Speaker 1: American International Group is no longer too big to fail.
Speaker 1: That's according to the Financial Stability Oversight Council. The official
Speaker 1: ruling from the Council is that a i G is
Speaker 1: no longer a systemically important financial institution or city. The
Speaker 1: label was pinned on it in in a step by
Speaker 1: regulators to protect the financial system from companies seen as
Speaker 1: posing a potential risk. AIGs collapse in two thousand and
Speaker 1: eight was at the center of the financial crisis. With
Speaker 1: that city label came stricter government oversight and tighter capital rules.
Speaker 1: The Risk Council voted six to three to make the change,
Speaker 1: with Treasury Secretary Stephen Manuchin and Federal Reserve Chair Janet
Speaker 1: Yellen supporting it, along with several of the newer regulators
Speaker 1: appointed by President Trump. Joining us is Robert Hockett, a
Speaker 1: professor at Cornell University Law School Bob. The decision was
Speaker 1: opposed by the director of the Consumer Financial Protection Bureau,
Speaker 1: the chairman of the fdi C, and the director of
Speaker 1: the Federal Housing Finance Agency, all Obama pointees. Was it
Speaker 1: the right decision? Well, I'll say this much and again
Speaker 1: thanks for having me on. It's not clearly the wrong decision,
Speaker 1: even though it might be the often decision. And here's
Speaker 1: why there have been substantial changes at a I G,
Speaker 1: at least along one dimension that's actually relevant for these purposes,
Speaker 1: and that has to do essentially with the short term
Speaker 1: character of its liabilities. The problem with a I G
Speaker 1: in two thousand and eight was that it was much
Speaker 1: like a bank in the sense that it's derivatives business
Speaker 1: was such as to render the firm prone to what
Speaker 1: we call run risks, that basically, people might suddenly call
Speaker 1: their various loans that have been made to I G
Speaker 1: in various forms, so that A I G might suffer
Speaker 1: a significant liquidity crisis. It has since then spun off
Speaker 1: a lot of that derivatives business, and in that sense
Speaker 1: it's less prone to run risk than it used to be,
Speaker 1: and in that sense less bank like. On the other hand,
Speaker 1: it still is have been very, very interconnected with other
Speaker 1: financial firms throughout the economy. It still is also gigantic,
Speaker 1: and indeed it's now looking into acquiring other firms and
Speaker 1: becoming yet larger. So I think this is a kind
Speaker 1: of a tough call. Miss. I'll say it wouldn't be
Speaker 1: clearly right to keep it a city, But it wouldn't
Speaker 1: have been clearly wrong to keep it one either, And
Speaker 1: in this case as well, I don't think it's clearly wrong,
Speaker 1: uh to sort of remove the designation as long as
Speaker 1: it stays the way it has become since the crisis, Bob,
Speaker 1: Prudential has been supposedly, you know, I'm laying the groundwork
Speaker 1: to try to get a similar ruling. Does this ruling
Speaker 1: mean the Prudential has got a good chance of getting
Speaker 1: out from under the designation? I think it does mean that.
Speaker 1: I think, I mean, there are a number of reasons
Speaker 1: why it's probably why we should probably bet that it's
Speaker 1: not going to remain ASSIFFI. One is this ruling which
Speaker 1: suggests that the Council itself is becoming a little bit
Speaker 1: less strict than it was, and that's no surprise because
Speaker 1: of all the Trump appointees. And the second is because
Speaker 1: in effect, Prudential has a bit of a blueprint now
Speaker 1: after looking at what happened at g E Capital, what
Speaker 1: happened at MetLife, and what happened at a I G.
Speaker 1: It has a kind of blueprint for what it has
Speaker 1: to do to look less systemically significant in the eyes
Speaker 1: of the Council. Bob, you explained how A I G
Speaker 1: Is a smaller, leaner company. Now it's sold off a
Speaker 1: hundred billion dollars in assets, but the announced goal of
Speaker 1: its CEO is to now expand through mergers and acquisitions.
Speaker 1: Is that a dangerous move? It's definitely potentially dangerous. I
Speaker 1: certainly didn't mean to suggest that A I G is
Speaker 1: an extent small or lean um. It's it's definitely small lurb.
Speaker 1: But as I mentioned before, it does intend to grow,
Speaker 1: and of course many of its shareholders are demanding this
Speaker 1: carl Icon among them, So it's going to become gigantic
Speaker 1: again if it's not indeed still gigantic. And therefore I
Speaker 1: think that the real focus of the f stock was
Speaker 1: probably on the liquidity risk that the institution faced. In
Speaker 1: other words, how panic prone was it right, how bank
Speaker 1: run vulnerable was it? As long as it stays uh
Speaker 1: sort of less bank like in that particular sense, my impressions,
Speaker 1: the F stock is going to be less concerned even
Speaker 1: while it grows. Now. I don't think that's good necessarily.
Speaker 1: I think that size matters, and interconnectiveness matters even more.
Speaker 1: But it looks as I the F sac is currently
Speaker 1: focusing on liquidity risk and in so far as the
Speaker 1: i G seems to be less liquidity risky than it
Speaker 1: once was, the Fox seems to be viewing it as
Speaker 1: in effect favor or less systemically dangerous. Well, Bob, you know,
Speaker 1: as with many of the court decisions, we see it,
Speaker 1: it looks like the who appointed the members has a
Speaker 1: big impact here. Is this really something that you think, uh,
Speaker 1: is you know, kind of based upon say, liquidity risk
Speaker 1: or is it is it just going to be one
Speaker 1: of these things where it depends which president appointed the
Speaker 1: members of the Council at the time as to how
Speaker 1: it gets enforced. Well, I sincerely hope that it's not
Speaker 1: the ladder um. But that being said, I fear that
Speaker 1: it is in large part the ladder. That's just say
Speaker 1: to Trump has announced his intention right from the get go,
Speaker 1: and even back in January, notwithstanding all of his campaign
Speaker 1: promises to go much lighter on Wall Street. Even then
Speaker 1: the Obama administration had done and we should be clear,
Speaker 1: the Obama administration was not particularly rough on Wall Street,
Speaker 1: nor were the Congresses that were in session during Obama's presidency.
Speaker 1: But nevertheless, Trump said he's going to go deeven lighter
Speaker 1: and it seems pretty clear that he's appointing people who
Speaker 1: have that intention. Bob in about thirty seconds about how
Speaker 1: much money does a I G save by not being
Speaker 1: a city. Oh, that's hard to calculate. Um, It's it's
Speaker 1: not just a matter of how much it saves in
Speaker 1: the form of costs to sort of put together living
Speaker 1: wills and the like. It's also a matter of how
Speaker 1: much capital it no longer has to sort of maintain
Speaker 1: as a buffer, and thus which is able to invest
Speaker 1: in a sort of more speculative and it's potentially profitable
Speaker 1: but also potentially dangerous manner. I don't know that I
Speaker 1: can actually quantify that right here, June, you've done large.
Speaker 1: You've explained so much to us. One of our favorite guests,
Speaker 1: that's Bob Hocket. He is a professor at Ornell University
Speaker 1: Law School.