WEBVTT - AIG Emerges from Federal Oversight after SIFI Ruling (Audio) 0:00:00.080 --> 0:00:03.560 American International Group is no longer too big to fail. 0:00:03.920 --> 0:00:07.760 That's according to the Financial Stability Oversight Council. The official 0:00:07.840 --> 0:00:10.000 ruling from the Council is that a i G is 0:00:10.080 --> 0:00:14.480 no longer a systemically important financial institution or city. The 0:00:14.560 --> 0:00:17.640 label was pinned on it in in a step by 0:00:17.720 --> 0:00:20.960 regulators to protect the financial system from companies seen as 0:00:21.000 --> 0:00:24.560 posing a potential risk. AIGs collapse in two thousand and 0:00:24.600 --> 0:00:27.360 eight was at the center of the financial crisis. With 0:00:27.520 --> 0:00:31.880 that city label came stricter government oversight and tighter capital rules. 0:00:32.240 --> 0:00:35.000 The Risk Council voted six to three to make the change, 0:00:35.040 --> 0:00:39.000 with Treasury Secretary Stephen Manuchin and Federal Reserve Chair Janet 0:00:39.040 --> 0:00:42.400 Yellen supporting it, along with several of the newer regulators 0:00:42.440 --> 0:00:46.040 appointed by President Trump. Joining us is Robert Hockett, a 0:00:46.040 --> 0:00:50.000 professor at Cornell University Law School Bob. The decision was 0:00:50.040 --> 0:00:53.360 opposed by the director of the Consumer Financial Protection Bureau, 0:00:53.600 --> 0:00:56.560 the chairman of the fdi C, and the director of 0:00:56.560 --> 0:01:01.320 the Federal Housing Finance Agency, all Obama pointees. Was it 0:01:01.360 --> 0:01:06.559 the right decision? Well, I'll say this much and again 0:01:06.600 --> 0:01:10.640 thanks for having me on. It's not clearly the wrong decision, 0:01:10.840 --> 0:01:13.680 even though it might be the often decision. And here's 0:01:13.680 --> 0:01:16.440 why there have been substantial changes at a I G, 0:01:17.000 --> 0:01:20.520 at least along one dimension that's actually relevant for these purposes, 0:01:20.800 --> 0:01:23.080 and that has to do essentially with the short term 0:01:23.240 --> 0:01:26.080 character of its liabilities. The problem with a I G 0:01:26.200 --> 0:01:27.720 in two thousand and eight was that it was much 0:01:27.760 --> 0:01:30.800 like a bank in the sense that it's derivatives business 0:01:31.040 --> 0:01:33.960 was such as to render the firm prone to what 0:01:34.000 --> 0:01:37.479 we call run risks, that basically, people might suddenly call 0:01:37.959 --> 0:01:40.040 their various loans that have been made to I G 0:01:40.160 --> 0:01:42.480 in various forms, so that A I G might suffer 0:01:42.520 --> 0:01:45.880 a significant liquidity crisis. It has since then spun off 0:01:45.920 --> 0:01:48.320 a lot of that derivatives business, and in that sense 0:01:48.640 --> 0:01:50.840 it's less prone to run risk than it used to be, 0:01:50.920 --> 0:01:53.880 and in that sense less bank like. On the other hand, 0:01:54.120 --> 0:01:57.520 it still is have been very, very interconnected with other 0:01:57.560 --> 0:02:00.880 financial firms throughout the economy. It still is also gigantic, 0:02:00.920 --> 0:02:03.640 and indeed it's now looking into acquiring other firms and 0:02:03.720 --> 0:02:06.040 becoming yet larger. So I think this is a kind 0:02:06.040 --> 0:02:08.720 of a tough call. Miss. I'll say it wouldn't be 0:02:08.800 --> 0:02:11.840 clearly right to keep it a city, But it wouldn't 0:02:11.840 --> 0:02:14.000 have been clearly wrong to keep it one either, And 0:02:14.000 --> 0:02:16.080 in this case as well, I don't think it's clearly wrong, 0:02:16.480 --> 0:02:18.920 uh to sort of remove the designation as long as 0:02:18.960 --> 0:02:22.480 it stays the way it has become since the crisis, Bob, 0:02:22.600 --> 0:02:27.680 Prudential has been supposedly, you know, I'm laying the groundwork 0:02:27.720 --> 0:02:29.840 to try to get a similar ruling. Does this ruling 0:02:29.880 --> 0:02:32.760 mean the Prudential has got a good chance of getting 0:02:32.760 --> 0:02:36.080 out from under the designation? I think it does mean that. 0:02:37.000 --> 0:02:38.679 I think, I mean, there are a number of reasons 0:02:38.880 --> 0:02:42.200 why it's probably why we should probably bet that it's 0:02:42.240 --> 0:02:45.560 not going to remain ASSIFFI. One is this ruling which 0:02:45.680 --> 0:02:48.560 suggests that the Council itself is becoming a little bit 0:02:48.600 --> 0:02:50.960 less strict than it was, and that's no surprise because 0:02:50.960 --> 0:02:53.680 of all the Trump appointees. And the second is because 0:02:53.800 --> 0:02:55.959 in effect, Prudential has a bit of a blueprint now 0:02:56.280 --> 0:02:58.680 after looking at what happened at g E Capital, what 0:02:58.800 --> 0:03:01.160 happened at MetLife, and what happened at a I G. 0:03:01.639 --> 0:03:03.440 It has a kind of blueprint for what it has 0:03:03.480 --> 0:03:06.839 to do to look less systemically significant in the eyes 0:03:06.880 --> 0:03:10.679 of the Council. Bob, you explained how A I G 0:03:11.280 --> 0:03:13.720 Is a smaller, leaner company. Now it's sold off a 0:03:13.760 --> 0:03:18.600 hundred billion dollars in assets, but the announced goal of 0:03:18.680 --> 0:03:22.480 its CEO is to now expand through mergers and acquisitions. 0:03:23.200 --> 0:03:27.440 Is that a dangerous move? It's definitely potentially dangerous. I 0:03:27.639 --> 0:03:29.639 certainly didn't mean to suggest that A I G is 0:03:29.800 --> 0:03:34.240 an extent small or lean um. It's it's definitely small lurb. 0:03:34.360 --> 0:03:37.160 But as I mentioned before, it does intend to grow, 0:03:37.280 --> 0:03:39.240 and of course many of its shareholders are demanding this 0:03:39.680 --> 0:03:43.680 carl Icon among them, So it's going to become gigantic 0:03:43.800 --> 0:03:47.400 again if it's not indeed still gigantic. And therefore I 0:03:47.440 --> 0:03:50.040 think that the real focus of the f stock was 0:03:50.160 --> 0:03:54.120 probably on the liquidity risk that the institution faced. In 0:03:54.120 --> 0:03:57.440 other words, how panic prone was it right, how bank 0:03:57.600 --> 0:04:02.840 run vulnerable was it? As long as it stays uh 0:04:03.040 --> 0:04:06.880 sort of less bank like in that particular sense, my impressions, 0:04:06.960 --> 0:04:09.720 the F stock is going to be less concerned even 0:04:09.720 --> 0:04:13.080 while it grows. Now. I don't think that's good necessarily. 0:04:13.400 --> 0:04:17.280 I think that size matters, and interconnectiveness matters even more. 0:04:17.640 --> 0:04:19.479 But it looks as I the F sac is currently 0:04:19.480 --> 0:04:22.039 focusing on liquidity risk and in so far as the 0:04:22.040 --> 0:04:24.800 i G seems to be less liquidity risky than it 0:04:24.920 --> 0:04:27.720 once was, the Fox seems to be viewing it as 0:04:28.360 --> 0:04:32.200 in effect favor or less systemically dangerous. Well, Bob, you know, 0:04:32.520 --> 0:04:34.680 as with many of the court decisions, we see it, 0:04:34.800 --> 0:04:37.960 it looks like the who appointed the members has a 0:04:37.960 --> 0:04:41.440 big impact here. Is this really something that you think, uh, 0:04:41.800 --> 0:04:44.960 is you know, kind of based upon say, liquidity risk 0:04:45.120 --> 0:04:46.520 or is it is it just going to be one 0:04:46.520 --> 0:04:48.520 of these things where it depends which president appointed the 0:04:48.520 --> 0:04:50.560 members of the Council at the time as to how 0:04:50.600 --> 0:04:54.200 it gets enforced. Well, I sincerely hope that it's not 0:04:54.360 --> 0:04:56.960 the ladder um. But that being said, I fear that 0:04:57.040 --> 0:04:59.760 it is in large part the ladder. That's just say 0:05:00.080 --> 0:05:02.560 to Trump has announced his intention right from the get go, 0:05:02.720 --> 0:05:05.640 and even back in January, notwithstanding all of his campaign 0:05:05.640 --> 0:05:08.840 promises to go much lighter on Wall Street. Even then 0:05:08.839 --> 0:05:11.320 the Obama administration had done and we should be clear, 0:05:11.360 --> 0:05:14.559 the Obama administration was not particularly rough on Wall Street, 0:05:14.600 --> 0:05:18.960 nor were the Congresses that were in session during Obama's presidency. 0:05:19.000 --> 0:05:21.440 But nevertheless, Trump said he's going to go deeven lighter 0:05:21.480 --> 0:05:23.680 and it seems pretty clear that he's appointing people who 0:05:23.680 --> 0:05:27.560 have that intention. Bob in about thirty seconds about how 0:05:27.640 --> 0:05:31.360 much money does a I G save by not being 0:05:31.400 --> 0:05:35.520 a city. Oh, that's hard to calculate. Um, It's it's 0:05:35.520 --> 0:05:37.200 not just a matter of how much it saves in 0:05:37.279 --> 0:05:39.720 the form of costs to sort of put together living 0:05:39.720 --> 0:05:41.840 wills and the like. It's also a matter of how 0:05:41.920 --> 0:05:44.240 much capital it no longer has to sort of maintain 0:05:44.240 --> 0:05:46.480 as a buffer, and thus which is able to invest 0:05:46.560 --> 0:05:49.479 in a sort of more speculative and it's potentially profitable 0:05:49.520 --> 0:05:52.080 but also potentially dangerous manner. I don't know that I 0:05:52.120 --> 0:05:55.200 can actually quantify that right here, June, you've done large. 0:05:55.279 --> 0:05:57.960 You've explained so much to us. One of our favorite guests, 0:05:58.040 --> 0:06:01.080 that's Bob Hocket. He is a professor at Ornell University 0:06:01.279 --> 0:06:01.960 Law School.