U.S. Is Said to Plan Freeing AIG From Systemic-Risk Label

(Bloomberg) -- U.S. regulators are planning to release American International Group Inc. from the special government oversight ordered for the insurer after its central role in the 2008 financial crisis, according to people familiar with the discussions.

The Financial Stability Oversight Council called an unusual last-minute meeting Friday to re-evaluate “the designation of a nonbank financial company,” it said late Thursday. While AIG isn't named in the statement, two people familiar with the discussions said the council has been working toward releasing AIG from its label as a systemically important financial institution. One of the people said Federal Reserve Chair Janet Yellen is expected to tip the balance of votes to allow the company's exit.

Freeing the insurer from close federal supervision would mark a reversal in the tougher treatment the government gave such firms in the wake of the crisis. FSOC already held a similar closed-door discussion last week, so the announcement Thursday that it planned to revisit the topic was unusual. More unusual was the one-day notice, because the group led by Treasury Secretary Steven Mnuchin usually announces meetings a week in advance. 

“We don't know whether the regulators will vote to de-designate AIG, but at the very least it looks like they've been making progress,” Ian Katz, an analyst with Capital Alpha Partners, wrote in a Thursday note to clients.

To be sure, meeting participants could still delay making a final decision. A Treasury representative didn't respond to a request for comment. A spokesman for the Fed declined to comment. AIG spokesmen either said they couldn't comment or didn't respond to messages.

Read more: Prudential is said to plot escape from Fed oversight

Yellen recently said that she thinks the process for de-designating firms is working well and that she was expecting Treasury to make recommendations she'd be “glad to consider.”

In addition to Mnuchin and Yellen, FSOC includes key U.S. financial regulators such as Securities and Exchange Commission Chairman Jay Clayton and Commodity Futures Trading Commission Chairman Chris Giancarlo. It was set up by the 2010 Dodd-Frank Act to guard the financial system against excessive risk. Part of the group's mission is to designate nonbank companies that its 10 voting members think could threaten the financial system if they fail.

Clayton chose not to participate in the voting because his former law firm works with AIG, meaning six of nine remaining members would need to approve the change to win a required two-thirds majority, the people said. The three expected to oppose the move are the Obama administration appointees heading the Federal Deposit Insurance Corp., Federal Housing Finance Agency and Consumer Financial Protection Bureau, one person said.

AIG shares rose 67 cents, or 1 percent, to $61.64 at 10:34 a.m. following news of FSOC's plan.

AIG and Prudential Financial Inc. are the only nonbank companies currently labeled as SIFIs. MetLife Inc. won a legal case overturning its too-big-to-fail tag. General Electric Corp. was de-designated by FSOC after shedding much of its GE Capital business.

Related story: AIG chief undone by lost credibility, frustrated investors

An escape for AIG would free 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 collapse.

A reprieve for AIG “would be a stunningly bad move,” said Phil Angelides, the former California state treasurer who led an independent government commission that investigated the causes of the financial crisis. “People have very short memories.”

The makeup of the FSOC has shifted as Obama-era holdovers are replaced with those appointed by President Donald Trump. His administration has been seeking a rollback of regulations across the government, and its officials have criticized the process FSOC used to designate companies as risky. Trump directed Mnuchin to study the issue and make recommendations in a report that's expected as soon as next month.

“I'm not sure the facts are going to matter to the Trump boys,” Angelides said. “They probably are going to go ahead and absolve AIG.”

--With assistance from Ben Bain and Sonali Basak

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net.

To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Dan Reichl, David Scheer