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Regulation and Compliance > Federal Regulation

Under shadow of Volcker Rule, AIG looks to sell thrift

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American International Group plans to sell its savings and loan out of concerns around restrictions imposed by the so-called Volcker rule, not federal regulation.

In comments on CNBC, Robert Benmosche, AIG president and CEO, also said he welcomes federal regulation “because we want someone over our shoulder,” especially after what happened in 2008, when AIG required a huge federal bailout because it insured an estimated $2.77 trillion of what turned out to be troubled mortgage securities.

If it sells its thrift, AIG will likely be federally regulated through designation by the Financial Stability Oversight Council as a systemically significant non-bank.

That is likely to be done after the election.

It would trigger the same consolidated-asset oversight the Fed plans for thrifts owned by non-banks such as insurers.

Effectively, Benmosche said, he wants the Fed to give AIG credibility in the marketplace through vigorous oversight.

To get that credibility, Benmosche said AIG would have to show the Fed a strong balance sheet so that it will allow AIG to pay a dividend to its shareholders.

He said AIG hopes to be able to pay a dividend to shareholders starting in 2013, and that it is “done for now” repurchasing its shares.

AIG bought $5 billion worth of the shares the Treasury is selling in its latest offering.

John Nadel, an analyst at Sterne Age & Leach in New York, said in an investor’s note that he was surprised that AIG had decided to limit share repurchase to $5 billion. He said he expected AIG to repurchase $10 billion, but that absent AIG management comment, “It seems plausible to us that regulators may have informed AIG that it shouldn’t push its capital management activities any higher.”

Benmosche also said he fully expects the federal government to sell its remaining shares in AIG “very quickly.”

Benmosche made his comments in response to a Wall Street Journal story that quoted a Federal Reserve Board spokesperson as saying that as soon as the federal government’s share of AIG falls below 50 percent of the company’s stock, the Fed will oversee AIG as a thrift holding company.

If so, AIG would become the first company that is first and foremost a domestic-based insurance company to be federally regulated.

The Office of Thrift Supervision oversaw the AIG thrift before its demise last July.

But the McCarran-Ferguson Act of 1945 mandates state oversight of insurance companies unless a federal law specifically says otherwise. And, the Federal Reserve Board has been barred by law from overseeing insurance holding companies since the Gramm-Leach-Bliley Act was enacted in 1999.

The National Underwriter has been saying that for several months, but the prospect of federal regulation became imminent when the Treasury announced that it was selling a huge chunk of AIG shares.

Treasury ownership is currently 53.4 percent, but sale through an initial public offering of most of that over the last several days will leave the Treasury Department holding only a 15.9 percent stake.

Benmosche said AIG will likely sell its thrift soon because long-term assets held by insurers would be restricted by the Volcker rule, which severely restricts proprietary trading, that is, a financial institution investing its own funds for profit, for example, in private equity.

Benmosche said proprietary trading is critical for insurers because of the long-term nature of their liabilities, and the thrift, based in Wilton, Conn., is relatively small, with $1 billion in deposits, and therefore not much of a money maker.

In other comments, Benmosche said it is unlikely AIG will be able to unload its leasing unit soon. “Well, we’re still working on that,” he told the anchorwoman, Maria Bartiromo. “The markets are not ready for an IPO of an aircraft leasing company. There’s a lot of concern in the industry, we’ve had some bankruptcies, so that’s just going to take a little longer to get done,” he said.


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