U.S. Considers Dropping Federal Oversight of AIG -- Update

By Ryan Tracy and Leslie Scism Features Dow Jones Newswires

U.S. officials are considering whether to remove federal oversight of insurer American International Group Inc., according to people familiar with the matter.

Continue Reading Below

The Financial Stability Oversight Council, a group of senior regulators, was set to discuss the matter at a meeting Friday, these people said. No final decision has been made, and the outcome of the discussion isn't certain, they said.

It is possible the council could decide not to vote on the matter Friday, delaying the decision until a future meeting.

Removing stricter oversight of AIG would be a symbolic step: The company was at the center of the global markets meltdown in 2008 and was effectively nationalized through a government bailout that topped $180 billion. That made it a poster child for financial excesses, and was one of the reasons for the creation of the oversight council in the 2010 Dodd-Frank financial regulatory law.

In 2013, the oversight council determined AIG posed a risk to the economy and designated it a "systemically important financial institution," or SIFI. It was the first time the council had used its main Dodd-Frank power. The label subjects AIG to stricter oversight than it would otherwise face, including supervision by the Federal Reserve.

The oversight council is required to review SIFI designations each year. Under the Trump administration, discussions about whether to remove the tag have become more active this year, the people familiar with the matter said.

Continue Reading Below

To remove the SIFI label, officials would have to determine that distress at AIG no longer poses a risk to U.S. financial stability.

The company is about half the size it was during the government rescue, slimming down to $499.76 billion in total assets as of June 30, from $1.048 trillion in 2007. It has divested itself of dozens of businesses, though it remains one of the 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.

Its turnabout was hard to imagine in 2008, when many government officials and industry executives expected it to go out of business.

U.S. officials said the rescue of a teetering AIG was necessary because the company was so financially entangled with other firms around the world that its collapse could have unpredictable effects. The bailout's initial terms proved so harsh for AIG that the aid package was later restructured.

AIG fully repaid taxpayers by the end of 2012. Its divestitures included crown-jewel life-insurance operations that spanned the globe and the sale of one of the world's biggest aircraft-leasing businesses. More recently, it sold a mortgage-insurance unit.

For many years, AIG had taken a glass-is-half-full approach to its SIFI designation, even as competitor MetLife Inc. successfully overturned its designation in federal court, arguing it had been unfairly applied and was harmful to its competitive position.

Former AIG Chief Executive Peter Hancock repeatedly emphasized that the global insurer needed a lead regulator, and the Fed fit the bill, referring to the central bank as a "helpful partner." Mr. Hancock also disputed that the Fed was hampering the company with too-tough capital requirements, saying that AIG aspired to high standards of its own choice to maintain solid credit and financial-strength ratings.

Mr. Hancock left the company earlier this year and was succeeded by industry veteran Brian Duperreault. In an August earnings call, Mr. Duperreault signaled a change in approach, reflecting AIG's years of shrinkage and efforts to improve risk controls.

He responded to a question about the SIFI designation by saying that AIG today "would not meet the hurdles" for the label. "This company has dramatically changed its risk profile and controls since the financial crisis," he said. "We will continue to work with our numerous regulators to demonstrate the substantial and successful de-risking that AIG has achieved," he added.

AIG's rescue was so high-profile and controversial that people in public policy say it helped usher in significant changes in the nation's politics. On the right, the federal government's intervention in the economy helped spawn the tea-party movement. On the left, it helped seed the Occupy Wall Street movement, which contended the government aided rich bankers while giving short shrift to struggling homeowners, among other things.

The Financial Stability Oversight Council currently has 10 voting members, including the Treasury Secretary and the heads of major regulators such as the Fed. Five were appointed by President Barack Obama and five by President Donald Trump. The Obama appointees may be more inclined to maintain federal oversight of AIG.

It will take a two-thirds vote of the oversight council to remove AIG's SIFI designation, and people familiar with the matter said they were uncertain Thursday how a vote would play out.

Seven of the 10 voting members would typically have to elect to rescind the SIFI tag, but Securities and Exchange Commission Chairman Jay Clayton may need to recuse himself from the AIG vote, some of the people said, because his former law firm Sullivan & Cromwell LLP counts AIG as a significant client. Council members have been discussing how Mr. Clayton's potential recusal would affect a vote, people familiar with the matter said.

A spokesman for Mr. Clayton declined to comment Thursday.

"If they decide to keep it a SIFI, it will be based upon politics, based upon notions of what AIG used to be, which is dramatically different from today's AIG," said Thomas Russo, who was a general counsel at AIG during the turnaround, from 2010 to 2016.

Write to Ryan Tracy at ryan.tracy@wsj.com and Leslie Scism at leslie.scism@wsj.com

(END) Dow Jones Newswires

September 21, 2017 18:25 ET (22:25 GMT)