Bloomberg News

AIG Weighs Shutting Insurer’s Bank as Volcker Rule Looms

August 03, 2012

AIG’s Benmosche Weighs Closing Bank as Volcker Rule Looms

American International Group Inc. advanced 0.4 percent to $30.97 at 11:46 a.m. in New York. Photographer: JB Reed/Bloomberg

American International Group Inc. (AIG:US), the bailed-out insurer, is considering whether to close its bank unit as the company prepares for more government regulation.

“We are discussing internally the effects the Volcker rule could have on us,” Chief Executive Officer Robert Benmosche said today in a conference call discussing second-quarter results. “We are giving thought to whether we should now close the bank we have.”

MetLife Inc. (MET:US), the largest U.S. life insurer, is seeking to limit U.S. oversight by getting rid of its bank status after the Federal Reserve blocked buybacks and a dividend (MET:US) increase. Hartford Financial Services Group Inc., Allstate Corp. and Ameriprise Financial Inc. (AMP:US) have also retreated from banking. Insurance units are overseen by watchdogs in the 50 states.

“They can be subject to less regulation and all the associated costs by simply disposing of the bank,” James Barth, a finance professor at Auburn University, said by phone. “If the bank is a small portion of its overall activities, then one has to say, ‘Why keep the bank?’”

Ownership of the bank would subject AIG to the Volcker rule, which limits proprietary trading and investing in private equity or hedge funds, the New York-based insurer said in its annual report. Some provisions may apply even if AIG no longer has a bank, the company said.

Exemption’s Scope

The proposed rule, named for former Fed Chairman Paul Volcker, contains an exemption for trading by insurers for their general accounts, “but the final breadth and scope of this exemption is uncertain,” AIG said in the report.

AIG had $19.3 billion invested in so-called alternative assets, including hedge funds and private equity, as of June 30, the insurer said on its website. Private equity added $325 million to profit in the second quarter while hedge funds lost $36 million.

AIG Federal Savings Bank had 37 employees and $1 billion in assets as of March 31, according to Federal Deposit Insurance Corp. data. The bank offers mortgages and certificates of deposit through its website and over the phone.

AIG agreed in 2010 to sell a majority stake in its consumer lender, American General Finance, to Fortress Investment Group LLC. for $125 million. The insurer’s banking role made the Office of Thrift Supervision its primary federal regulator prior to the financial crisis.

‘Fell Short’

The OTS said in 2009 that it “fell short” in its oversight of AIG and failed to recognize the risk of the firm’s credit-default swap portfolio. After the bets went against AIG, the insurer received a U.S. rescue that swelled to $182.3 billion. Most OTS functions have since been assumed by the Office of the Comptroller of the Currency.

AIG has reduced outstanding U.S. aid to about $30 billion using proceeds from asset sales. The Treasury owns (AIG:US) 61 percent of the insurer, and AIG has said in a filing that when the U.S. stake falls below 50 percent, it will be probably be regulated by the Fed as a savings-and-loan holding company.

The Fed blocked New York-based MetLife from raising its dividend or buying back shares after reviewing how it would fare in a severe economic slump. Prudential Financial Inc. (PRU:US), the second-largest U.S. life insurer, isn’t subject to the same oversight and has boosted its dividend in 2009, 2010 and 2011.

AIG advanced 0.4 percent to $30.97 at 11:46 a.m. in New York. The shares have rallied 33 percent this year.

To contact the reporter on this story: Zachary Tracer in New York at ztracer1@bloomberg.net

To contact the editor responsible for this story: Dan Kraut at dkraut2@bloomberg.net


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Companies Mentioned

  • AIG
    (American International Group Inc)
    • $52.02 USD
    • 0.34
    • 0.66%
  • MET
    (MetLife Inc)
    • $50.78 USD
    • 0.83
    • 1.63%
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