On Friday, September 29, the Financial Stability Oversight Council (FSOC) voted 6-3 to remove American International Group Inc.’s (AIG) designation as a systemically important financial institution (SIFI), determining that financial problems at AIG would not pose a threat to the financial security of the United States. Federal Reserve Chair Janet Yellen and several of the FSOC’s new regulators appointed by President Trump voted in favor of the change.
The decision gives AIG more freedom from previously instituted stringent capital restriction rules, in part, as a result of AIG’s collapse in 2007 and the federal government’s subsequent bailout.
“The Council has worked diligently to thoroughly reevaluate whether AIG poses a risk to financial stability,” Treasury Secretary Steven T. Mnuchin, also a member of the FSOC, said in a recent statement. “This action demonstrates our commitment to act decisively to remove any designation if a company does not pose a threat to financial stability.”
AIG is certainly grateful for this decision.
“The council’s decision reflects the substantial and successful de-risking that AIG’s employees have achieved since 2008,” chief executive officer Brian Duperreault said in a statement after the FSOC announced its decision. “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.”
Yellen hinted that that the SIFI designation process had worked as intended, saying, “We should welcome de-designation of firms if their business model has changed in a way that leads us to believe that their failure or distress would no longer be systemically important.”
The SIFI designation is a result of the 2010 Dodd-Frank law, which gave the FSOC the authority to apply the designation to firms whose failure or risk-taking behavior could threaten the financial security of the United States. Banks and firms with more than $50 billion in assets automatically receive the designation. Firms with the designation are subject to greater regulatory scrutiny from the Federal Reserve, greater capital requirements, and must have bankruptcy plans in place. Regulators named AIG a SIFI in 2013.
AIG is the third non-bank SIFI to be de-designated, after General Electric Co. and MetLife Inc. both shed their designations in 2016. The decision leaves Prudential Financial Inc. as the last non-bank SIFI, though reports surfaced in August that Prudential, seeking to remove the designation, may not be considered a SIFI much longer.
For AIG’s new chief executive officer Brian Duperreault as well as activist investor Carl Icahn, who served as President Trump’s adviser on deregulation, the FSOC’s decision is a decisive victory.
The SIFI designation is costly to companies because of the greater oversight and compliance requirements. For Icahn, shedding the label reduces AIG’s costs and potentially increases shareholder value.
Though the FSOC is composed of Trump administration appointees and a shrinking number of Obama holdovers, weakening Dodd-Frank has long been a part of the Republican agenda, and the FSOC’s decision aligns with President Trump’s call to reduce the regulatory burden companies face.
In the past, Icahn pressured AIG to divest its troublesome assets in order to jettison the SIFI designation. When Icahn later became an adviser to Trump, questions arose about his role in advocating for deregulating AIG despite his stake in the company.
Before the FSOC announced its decision, Democrats raised alarm bells about the prospect of AIG losing the SIFI designation. Politico reports that Sens. Elizabeth Warren (D-M.A.) and Sheldon Whitehouse (D-R.I.) called on Secretary Mnuchin to disclose Icahn’s role in AIG’s SIFI designation given his proximity to President Trump.