Regulators Disagreed Sharply on Freeing AIG of Federal Oversight

By Ryan Tracy Features Dow Jones Newswires

U.S. regulators disagreed sharply about whether to remove American International Group Inc. from federal oversight, including over whether Friday's vote to release the company was legal, documents released Monday show.

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The Financial Stability Oversight Council of senior financial regulators released the insurer -- which received a financial-crisis bailout of more than $180 billion -- from its designation as a "systemically important financial institution" in a divided vote last week. But it didn't disclose details.

Monday's release of the basis for the council's decision and statements from individual regulators explaining their views paint a picture of significant divisions over AIG's future.

Federal Reserve Chairwoman Janet Yellen, who cast a key vote in favor of releasing the company from tighter oversight, said in a statement, "Since the financial crisis, AIG has largely sold off or wound down its capital markets businesses, and has become a smaller firm that poses less of a threat to financial stability."

Ms. Yellen, one of five regulators on the 10-member council who was appointed by President Barack Obama, said she still saw the possibility of a destabilizing "run" where panicky holders of certain AIG insurance products withdraw cash en masse, but she said "the financial system should be able to handle" the resulting stress.

Federal Deposit Insurance Corp. Chairman Martin Gruenberg, another Obama appointee, voted to keep AIG a "systemically important" firm under federal oversight. He said many issues at the insurer "remain the same today as they were in 2013," when the oversight council voted to place AIG under stricter rules.

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"While there have been some reductions in certain exposures, there have been increases in others, most notably in the life insurance and annuity business," Mr. Gruenberg wrote. "Nothing about the liquidity characteristics of AIG's liabilities and assets has changed to diminish the concerns originally raised."

The documents show supporters of the AIG decision saw a firm with a shrunken financial footprint, engaging less in potentially risky activities such as derivatives.

Another factor that worked in AIG's favor: The council made less conservative assumptions when it calculated how distress at AIG could affect the broader financial system.

The council also faced a legal quandary when it voted on AIG, the documents show. The vote was 6-3, with Securities and Exchange Commission Chairman Jay Clayton recusing himself because of his prior law firm's work for AIG.

The 2010 Dodd Frank regulatory-overhaul law, which created the council, says a company can shed a "systemically important" designation "by a vote of not fewer than 2/3 of the voting members then serving."

The council has 10 voting members and some nonvoting members, so it would typically take seven "yes" votes to win a two-thirds majority. With Mr. Clayton recused, council members disagreed over whether six of nine votes would be enough.

Federal Housing Finance Agency Director Mel Watt, who opposed releasing AIG, wrote in his statement that the AIG vote lacked "the two-thirds required by statute."

Mr. Watt said the council's chairman, Treasury Secretary Steven Mnuchin, "made a unilateral determination" that six votes was sufficient to release AIG "and subjected his ruling to a vote that required only a majority to affirm."

A spokeswoman for Mr. Mnuchin didn't immediately respond to a request for comment.

Write to Ryan Tracy at ryan.tracy@wsj.com

(END) Dow Jones Newswires

October 02, 2017 20:40 ET (00:40 GMT)