Late last month, without much fanfare, financial regulators voted to relax rules on AIG, the insurance giant synonymous with last decade’s global financial meltdown.
The process was done in such hushed tones, according to Democratic Senators, that the decision was first revealed not by the inter-agency body that made it–the Financial Stability Oversight Council (FSOC)–but by an industry trade association.
“The timing…indicates that insurance industry representatives and others individuals learned of the decision to de-designate AIG before it was announced publicly,” Sens. Elizabeth Warren (D-Mass.) and Sheldon Whitehouse (D-R.I.) said on Monday.
The lawmakers made the statement to FSOC Chair, Treasury Secretary Steve Mnuchin, and all other members of the body, in letters published on Tuesday.
The inter-agency body had voted on Sept. 29 to remove the “Systemically Important Financial Institution” (SIFI) designation from AIG—a distinction the company had received in 2013. Under Dodd-Frank financial reform, banks and non-banks labeled SIFI are subject to additional regulatory oversight.
The lobbying organization that scooped FSOC was the Property Casualty Insurer’s Association of America (PCI), an industry trade group that represents hundreds of companies. Warren and Whitehouse said that PCI praised the deregulatory ruling “minutes after a FSOC readout that made no mention of the decision.”
“It is unclear why or how insurance industry representatives knew of this decision at the time, which was not made public until approximately 30 minutes later, when a second FSOC readout with the announcement was released to the public,” the senators said.
The lawmakers brought up the PCI revelations, noting they had other concerns about undue influence on FSOC oversight of AIG. Former White House economic adviser Carl Icahn, they noted, owns a massive stake in the insurance behemoth. Last summer, Icahn began backing off previous calls to break up the company.
Warren and Whitehouse asked Mnuchin in writing, in July, if Icahn “had any contact with or influence on FSOC member who voted on the AIG SIFI designation.” Monday’s letter noted that Mnuchin replied last week by merely listing FSOC conflict of interest policies and the fact that Jay Clayton, the chair of the Securities and Exchange Commission, recused himself from the AIG vote. The SEC Chair had previously confirmed that he met with Icahn, after his nomination was announced.
“The response ignored our questions about contacts that Mr. Icahn or his associates may have had with FSOC members–meaning the existence of or precise extent and nature of any contacts is still unclear,” the lawmakers said.
The senators also questioned whether Mnuchin even properly tallied the Sept. 29 vote, which was 6-3 in favor of a motion to strip AIG of the SIFI label.
Dodd-Frank requires a two-thirds FSOC vote to remove SIFI designations. Mnuchin had ruled that Clayton, having recused himself, did not qualify as a “voting member.” The definition was accepted by a simple FSOC majority.
“Such an arbitrary decision with no legal basis puts the legality of the de-designation vote into question,” Warren and Whitehouse said.
The pair also claimed that much of AIG’s risk profile is the same as it was in 2013, when it was slapped with the SIFI designation. Monday’s letter noted that one unnamed FSOC member who voted to relax rules admitted AIG “remains a complex international insurance company with an embedded financial institutions component.”
“Although the company has decreased in size, it still insures 87 percent of all Fortune 500 companies,” Warren and Whitehouse said. They said that the firm is still exposed to “discretionary withdrawal,” much like it was in 2008, when institutional investors made claims on insurance against turbulence in the housing market. AIG couldn’t meet its obligations and eventually received a $182 billion bailout from the US government.
Even if the company doesn’t require another publicly-funded rescue, the senators said AIG could cause tremors in the stock market, if it once again needs cash and holds a “fire sale.”
“Such a fire sale would then reduce the value of these bonds across the sector, putting immense stress on the financial system,” they warned.
