Prudential pushes Trump officials to loosen oversight

The sole insurance company subject to stricter federal oversight under the Dodd-Frank Act is pushing Washington to set it loose.

Prudential Financial is asking an interagency group of regulators to strip its designation as a “systemically important” nonbank financial institution. The insurance company insists it should have never been grouped in with the banks and financial firms that helped tank the economy in 2008, and says its business has only grown safer and stronger.

Prudential has enlisted a team of Washington lobbyists to push the company’s case as the Trump administration takes aim at the rules the company is fighting.

{mosads}“Prudential has a long track record of consistent execution through market cycles —delivering on our promises to our customers,” the company said in a statement.

“We have and continue to maintain that we do not meet the standard for designation and that flaws in the designation process led to this outcome.”

Prudential manages more than $1.3 trillion in assets and $3.7 trillion in life insurance policies, making it one of the largest insurance companies in the U.S. The company says it employs 50,000 people, serving 40 countries through a slew of subsidiaries.

Dodd-Frank imposed heavy federal oversight on the largest banks and financial firms, seeking to prevent companies that are “too big to fail” from collapsing and threatening the entire U.S. economy.

The Federal Reserve issues yearly stress tests to systemically important financial institutions (SIFIs) and requires them to submit plans on how they’d dismantle upon failure without triggering an economic crisis. Failure to meet the Fed’s criteria can lead to severe penalties.

Democrats have defended the process as a critical check on dangerous financial activities. Republicans says it is overly burdensome and doesn’t make markets safer.

The Trump administration has opposed the SIFI label for nonbank financial institutions and called for a regulatory system focused on specific risky investments and practices.

Prudential’s size and scale made it an easy target for regulators charged with preventing financial titans from crashing the economy. It was one of three major nonbank financial firms marked for tighter oversight in 2013, alongside AIG and GE Capital.

The Financial Stability Oversight Council (FSOC), a panel of top federal financial regulators created by Dodd-Frank, designated the four firms as systemically important — massive and interconnected enough to trigger a credit crisis upon collapse. FSOC added Metlife to the list in 2014.

The FSOC argued in 2013 that Prudential’s trillions of dollars in issued life insurance policies, investments in derivatives, and connections to banks, pension plans and corporations threatened to derail the economy if the company failed. The regulators warned that a rush of customers seeking to cancel their insurance policies could bring down Prudential, akin to a run on bank deposits.

“Material financial distress at Prudential …  would be sufficiently severe to inflict significant damage on the broader economy,” the FSOC wrote in its decision to designate the firm.

Prudential protested, claiming it didn’t belong beside the banks and companies whose risky investments crashed the financial system in 2008.

Nearly a decade after the crisis, Prudential is the only nonbank SIFI left. 

GE Capital successfully appealed its designation in 2016 after spinning off much of its lending and investment operations. The FSOC delisted AIG in 2017 after the firm spent the years following its federal bailout downsizing. And a federal court struck down Metlife’s designation in 2016 after the company sued the FSOC and the Trump administration dropped the U.S government’s appeal of the case in January.

Prudential has not sued the FSOC, but is working to convince its members, the chiefs of financial regulatory agencies, that it doesn’t need special oversight from the Fed. The Newark, N.J.-based company believes it’s diversified and well-capitalized enough to weather a storm and that their supervision by the New Jersey Department of Banking and Insurance makes the Fed’s additional rules superfluous.

Prudential spent millions on lobbying last year to make its case to Capitol Hill and regulators on financial regulation and other issues, including tax reform and insurance law.

The company spent more than $8.6 million in 2017 spread between in-house lobbyists and K Street powerhouses. Major lobbyists and groups contracted by Prudential include former Sens. Trent Lott (R-Miss.) and John Breaux (D-La.) at Squire Patton Boggs, the Raben Group, Baker & Hostetler and Invariant, formerly known as Heather Podesta + Partners.

Prudential has also hired the firm of Brian Ballard, a prominent Florida lobbyist and major Trump campaign fundraiser, to lobby the Treasury Department. Treasury Secretary Steven Mnuchin served as Trump’s campaign finance chief and now chairs the FSOC.

“We look forward to making our case to FSOC as part of our designation review, and we will continue our active engagement with regulators while evaluating our options as the process moves forward,” Prudential said.

Mnuchin said last week that the FSOC would likely review Prudential’s designation within months, and the panel will meet Feb. 21 for “an update on the annual reevaluation of the designation of a nonbank financial company. Lawmakers are trying to change the way the panel cracks down on financial risk. The panel can free Prudential with a simple majority vote; the FSOC now has six Trump appointees and four carryovers from the Obama administration.

Republicans and slew of Democrats in both chambers are also backing measures to scrap the $50 billion asset threshold at which a bank or firm is automatically designated a SIFI.

The House passed a bill in December with bipartisan support to replace the threshold with a five-part test focused on the riskiness of a bank or firm’s assets and business practices. A bipartisan Senate bill to roll back Dodd-Frank would raise the SIFI threshold to $250 billion, far below Prudential’s more than $750 billion in assets.

“Prudential has a fair argument if they’re the only one getting caught in the net. If the standard is viable, you wouldn’t just be catching Prudential,” said Rep. Stephen Lynch (D-Mass), a House Financial Services Committee veteran.

Lynch declined to say whether the FSOC should delist Prudential, but suggested that the designation process might need some tweaks. Even so, he fears that attempts to loosen the standard could free major banks from federal oversight.

“If it’s not working out in practice and it’s too onerous, there’s probably some room for tinkering, but it’s awful soon,” Lynch said. “Our experience back in 2008 certainly justifies that scrutiny.”