to designate SIFIs.
"Any legislative or legal actions to hamstring that essential oversight mission could threaten our ability to address risky Wall Street practices in the future, leaving taxpayers and our economy exposed to another crisis," Brown and Waters said in their joint statement.
Their comments were targeted at a 500-page package of legislation called the Choice Act, introduced by Rep. Jeb Hensarling, R-Texas, that would repeal a large part of Dodd-Frank in exchange for increased capital restrictions.
The legislation isn't expected to be approved any time soon but could be a starting point for deregulatory negotiations down the road.
Drafters of the legislation issued a statement arguing that the provision allowing FSOC to designate SIFIs is "one of Dodd-Frank's greatest sources of regulatory overreach" that "injects unprecedented levels of political risk" into the system. It added that the council gives its group of largely presidential appointees "the authority to dictate the range of acceptable activities and the size and scope of private financial firms.
The Republican position was bolstered in March when a federal court judge ordered U.S. regulators to remove MetLife's (MET) SIFI designation, arguing that the council failed to conduct a cost-benefit analysis for whether the designation was necessary.
Both Democrats and Republicans also continue to squabble over whether the FSOC's designation authority instills or removes the perception that certain large financial firms are too-big-to-fail.
Critics of the SIFI rules, including some Republican lawmakers, argue that designation as a SIFI creates a perception that an institution is considered "too-big-to-fail" and would be bailed out in a future financial crisis. They contend that as a result creditors and counterparties are more comfortable doing business with the too-big-to-fail institution because they may believe that they too would receive tax-payer backed funds if there was a failure.
However, many Democrats including Brown and Waters, dismiss that criticism, suggesting that GE's move to divest its financial assets after it was designated by FSOC demonstrates that they don't believe that the designation is beneficial to them.
"FSOC is working just as Wall Street reform intended: to protect working Americans from once again bailing out 'too-big-to fail' institutions," they said.
If it hadn't been de-designated, GE likely also would have had to begin Federal Reserve Board stress tests starting in 2018 to see if it could survive a hypothetical future financial crisis. In addition, it no longer has to put together lengthy and detailed annual living wills to explain how it would break itself up in a way that didn't spread havoc on U.S. and global economies.
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-- This article was originally published by The Deal, a sister publication of TheStreet that offers sophisticated insight and analysis on all types of deals, from inception to integration. Click here for a free trial.
