Stephen Gandel is a Bloomberg Gadfly columnist covering equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.

American International Group Inc. could finally be ungrounded by its helicopter-parent-like regulators. It's about time.

The Financial Stability Oversight Council is meeting on Friday, and one of the items on the agenda, according to a Bloomberg News article, is a vote on whether to let AIG shed its designation as a Systemically Important Financial Institution, which is regulator-speak for too big to fail. Companies dislike the designation because it comes with additional regulatory burdens. 

Already, some are saying removing the SIFI designation is a sign that regulators have forgotten about the financial crisis and are pulling the protections put in place to stop the next one. Phil Angelides, chairman of the Financial Crisis Inquiry Commission, calls the effort to take AIG off the list a "stunningly bad move."

Financial Crisis Overhang
Some investors think removing AIG from the list of firms designated as too big to fail will lift its shares
Source: Bloomberg

But taking AIG off the SIFI list is not about forgetting the crisis, it's about correcting a regulation error made in the charged days after the financial system nearly collapsed. AIG should have never been on the SIFI list to begin with. About a year after the crisis, H. Rodgin Cohen, a top Wall Street lawyer, who was in the room when the negotiations to save Lehman Brothers faltered, warned regulators about putting too much focus on stopping the next bank failure or financial market meltdown and too little emphasis on installing protections to stop financial fires from spreading when the do erupt. Focus on contagions, Cohen advised, not causes.

AIG's designation missed Cohen's warning. The reason large banks are on the SIFI list is not because they are large and can fail but because they provide liquidity. When they fail, liquidity dries up, which can lead to the failure of other financial institutions and eventually any firm that has regular short-term bills to pay -- pretty much every company. That's not the case with insurers. What's more, no one can walk up to a branch of an insurance firm, like they can with a bank, and say they want the money in their policy. An event has to take place to trigger the collection. Huge hurricanes or other weather disasters can be a concern, but insurers' actual losses from them hasn't truly increased in the past few years. Even when losses occur, insurance payouts take place over time after adjusters do their work. AIG made it through Harvey and Irma with little difficulty.  

Catastrophe Anxiety
Insurance losses in the U.S. from hurricanes and other disasters have not jumped in the past decade and a half
Source: Bloomberg

The exception, of course, is insurance-like financial derivatives, which is how AIG got into trouble in the financial crisis. Those swaps can be called on short notice and do require instant liquidity. But AIG is out of that business. What's more, credit swaps are more tightly regulated than they used to be.

After the financial crisis, regulators' response to AIG has appeared to be more about punishment than anything else. Andrew Cuomo, who was New York attorney general at the time, stoked public outrage about $165 million in bonuses that AIG paid to employees in its financial products unit. Designating AIG as too big to fail was an extension of that anger about what AIG did wrong before the financial crisis and not what it could do to the economy since.

AIG could benefit from removal. Shares of fellow insurer MetLife Inc., for instance, which won its SIFI freedom in a court case March 2016, have risen 35 percent since then. But that shouldn't be part of the calculus of the decision. The punishment phase for the financial crisis, at least when it comes to regulating firms, should be over.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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