The Treasury has announced that it would sell off $18 billion in AIG shares, meaning it will no longer be the majority shareholder in one of the companies most associated with the financial crisis. As the Treasury loosens its grip on a company that threatened the nation's financial system, the question still remains now, four years later: who should be in charge?
The handover of control is a symbolic moment in the country's recovery from the crisis. After suffering substantial losses, the government committed over $180 billion in bailout money to the company, and the Treasury now stands to turn a profit on that investment. However, there is some frustration that the company has yet to be handed over to a central regulator.
"Our regulatory system is really screwed up, and Dodd-Frank didn't touch the messed-up nature of our regulatory structure," says James Angel, associate professor at Georgetown University's McDonough School of Business. "Insurance companies like AIG could fall through the cracks."
Prior to the financial crisis, AIG's financial activities were regulated by the Office of Thrift Supervision, a now-defunct agency that was seen as the laxest federal regulator (the company's insurance activities, then as now, were regulated on a state level). The OTS's supervision ended in March 2010 and since then the company has had several regulators for its diverse non-insurance activities. Many of AIG's losses also stemmed from financial instruments sold outside the U.S., by the company's London office, which was not overseen by Britain's Financial Services Authority.
Some would argue that the company had additional oversight in the Treasury Department since the end of the crisis—oversight that now will come to an end.
"The Treasury was the majority shareholder, so they were basically controlled by the Treasury," says Angel. "Even if Treasury didn't exercise any direct oversight, I'm sure the people they installed to run the place were very concerned about what their overseers would think about their various actions."
One of the key provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law in July 2010, is the designation of systemically important financial institutions, or SIFIs. These are companies whose collapse could seriously threaten the economy. THe Financial Stability OVersight Council is tasked with designating SIFIs, and the Federal Reserve will be tasked with regulating those institutions. The central bank has proposed a set of criteria, including amounts and types of assets, for determining which institutions are "systemically important."
If designated a SIFI, AIG would finally fall under what Angel calls the "tremendous power" of one government entity: the Fed.
But the FSOC has yet to designate non-bank SIFIs, to the chagrin of watchdogs. Christy Romero, special inspector general for the Troubled Asset Relief Program, vented her frustration to MarketWatch in an interview published today: "A key problem with AIG is that so far there is no regulator for AIG's financial business," she said. "I am absolutely frustrated that it is taking so long to designate AIG as a SIFI." However, she said she is hopeful that the Fed will soon take over, now that the Treasury is no longer in charge.
A spokesman for the Federal Reserve gave no comment when asked if there is a timeline on labeling those institutions. Exactly why the FSOC hasn't yet declared AIG a SIFI is unclear. One potential reason is that there was no need to hurry as long as the company was under Treasury ownership, says Thomas Cooley, a professor of economics at NYU's Stern School of Business.
Another is the mind-boggling complexity of new financial regulations.
"Because it's a complicated bill, implementation of the Dodd-Frank Act has been going along fairly slowly, I would say," says Cooley.
And, he adds, firms will lobby hard to avoid the regulatory hand of the central bank.
AIG has no comment on whether it expects to be designated a SIFI, but it seems likely that it will happen, says Douglas Elliott, a fellow at the Brookings Institution. He's "confident" that the company will earn the label partly because of its size and reach, and "partly because the regulators would open themselves to strong attacks if they did not so designate it."
Even so, there is always the question of whether Dodd-Frank regulations will be enough to prevent a future meltdown. And not everyone is convinced. Angel thinks that Congress "botched the opportunity" to truly fix financial regulation.
As a result, he says, "It will probably take another crisis before we think about how to restructure our regulations."
Danielle Kurtzleben is a business and economics reporter for U.S. News & World Report. Connect with her on Twitter at @titonka or via E-mail at email@example.com.
Correction: An earlier version of this article stated that the Federal Reserve designates SIFIs. The Financial Stability Oversight Council will have the task of determining SIFIs.