I concur with the decision to rescind the designation of AIG as a Systemically Important Financial Institution, or SIFI.
My analysis of AIG began in 2009 when I served as a member of the TARP Congressional Oversight Panel. The TARP Panel was charged by Congress to report every 30 days on the implementation of the TARP program by the Department of Treasury. Our investigation of AIG yielded a 300-plus page report in which we concluded that AIG was mismanaged and engaged in inappropriately risky financial transactions. We concluded that AIG failed to prudently underwrite and appropriately price its substantial portfolio of credit default swaps and other derivative products. Payments due to the swap counter-parties were sufficient to guarantee that, if the company did not receive help, AIG would fail. That failure would have led to catastrophic consequences for the U.S. and world economies.
In reality, those consequences were mitigated by the $183 billion bailout of the company funded by American taxpayers. In essence, Main Street bailed out Wall Street to help keep the entire U.S. economy afloat. Put bluntly: AIG was a basket case in late 2008, the proverbial poster child for ill-conceived business plans, internal control systems, and risk-management protocols.
In contrast, AIG is a different company today. As a commercial finance, M&A, and tax attorney with a CPA license, I have thoughtfully analyzed the financial statements and other public and non-public information submitted to Council members and staff. I have also reviewed the detailed analysis of AIG prepared by the Nonbanks Designation Committee and reviewed by the FSOC Deputies. I have also had an opportunity to reflect on the comments of my fellow Council members, and have paid particular attention to those who do not concur with the dedesignation of AIG.
Although I certainly appreciate that reasonable minds may differ, after consideration, I believe that AIG no longer presents a systemic risk to the U.S. economy. I note that AIG remains a complex international insurance company with an embedded financial institutions component, and so, AIG is certainly not free of risk. In my judgment, however, the additional regulatory burden of a continuing SIFI designation is neither necessary nor appropriate for AIG. Instead, we should acknowledge that the Council’s original decision with respect to AIG has had its intended effect, and that AIG’s traditional regulators may now supervise and oversee the safety and soundness risks presented by the company, without continued heightened concern that the company presents an undue risk to U.S. financial stability.
In reaching this conclusion, I note that AIG no longer holds an extensive portfolio of the derivative products that spawned the 2008 financial crisis and ensuing taxpayer bailout—the circumstances and events that were still fresh in the minds of regulators as the original SIFI designation analysis was being done. Today, AIG has a decidedly smaller financial footprint in the capital markets than it did at the time of designation. In turn, capital market participants are now less exposed to AIG. The company has reduced its total debt, short-term debt, derivatives transactions, securities lending volume and activity in the repurchase markets. In addition, AIG has moved to simplify its corporate structure and reduce its financial market footprint by selling significant interests in the aircraft leasing and private mortgage insurance markets.
As some Council members have properly noted, and the basis document notes, AIG continues to hold significant exposure to annuity products. And some Council members have raised concerns that, if AIG were to experience material financial distress, policyholders would withdraw their funds quickly, resulting in a cascade of asset sales that would be destabilizing to the U.S. financial system.
The “fire sale” concerns with respect to AIG were appropriate for the time when they were first raised. However, FSOC has continued to dig more deeply and refine its previous analyses. The document developed by the staff takes a more nuanced—and likely more correct—view of the potential for fire sales and their likely effect on the markets in which AIG is currently operating. The analysis presented leads me to believe that risk from this possibility is substantially smaller than previously thought. Again, while I understand that reasonable minds may differ on this, I am not aware of any compelling evidence that AIG's internal control systems and risk-management protocols, as overseen by its traditional regulators, cannot manage the risks in these entirely traditional insurance products. As a result, I believe the risks to U.S. financial stability from this possibility are very remote.
I must also note that, since the original designation, there have also been developments in state and industry regulation that work to more clearly identify enterprise risk at AIG. This would appear to be a necessary step in further developing management and mitigation strategies that ultimately strengthen the company’s resiliency.
I remain confident that AIG, if presented to this Council as, say, Company X, would not receive a SIFI designation today. We should not unduly burden AIG with the legacy of prior acts of mismanagement, ill-conceived business models, and profound negligence in assessing risk. Instead, I believe it is more appropriate to analyze AIG based upon the facts and circumstances presented today and reasonably anticipated in the future. From that perspective, and armed with the significant and detailed analysis of the staff, I believe it is in the public policy interest to rescind AIG’s designation as a systemically important financial institution.
Separately, acting on the independent advice of my own counsel, I approved of the Council’s determination that, under the Dodd-Frank Act, a Council member who is disqualified from participating in a particular matter—and therefore cannot participate in that matter—is not “then serving” on the Council with respect to that matter.