AIG, Prudential, and GE Capital are SIFIs  

A blog about business and economics.
June 4 2013 10:01 AM

AIG, Prudential Financial, and GE Capital Receive Preliminary Designation as "Systemically Important" Financial Institutions

eff Immelt, chairman and CEO of General Electric
eff Immelt, chairman and CEO of General Electric

Photo by Bill Pugliano/Getty Images

AIG, Prudential Financial, and GE Capital aren't "banks" in a traditional sense. But the Financial Stability Oversight Council has made a preliminary determination that they should be considered "systemically important financial institutions" in the sense of the Dodd-Frank bill and thus subject to heightened financial scrutiny.

This is, I think, an underrated aspect of Dodd-Frank vis-a-vis some other financial regulatory approaches that seem appealingly simple. The idea here is that even though these institutions aren't banks, a catastrophic failure of any one of them would pose severe risks to the banking system. AIG is the clear precedent here. Banks were counting on AIG being able to make good on its insurance contracts in order to keep their own balance sheets solvent. But AIG screwed up and mispriced its own insurance contracts. So had AIG failed, it would have been unable to pay banks everything they were owed. And had banks been unable to collect, they would have failed as well. So the federal government ended up needing to shoulder AIG's financial obligations. The idea is that an institution in that role should be regulated in advance in light of its heightened importance to the overall financial system. An approach that focused exclusively on bank size or bank leverage could end up ignoring the possibility of offloading bank risk to non-bank institutions, which would be particularly unfortunate since that exact thing already happened in the case of AIG.

Advertisement

This SIFI designation should probably be considered an important part of the backdrop for why Jeffrey Immelt wants to spin most of GE Capital off from the rest of the company. For a while GE Capital was the main money-maker for the company. But that in part reflected an arbitrage play in which being the financing arm of an industrial company was a very advantageous classification. The FSOC's ability to say, "well you may not be a bank but you're a giant financial institution so we're going to regulate you like one anyway" makes the whole operation considerably less lucrative.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

TODAY IN SLATE

Medical Examiner

The Most Terrifying Thing About Ebola 

The disease threatens humanity by preying on humanity.

I Bought the Huge iPhone. I’m Already Thinking of Returning It.

Scotland Is Just the Beginning. Expect More Political Earthquakes in Europe.

Students Aren’t Going to College Football Games as Much Anymore

And schools are getting worried.

Two Damn Good, Very Different Movies About Soldiers Returning From War

The XX Factor

Lifetime Didn’t Think the Steubenville Rape Case Was Dramatic Enough

So they added a little self-immolation.

Politics

Blacks Don’t Have a Corporal Punishment Problem

Americans do. But when blacks exhibit the same behaviors as others, it becomes part of a greater black pathology. 

Why a Sketch of Chelsea Manning Is Stirring Up Controversy

How Worried Should Poland, the Baltic States, and Georgia Be About a Russian Invasion?

Trending News Channel
Sept. 19 2014 1:11 PM Watch Flashes of Lightning Created in a Lab  
  News & Politics
Weigel
Sept. 20 2014 11:13 AM -30-
  Business
Business Insider
Sept. 20 2014 6:30 AM The Man Making Bill Gates Richer
  Life
Quora
Sept. 20 2014 7:27 AM How Do Plants Grow Aboard the International Space Station?
  Double X
The XX Factor
Sept. 19 2014 4:58 PM Steubenville Gets the Lifetime Treatment (And a Cheerleader Erupts Into Flames)
  Slate Plus
Slate Picks
Sept. 19 2014 12:00 PM What Happened at Slate This Week? The Slatest editor tells us to read well-informed skepticism, media criticism, and more.
  Arts
Brow Beat
Sept. 20 2014 3:21 PM “The More You Know (About Black People)” Uses Very Funny PSAs to Condemn Black Stereotypes
  Technology
Future Tense
Sept. 19 2014 6:31 PM The One Big Problem With the Enormous New iPhone
  Health & Science
Bad Astronomy
Sept. 20 2014 7:00 AM The Shaggy Sun
  Sports
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.