US Regulators End Federal Oversight of American International Group (AIG)

by Ike Obudulu Posted on September 30th, 2017

Washington, D.C: American International Group Inc. is no longer too big to fail. In a major win for activist investor Carl Icahn, the U.S. Financial Stability Oversight Council (FSOC), a panel of U.S. financial regulators, voted on Friday to strip AIG of  “systemically important financial institution” or SIFI label. That releases American International Group (AIG.N) from stricter government oversight, marking the insurance giant’s rehabilitation since a massive bailout during the 2007-2009 global financial situation. They have determined that AIG is no longer a crucial part to the health of the global financial system after shedding billions of dollars in assets.

The decision by the Financial Stability Oversight Council means that AIG, which received a $182 billion bailout from the federal government during the 2007-09 global financial situation, no longer needs to adhere to a stricter regulatory regime, including holding extra capital which was implemented under a Dodd-Frank Act provision aimed at preventing situation-causing bank failures.

“This action demonstrates our commitment to act decisively to remove any designation if a company does not pose a threat to financial stability,” Treasury Secretary Steven Mnuchin, a member of the FSOC, said in the statement. The risk council voted 6-3 to make the change, with Federal Reserve Chair Janet Yellen supporting it alongside several of the newer regulators appointed by President Donald Trump.

By law, all banks with over $50 billion in assets are automatically considered SIFIs, while the FSOC can apply the label to nonbanks on a case-by-case basis. The panel only once before has removed a SIFI designation with GE Capital in 2016.

Th FSOC’s decision on Friday left Prudential (PRU.N) as the only remaining nonbank “systemically important financial institution”.

In a statement late on Friday, Prudential said it was encouraged by FSOC’s move and would consider its options while contesting its designation through the review process.

A third insurance company, Metlife (MET.N), had also received the SIFI label, but mounted a legal challenge against the decision. A federal court ruled in the company’s favor. That decision was appealed by the government under President Barack Obama and remains pending in an appeals court.

AIG, whose 2007 collapse helped trigger the ensuing financial situation and inspired the SIFI label, had long sought to lose the designation.

AIG’s huge pile of credit derivatives helped spark the global financial situation, and the company quickly became a focus of public outrage when employee bonuses were paid after the government bailout in September 2008.

The labeling of major financial institutions as systemically important had its roots in AIG’s rescue, which came just before the company would have been forced to file for bankruptcy protection amid mounting losses on its derivatives book.

Worried the insurance giant was “too big to fail,” the government stepped in to prevent further chaos to the financial system. The company ultimately repaid taxpayers in full by the end of 2012, with a profit of $22.7 billion, according to AIG.

The company as it stands today is much smaller and insurance-focused than the sprawling company whose risky investments helped lead to the Dodd-Frank regulations on large firms.

AIG fully repaid its bailout by the end of 2012 by selling off businesses and other assets to roughly halve its size. Months later, the oversight council determined stress at AIG could threaten the economy and designated it as systemically important. It was the first time the council had used its main Dodd-Frank power.

AIG was one of two non-bank SIFIs designated by FSOC. Prudential is currently seeking the removal of its SIFI designation, while MetLife is defending a federal court decision to strike down its labeling.

AIG remains one of the world’s biggest sellers of property-casualty insurance to businesses world-wide and is also a major seller of life insurance and retirement-income products in the U.S., along with home and car insurance to wealthy households.

Since the situation, AIG, which remains the largest commercial insurer in the United States and Canada, has sold dozens of businesses, including two Asian life insurance operations and one of the world’s biggest aircraft leasing businesses. It recently sold a mortgage-insurance unit.

AIG’s lead regulator will once again be New York’s Department of Financial Services, widely considered one of the strictest and most well-staffed insurance departments in the country. Superintendent Maria T. Vullo said in a statement that the department “will continue to conduct in-depth and rigorous supervision of AIG’s insurance companies to ensure their financial soundness and compliance with law. This state-based regulation will continue to keep our financial markets strong and robust while protecting consumers.”


Photo: American International Group (AIG.N)

AIG Chief Executive Brian Duperreault said in a statement that the council’s “decision reflects the substantial and successful de-risking that AIG’s employees have achieved since 2008. The company is committed to continued vigilant risk management and to working closely with our numerous regulators to enable a strong AIG to continue to serve our clients.”

The practical impact of Friday’s action was limited because many of the rules for insurance companies have yet to be written.

The company’s shares rose 1 percent in after-hours trading.

Author

Ike Obudulu

Ike Obudulu

Versatile Certified Fraud Examiner, Chartered Accountant, Certified Internal Auditor with an MBA in Finance And Investments who has both worked for and consulted with some of the world's largest companies on main street and wall street in over 20 countries, Ike brings his extensive reporting and investigations experience to bear on his role as Chief Editor.
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