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AIG is no longer too big to fail and taxpayers deserve to know why

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This month, the Financial Stability Oversight Council (FSOC) voted to remove the systemically important financial institution (SIFI) label from American International Group, which means AIG will no longer be subject to enhanced regulation and oversight by the Federal Reserve. While the Center for American Progress strongly believes that material stress at AIG would threaten financial stability, reasonable policy observers can disagree on the substance of the FSOC’s decision. But no reasonable observer should think that the process surrounding the decision was acceptable.

There are several troubling elements to this decision that erode the credibility of FSOC under the leadership of Treasury Secretary Steven Mnuchin. First, the council’s own transparency policy calls for public notice of meetings no less than seven days in advance of the meeting. The Sept. 29 meeting at which AIG was de-designated was publicly announced at 4:00 P.M. on Sept. 28, less than 24 hours prior to the meeting. This meeting was not called to address some imminent threat to financial stability or an emergency in the markets. Mnuchin owes an explanation to the public as to why the transparency policy was violated in this instance.

{mosads}Second, the Dodd-Frank Act gives FSOC authority to designate and de-designate nonbank financial companies as systemically important if two-thirds of the voting members of the council, including the chairman, vote affirmatively. The voting members are the 10 financial regulators on the council with voting authority. There are five additional members on the council who are nonvoting members. In the AIG decision, six serving members of the council, including the chairman, voted to rescind AIG’s designation. This falls short of the required two-thirds majority necessary.

Securities and Exchange Commission (SEC) Chairman Jay Clayton recused himself from the vote, and the council somehow interpreted the statutory threshold for de-designation as meaning two-thirds of voting members that vote, making the tally six out of nine. Clayton is a serving voting member of the council and should have been counted despite his recusal. If FSOC has 10 serving voting members at the time of a vote, they need seven votes, including the chairman, to designate or de-designate.

The council provided one line in its announcement addressing this issue: “The council determined that a member who is recused from participating in a matter is not included in the vote tally.” Based on the statement of Federal Housing Finance Agency Director Mel Watt, who dissented in the vote, Mnuchin made the interpretation unilaterally, and put affirming his interpretation to a majority vote of the council. This issue puts the legality of the de-designation vote into question. It is unclear whether any of the dissenting agencies, or outside groups, will file a lawsuit challenging this decision in court, but it is an option that should be carefully explored.

Third, the council’s initial readout of the meeting, released around 5:30 P.M., did not include any mention of the vote to rescind AIG’s designation. Yet, minutes after the release of that readout, at least one insurance industry trade association published a press release praising FSOC on their decision to de-designate AIG. It was not until about 6:00 P.M. that FSOC publicly announced their decision on AIG. Who in the government and industry knew about this decision prior to the public announcement? Did any trading on this material nonpublic information occur during this window? If the SEC has not already opened a preliminary investigation into this matter, it should.

Finally, the key assumptions in the council’s analysis of material distress at AIG and the impact on financial stability are different and significantly less severe than the previous analyses conducted in 2013 when AIG was first designated, and in 2014 and 2015, when the company was reevaluated. Federal Deposit Insurance Corporation Chairman Martin Gruenberg, who dissented in FSOC’s vote, stated that the analysis underpinning the AIG decision “largely relies upon the experience of much smaller insurance company failures in moderate stress environments years ago.” It appears that FSOC had a predetermined outcome and worked backwards in the analysis to justify it.

The council’s decision to de-designate AIG was disappointing because material stress at the firm would pose many of the same financial stability risks that regulators were worried about in 2013 when the company was first designated. But equally troubling is the cavalier decision to ignore the process mandated in the statute. Given the serious nature of the questions and concerns outlined above, it would make sense for the inspectors general of the Treasury Department and other financial regulators to jointly investigate the circumstances surrounding the vote to de-designate AIG.

Gregg Gelzinis is special assistant for economic policy at the Center for American Progress. He previously worked at the U.S. Treasury Department.

Tags AIG Federal Reserve Finance Insurance Jay Clayton Martin Gruenberg Steven Mnuchin Steven Mnuchin Treasury Department
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