NU Online News Service, Aug. 6, 1:50 p.m. EDT

American International Group officials are looking favorably at federal oversight as they say they are preparing for regulation by the Federal Reserve Board in addition to state regulation.

Robert Benmosche, AIG president and chief executive officer, on Friday says of the Federal Reserve Board's oversight, “in a way, we see it as a big positive.”

It is believed that AIG will come under Federal oversight as a systemically important financial institution (SIFI) under a provision of the Dodd-Frank financial services reform law once federal ownership of the company dips below 50 percent.

Benmosche brought the issue of federal regulation to the front burner during a conference call with financial analyst on Friday morning following AIG's second quarter earnings announcement.

“We really don't know when we will be regulated but we do believe we will be regulated by the Federal Reserve, probably,” he told analysts. “That seems the most likely candidate and we're putting an enormous amount of effort and cost to make sure that we are Fed-ready.”

However, the final level of Treasury ownership depends on how much the Treasury gets for the remainder of the offering.

Analysts believe that the new offering announced Friday after markets closed, will still leave Treasury owning 54 percent of AIG stock, above the 50 percent threshold needed to trigger federal regulation of AIG.

Another factor is that the Treasury has granted the underwriters a 30-day over-allotment option with respect to approximately 24.6 million additional shares of AIG common stock, which could dip Treasury's ownership further.

In his comments, Benmosche says AIG has made a comprehensive study of how it will be impacted by federal regulation, and that its only concern is whether it should divest itself of its Wilton, Conn.-based thrift.

He acknowledged that AIG “is giving thought to whether we should now close the bank we have because we're concerned about that aspect of it, and an insurance company invests very differently than a bank would.”

But aside from that issue, he continues, “this is really about making sure we have a really good process and good controls, especially in the risk management arena, very good controls around how we determine [how] we can handle a bump in the night that happened in 2008, for example.”

He says AIG has “discussed internally” the effects the Volcker Rule could have on us, and “so there is a little concern there.”

The Volcker rule, which is still being drafted, would severely limit the ability of financial firms to invest in private equity deals for their own account.

Currently, the Treasury Department holds 61 percent of AIG. Treasury's ownership stems from federal intervention in 2008 through the Federal Reserve Board when the company ran into financial trouble over its investments in credit default obligations. The Fed agreed to provide $182.3 billion in cash aid to AIG in return for 79.9 percent of its stock.

The Fed and the Treasury ultimately provided more aid through special purpose vehicles created by the Fed, guarantees on its commercial paper, and aid through the Troubled Asset Relief Program and other Treasury programs.

The Fed's investments have been paid off, either through the sale of AIG assets contained in the SPVs, or through acquisition of AIG stock by the Treasury in return for cash that ended the Fed's investment.

AIG has been working hard to bring down the government's investment as soon as possible, hopefully by the fall, and Friday's night announcement was part of that.

Other insurers, both property and casualty and life, are also expected to be designated SIFI, but they are fighting it tooth and nail, and enlisting the help of members of Congress to support their position.

They could be eligible for Fed regulation either by being designated SIFI or because they own thrift holding companies.

A number of insurers which operate thrifts are moving to either divest their thrifts or reduce their involvement with them. These include Prudential Insurance Co., Massachusetts Mutual Insurance Co. and W.R. Berkley.

Special Reports /

AIG Says It is Preparing for Regulation

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