U.S. Financial Bigwigs Dissent The SIFI Label

On May 2, 2015, Warren Buffett (Trades, Portfolio), founder of the conglomerate Berkshire Hathaway Inc. (BRK.A, Financial) (BRK.B, Financial), denied its status as a possible too-big-to-fail risk to the U.S. economy joining GE Capital (GE, Financial) and MetLife (MET, Financial) in their dissidence against the SIFI label. On April 10, 2015, General Electric Co., one of the best known and highly respected American companies, announced the sale of the majority of its $500 billion banking assets in GE Capital, in a deliberate effort to unshackle from restrictive regulations, streamline the conglomerate and refocus on the best-performing segments in industrial operations.

Analysts predict that GE‘s poignant withdrawal from the banking business and subsequent consolidation may pose as a prelude for MetLife Inc., the largest life insurance company by assets in the U.S., to take similar action. Post recovery from the financial crisis of 2008-09, large non-banks like GE Capital and MetLife were branded SIFI –Â i.e. Systemically Important Financial Institutions –Â by U.S. regulators with supervised restrictions to ensure they do not fail. Like GE, MetLife has also expressed angst over these potentially burdensome regulations.

SIFI and its financial regulations

In the aftermath of the financial crisis of 2008-09, government’s Troubled Asset Relief Program (TARP) had to rescue major financial firms from insolvency. This prompted the Financial Stability Oversight Council to designate all crucial financial firms whose collapse could potentially jeopardize the stability of the financial system as SIFI. Added supervision and a plethora of tight regulations like tougher standards on capital buffers against losses are in the works for the SIFI non-banks. American International Group Inc. (AIG, Financial), with its enormous 2008 bailout of a staggering $180-billion-plus, and Prudential Financial Inc. (PRU, Financial), another financial firm almost as big as MetLife, are the other two non-bank SIFI insurance companies.

With divestiture of its major banking assets scheduled over the next two years, GE plans to apply for “de-designation” as SIFI with the concerned authorities next year.

Unhappy with the constant scrutiny of regulators, MetLife has been steadfastly resisting the SIFI designation claiming a competitive disadvantage among peers and that it doesn’t merit the systemic-risk brand as its collapse wouldn’t threaten the financial system. On January 13, 2013, MetLife took the legal route and filed a lawsuit challenging its SIFI designation by the Federal Council.

What’s next?

According to the analysts at Credit Suisse (CS, Financial), MetLife may follow GE’s lead if they lose the legal contest, and if the new "yet to be declared" capital standards being developed by the Federal Reserve prove burdensome. Thomas Gallagher and two other analysts wrote to The Wall Street Journal, saying, “We would expect the MetLife management to strongly consider a broad restructuring including a breakup of the company.” They elaborated that their belief that MetLife is already framing a contingency plan with a prominent restructuring strategy. Credit Suisse analysts came up with suggestions that MetLife might consider splitting off its global operations, mostly acquired from the international unit of AIG in 2010, from its U.S. businesses or it could split MetLife such that specific parts continue as SIFI while others parts are unrestricted.

Officially MetLife has not responded to the analysts’ speculation but at an investors meet in 2013, MetLife Chief Executive Steven Kandarian had hinted at a possible breakup of the company “if the SIFI rules become too difficult to manage” and “if the rules don’t come out the way we think they will in terms of being reasonable, all options have to be put on the table.”