If the Dodd-Frank Act had been in place years ago, regulators probably still would not have intervened to stop problems at American International Group's Financial Products unit, three former U.S. financial regulators said earlier this month.
The three men—Brian McCormally, a 20-year veteran of the Office of the Comptroller of the Currency and the Office of Thrift Supervision; Simon Lorne, who formerly served as legal counsel to the Securities and Exchange Commission; and George Curtis, who served as SEC deputy director of enforcement in 2008 and 2009—spoke in New York at a session of the D&O Symposium of Minneapolis-based Professional Liability Underwriting Society.
The Dodd-Frank Wall Street Reform and Consumer Protection Act became law in July 2010. Congress developed the Act with the intent of preventing the types of situations that ultimately prompted a U.S. government bailout of the parent company of AIGFP and other significant financial services firms as one of its goals.
At the PLUS conference, the three former employees of U.S. financial regulatory agencies reviewed some worrisome unintended consequences of the Act that could impact directors and officers liability and other professional liability insurance underwriters. At the end of the session, an audience participant asked whether AIGFP would have been the subject of regulatory action if Dodd-Frank had been in place when the London-based AIG unit was engaged in the sale of credit default swaps that pushed the parent company to the brink of bankruptcy.
Mr. McCormally, the former legal staffer of U.S. banking regulatory agencies who is now a partner at Arnold & Porter in Washington, was the first to say that it would not.
"The OTS supervised AIG's parent company. They want to pretend as though they didn't," he reported. "AIG is a savings and loan holding company" and it is publicly known information that the OTS had examiners in AIG.
"They had examiners in London," Mr. McCormally said. "The passage of [Dodd-Frank] legislation would not have changed anything. The fact is the agency just dropped the ball, and they did not understand credit default swaps," he said.
Mr. Lorne, former SEC counsel who is now vice chair and chief legal officer of Millennium Management, a New York-based hedge fund manager, said he disagreed with Mr. McCormally slightly.
Now that "AIG has happened," and now that the Financial Stability Oversight Counsel of Dodd-Frank in place, "if AIG happened tomorrow, if…exactly the same circumstances [were present], the FSOC would step in and do something," Mr. Lorne said.
"But if AIG hadn't happened, would they be aware of it? I think not," he said.
"I think the odds of the next big calamity five years from now, 10 years from now, or 20 years from now, are not very much changed by virtue of Dodd-Frank," Mr. Lorne added.
Mr. McCormally, revealing details of conversations he has had with the "people in Washington who were the ones with their fingers on the button," said that those regulators suggest that the general collapse of the financial system—not just AIG—"occurred so fast that nobody could react."
"No regulator had the functionality to address the issues because they were coming so quickly," these people tell Mr. McCormally, he reported.
Giving his own take, Mr. McCormally said the speed of the collapse "may have been a problem because they were not perceiving problems [earlier, but] I can tell you from the inside—when I was at the OCC in 2004, 2005, we were getting information that the bubble was about ready to blow up."
"So for the [federal] agencies to suggest that it was too quick for them to react is a little Pollyannaish given the fact that they were looking at observable facts," he said.
"But in reality, out in the hinterlands, things did move fairly quickly and the agencies were put in an incredibly difficult position. So for FSOC to move that quickly on an AIG, I just don't see it," he said.
Mr. Curtis, the former SEC director of enforcement who is now a partner with Gibson, Dunn & Crutcher in Denver, suggested that another issue that fueled AIG's near collapse was the firm's inability to assess it's own risk. "I don't see anything in Dodd-Frank that's going to change that appreciably," Mr. Curtis said.
"With one exception," Mr. McCormally interjected. "AIG would be a systemically significant organization," and the Federal Reserve is going to require that such organizations put together what amounts to "a living will," in which they will have to show interrelationships with affiliates and non-affiliates, "and reportedly show the government how they could unwind the thing in the event of collapse."
"Is that possible? I have no idea. But that's what they're required to do."
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