American International Group Inc. and General Electric Co.’s finance unit were designated systemically important by U.S. regulators, a ruling the companies had already agreed to accept.
The vote by the Financial Stability Oversight Council subjects AIG and GE Capital to heightened Federal Reserve oversight, the Treasury Department said in a statement today in Washington. The council, or FSOC, proposed the designations of the two companies and Prudential Financial Inc. on June 3 and gave them 30 days to appeal. AIG and GE Capital said last week they wouldn’t contest the decision, and Prudential said it will.
“The council has taken a decisive step to address threats to U.S. financial stability and create a safer and more resilient financial system,” Treasury Secretary Jacob J. Lew, the council’s chairman, said in the statement. “These designations will help protect the financial system and broader economy from the types of risks that contributed to the financial crisis.”
The council will “continue to review additional companies in the designations process,” Lew said.
The vote completes the first designations of systemically important companies by the council, which was created by the 2010 Dodd-Frank financial overhaul law to prevent a financial company’s failure from threatening the economy. The panel has 10 voting members and includes Fed Chairman Ben S. Bernanke.
The FSOC determined that “material financial distress” at AIG and Stamford, Connecticut-based GE Capital “could pose a threat to U.S. financial stability,” the Treasury said in the statement. “This does not constitute a determination that the company is currently experiencing material financial distress.”
AIG’s life-insurance liabilities help make the company a risk to the broader financial system, the council said in documents released by the Treasury today. Withdrawals from life insurance and annuities in a crisis could undermine the firm’s stability and might harm other insurers if panic spread, the council said. The products typically have restrictions such as surrender fees designed to prevent customers from ending contracts.
If AIG was in distress, “funds from products allowing for early withdrawals might be withdrawn regardless of the size of associated surrender charges or tax penalties,” the council said. Rapid liquidation could drain AIG’s cash and “compel the company to liquidate a substantial portion of its large portfolio of relatively illiquid corporate and foreign bonds.”
AIG did not contest the designation “and welcomes it,” the insurer said in a statement.
GE Capital said it has been prepared for the ruling.
“We have strong capital and liquidity positions, and we are already supervised by the Fed,” the company said in a statement. “We are prepared to work with the Fed and FSOC on the implementation of this designation.”
All 10 voting members agreed to designate New York-based AIG. The vote on GE Capital was 9-0, with Securities and Exchange Commission Chairman Mary Jo White recusing herself. White represented General Electric when she was previously a partner at Debevoise & Plimpton LLP, according to her financial disclosure report filed in February.