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From Banking and Finance Law Daily, October 3, 2017

Treasury document sheds light on FSOC’s AIG decision

By Lisa M. Goolik, J.D.

The Treasury Department has released a document detailing the views of seven of the members of the Financial Stability Oversight Members regarding the FSOC’s decision on Sept. 29, 2017, to rescind the designation of American International Group, Inc., LLC (AIG) as a systemically important financial institution. The Council approved the rescission of AIG's designation by a six-to-three vote with one member being recused. The latest document reveals that Richard Cordray, Director of the Consumer Financial Protection Bureau, Martin J. Gruenberg, Chairman of the Federal Deposit Insurance Corporation, and Melvin L. Watt, Director of the Federal Housing Finance Agency, voted against the rescission.

Additional review needed, says Watt. Dissenting from the decision, Watt believed the FSOC should have conducted an independent review of AIG to determine whether "the nature, scope, size, scale, concentration, interconnectedness, or mix of activities" of AIG could pose a threat to the financial stability of the United States.

Under Section 113 of the Dodd-Frank Act, the FSOC may determine that a nonbank financial company will be supervised by the Federal Reserve Board and be subject to prudential standards if it determines that:

  1. material financial distress at the nonbank financial company could pose a threat to the financial stability of the United States; or
  2. the nature, scope, size, scale, concentration, interconnectedness, or mix of activities of the nonbank financial company could pose a threat to the financial stability of the United States.

According to Watt, the FSOC has never reviewed AIG under the second standard. Rather, the Council incorporated an evaluation of the factors required to be considered under the second standard into its evaluation under the first standard. Thus, Watt concluded that, if the Council determined that AIG no longer meets the criteria for designation under the first standard, an independent review and determination under the second standard is required before a decision can be appropriately made to rescind the designation. Watt called the Council’s decision without evaluating the second standard "premature and unwise."

Gruenberg and Cordray: no material change. Gruenberg also disagreed with the decision because, in his view, nothing had materially changed since 2013 to diminish the concerns raised by the FSOC at that time. Gruenberg stated a "core basis" for the designation in 2013 was that AIG had a large volume of liabilities subject to discretionary withdrawal, and if the firm were in material financial distress, a large number of those liabilities could run within a short period of time, posing a threat to U.S. financial stability. The asset liquidation could have disruptive effects on the broader financial markets and impair financial market functioning, said Gruenberg.

"These issues remain the same today as they were in 2013. While there have been some reductions in certain exposures, there have been increases in others, most notably in the life insurance and annuity business. Nothing about the liquidity characteristics of AIG’s liabilities and assets has changed to diminish the concerns originally raised by the FSOC."

Cordray added that he was on the Council at the time that it designated AIG in 2013, and nothing in the analysis on the issue of rescinding that designation changed his views. In Cordray’s opinion, AIG continues to pose a threat to the stability of the financial system and satisfies both standards under the test—material financial distress at AIG not only could pose, but actually does continue to pose, a threat to the financial stability of the United States, and the nature, scope, scale, concentration, interconnectedness, or mix of activities at AIG could pose a threat to the financial stability of the United States.

AIG today is not the AIG of yesterday. In contrast, J. Christopher Giancarlo, Chairman of the Commodities Futures Trading Commission, concluded that the AIG of today no longer meets the standard for SIFI designation. Giancarlo concluded that AIG’s debt-holders, derivatives counterparties, and market participants view the firm as a far less significant credit risk than it was in 2013. Giancarlo also argued AIG does not meet the standard for SIFI designation because "AIG does not have systemically important ties to other large financial institutions."

Similarly, while J. Mark McWatters, Chairman of the National Credit Union Administration, called the AIG of 2008 "a basketcase" and "the proverbial poster child for ill-conceived business plans, internal control systems, and risk-management protocols," he concluded that "AIG is a different company today."

Calling on his experience as "a commercial finance, M&A, and tax attorney with a CPA license," McWatters said he had "thoughtfully analyzed" the financial statements, recommendations, data, and other reports, and concluded that AIG no longer poses a systemic risk to the financial system. "I remain confident that AIG, if presented to this Council as, say, Company X, would not receive a SIFI designation today," said McWatters.

Likewise, concurring with the decision to rescind AIG’s SIFI determination, independent member S. Roy Woodall, Jr. wrote that the AIG of 2016 is "a different organization, approximately half the size it was at the time of the financial crisis and, therefore, no longer satisfies the first determination standard under which it was designated."

Continued monitoring recommended. Notably, Woodall also said he remained concerned with some of AIG’s activities, especially those relating to annuities with guaranteed features. Although Woodall did not believe the activities would justify continuing to regulate AIG as a SIFI, he felt the activities should continue to be monitored from a macro-prudential perspective.

While Woodall noted also that that state insurance regulators are recognized as the primary financial regulators of insurance activities and that they have enhanced their regulatory capabilities since the financial crisis, he recommended that the Council closely monitor state regulatory developments.

Noreika questions FSOC’s authority. Keith A. Noreika, Acting Comptroller of the Currency, questioned the authority of the FSOC to designate individual nonbank companies for bank-like regulation. "I am concerned that by picking institutions from among similarly situated competitors within the same industry and labelling one systemically important and not the other, we may adversely affect the competitive environment in unfair and arbitrary ways," said Noreika.

Noreika criticized the process as "politicized" and said it "invariably forces the Council to pick ‘winners and losers’ from among firms in a competitive industry."

Companies: American International Group, Inc., LLC

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