U.S. Regulator Lifts Systemic Risk Tag on Slimmed-Down AIG

American International Group Inc. is no longer too big to fail.

That was the ruling Friday from the Financial Stability Oversight Council, which said AIG, whose collapse in 2008 reverberated throughout the U.S. economy, was no longer a systemically important financial institution.

“This action demonstrates our commitment to act decisively to remove any designation if a company does not pose a threat to financial stability,” Treasury Secretary Steven Mnuchin, a member of the FSOC, said in the statement.

The risk council voted 6-3 to make the change, with Federal Reserve Chair Janet Yellen supporting it alongside several of the newer regulators appointed by President Donald Trump.

The decision frees the New York-based insurer from the threat of more-stringent capital rules. The firm was at the center of the crisis, when its investing blunders led to a government bailout of $182.3 billion. AIG repaid the rescue, turning away from its infamous derivatives portfolio that contributed to the carnage.

The ruling for AIG was a win for activist investor Carl Icahn, who has pushed for ending the designation since taking a stake in the insurer two years ago, and for Brian Duperreault, who took over as chief executive officer in May. Icahn announced his departure as a special regulatory adviser to Trump in August after questions were raised about potential conflicts of interest with his business dealings.

‘A Strong AIG’

“The council’s decision reflects the substantial and successful de-risking that AIG’s employees have achieved since 2008,” Duperreault said Friday in a statement. “The company is committed to continued vigilant risk management and to working closely with our numerous regulators to enable a strong AIG to continue to serve our clients.”

AIG, which climbed about 0.7 percent to $61.39 Friday in New York, jumped an additional 48 cents in extended trading after the statement was released. Bloomberg reported late Thursday that the FSOC would remove the label, according to people familiar with the plan. The shares are down about 6 percent this year.

AIG had privately told the FSOC that it’s not a SIFI, partly because the unit with soured investments wasn’t an insurance entity, people familiar with the discussions said. Duperreault, 70, has been working to reshape the company, and said in August that AIG didn’t deserve the SIFI tag after years of slimming down.

The stance was a departure from that of former CEO Peter Hancock, Duperreault’s predecessor, who had said getting out from under the SIFI designation wasn’t among his top 10 priorities. The insurer didn’t publicly fight the risk tag under Hancock partly because of perception, and because executives acknowledged that the firm really was a sprawling operation, the people said.

Duperreault’s view aligned with Icahn’s, who called the regulation a ” tax on size.” In 2015, Icahn urged Hancock to break up the company, arguing that AIG’s businesses would be more valuable if they weren’t part of a too-big-to-fail insurer. Icahn, 81, is the fourth-largest shareholder in AIG, according to data compiled by Bloomberg.

AIG was named a SIFI in 2013 in a step by U.S. regulators to protect the financial system from companies seen as posing a potential risk. The designation brought an extra layer of scrutiny and compliance requirements for a company already overseen by myriad state regulators.

Trump’s Impact

The oversight council is led by Mnuchin and its members, including Yellen, are a mix of Trump’s appointees and holdovers from former President Barack Obama’s administration. Trump directed Mnuchin in April to review the designation process.

AIG is the third non-bank SIFI to lose the tag. General Electric Co.’s finance arm asked regulators to drop it from the list after the industrial giant sold more than $200 billion in lending assets. The panel agreed in 2016. MetLife Inc. won a court case last year in which the presiding judge struck down its designation. The government is appealing, in a case that was put on hold while the Treasury Department works on a report.

Prudential Financial Inc., the largest U.S. life insurer by assets, is also deemed too big to fail. The company is laying the groundwork to escape the label, people familiar with the matter said in August.

Leaving one nonbank firm under SIFI status means an “unbalanced playing field,” according to a statement from Prudential, and it “underscores the need for FSOC to re-examine its process and rescind our designation.” The insurer said it takes encouragement from the AIG decision and will consider its own options for contesting its designation.

Copyright 2017 Bloomberg.

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