FSOC | Delisting AIG

FSOC Delisted AIG, One of Only Two Nonbank SIFIs

The following is a belated posting of an interesting report by Dana Chasin (Update 209) on the FSOC’s De-Designation Decision, posted here by permission:

The Update takes its own “tax holiday” to look at last Friday's Financial Stability Oversight Council (FSOC) under-the-radar vote to de-designate AIG as a Systemically Important Financial Institution (SIFI) and the rationales provided by seven of the ten FSOC members. 

The Council’s 68-page report – the most comprehensive snapshot of the current financial regulatory leadership and administration’s thinking on systemic risk – attributes the decision to material changes in the company’s size, complexity, and risk profile since its designation. Now only one non-bank financial company, Prudential Financial, maintains its SIFI designation. 

Was this decision merely the operation of law or is it the result of a clear Trump agenda to diminish or eliminate FSOC’s impact? What does the vote breakdown tell us? More below.

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The Votes

The Council voted 6-3 to rescind its 2013 designation of AIG as a SIFI. All four Trump appointees on the FSOC voted in favor of delisting, while the Obama-era appointees were split. SEC chairman Jay Clayton recused himself from Friday’s vote in order to avoid a conflict of interests, raising a key legal question about the vote. Fed Chair Janet Yellen voted in favor. 

•  All Those In Favor

–Keith A. Noreika, Acting Comptroller of the Currency: Noreika, an Obama-era appointee, voted in favor of rescission. He does not believe non-bank financial institutions should be regulated as SIFIs.

–J. Mark McWatters, Chairman of the National Credit Union Administration: McWatters voted in favor of rescission on the grounds that AIG today is a far different company than in 2009 when he examined the company as part of the Congressional TARP Oversight Committee. Notably, he fails to acknowledge that AIG’s baseline SIFI designation occurred in 2013, not 2009.    

–J. Christopher Giancarlo, Chairman of the Commodities Futures Trading Commission: Giancarlo explained that AIG’s decreased derivatives liabilities, lending liabilities, capital markets downsizing, and ceasing of swaps activity led to his decision to vote yes.

–S. Roy Woodall, Jr., the Independent Member Having Insurance Expertise: Woodall, an Obama appointee, criticized FSOC’s rescission document as confusing and deviant from the statutory test to determine whether the company poses a risk to financial stability. On the grounds of this statutory test, however, he does not believe AIG to be a SIFI, writing that it is half the size it was during the crisis. 

–Janet Yellen, Chair of the Federal Reserve: Fed Chair Janet Yellen, the most prominent Obama-era appointee on the Council, voted in favor of rescission on the grounds that AIG’s downsizing efforts render is no longer too big to fail.

Steven Mnuchin, Treasury Secretary: Mnuchin praised FSOC’s decision of rescind AIG’s designation, claiming that it showed the Council’s commitment to removing companies that are no longer systemically risky. (The Council is housed in the Treasury.)

•  The Dissenters

–Richard Cordray, Director of the Bureau of Consumer Financial Protection: As a member of the 2013 Council, Cordray does not believe AIG has made true reduction changes based on planning but has shrunk due to a failed business model and weakened financial market.

–Martin J. Gruenberg, Chairman of the Federal Deposit Insurance Corporation: Dissented for three reasons – an increase of liabilities/assets in other areas of AIG like life insurance and annuities, an inconsistent determination of the Council, and continued irresolvability due to AIG’s size and operations.

–Melvin L. Watt, Director of the Federal Housing Finance Agency:  the two legal standards for FSOC designation were not given independent reviews. If FSOC reviewed AIG under the other standard (size, scope, etc.,) then the Council would have found AIG is still in need of enhanced supervision.

AIG’s Material Changes

Many see FSOC’s decision as a manifestation of Trump’s deregulatory agenda. The FSOC here was fulfilling its legal obligation to re-evaluate its designations annually. At the time of designation, the FSOC concluded that AIG posed significant systemic risk primarily because of its exposure to financial intermediaries, its inability to conduct an orderly liquidation of its assets, the company’s “financial contagion” risk in insurance markets, and its general complexity.

Friday’s announcement comes after more than a year of interaction between AIG and FSOC and an official request for de-designation on July 7, 2017. FSOC’s re-evaluation focused on “material changes” since the Council’s previous review. 

Since 2012, AIG has:

• decreased its debt by 58 percent since 2012
• decreased its asset size from $547 to $498 bn
• divested billions including $30 billion with divestiture of ILFC assets
• sold non-core operations and businesses including ILFC, AIG Advisor Group, and United Guaranty Corporation

FSOC’s Determination

FSOC based its determination of designation of AIG in 2013 on three transmission channels of negative effects on the financial market:

• Exposure: material impact on creditors, counterparties, investors, etc.
• Asset liquidation: liquidation in such a way that asset prices and markets are affected.
• Critical function/service: entity no longer provides services that are relied upon.

At that time, AIG produced negative risk most frequently and powerfully through excessive exposure and asset liquidation. The decision to rescind the company’s designation was due to the reconstruction and reduction of various high-risk practices.

Capital market/institutional exposures lead to a cascading effect if a non-bank experiences distress later on. Therefore, AIG reduced its total assets, total debt outstanding, short-term debt, and securities lending from their 2012 levels. Also, the complexity of AIG rendered it irresolvable in 2013. The Council considered that the company has simplified its total assets, multi-jurisdictional operations, and global financial impact in order to address this. Yet, it maintained that the entity is still complex and requires further efforts.

State of Play

•  One Last Shadow Banking SIFI 

After Friday, Prudential Financial is only nonbank financial company to bear a SIFI designation. The institution is the largest nonbank by by asset size at $784 billion – over $285 billion larger than AIG. As FSOC must re-evaluate all designations each year, we could soon see the announcement of its de-designation.

•  Trump Decision on MetLife Appeal Expected

Metlife challenged its SIFI designation and won de-designation in court. President Obama’s justice department appealed the decision. The Trump could announce that it will not move forward with the appeal at any point.

•  Two-Thirds Requirement Satisfied? 

Clayton’s recusal might be legally significant. Section 113(d) of DFA requires two thirds of serving FSOC members to vote yes for a SIFI rescission. If Clayton is considered to be a serving voting member FSOC, then FSOC has ten serving members. Six of ten is not a two thirds majority. This would open up a question about the legal standing of AIG’s de-designation.

U.S. PRESIDENT | Line of Succession

The photos are as of August 2017. They omit #9, Sonny Perdue (R), Agricultue Secretary.
The wrong person is also listed as #11, Secretary of Labor; it should be Alex Acosta (R).

Acting officers whose prior appointment required Senate confirmation are considered eligible for the line of succession. 

No Democrats or women appear among the top 14 names on this list. The highest-ranking woman on the list would have been Elaine Chao (R), Secretary of Transportation, at  #14, except that she is a naturalized, not a natural-born, citizen.

Postscript, April 28, 2020: The first in line after Mike Pence would now be Nancy Pelosi. For more details, consult this post by election-law attorney Jerry Goldfeder: https://2hljrm13wpep1y93sv1m25vn-wpengine.netdna-ssl.com/wp-content/uploads/2020/04/NYLJ-JG-2020-Election-Sidebar-Can-the-Election-Be-Postponed-1.pdf
  

1 Vice President – Mike Pence (R)
2 Speaker of the House of Representatives – Paul Ryan (R)
3 President pro tempore of the Senate – Orrin Hatch (R)
4 Secretary of State – Rex Tillerson (R)
5 Secretary of the Treasury – Steven Mnuchin (R)
6 Secretary of Defense – James Mattis (I)
7 Attorney General – Jeff Sessions (R)
8 Secretary of the Interior – Ryan Zinke (R)
9 Secretary of Agriculture – Sonny Perdue (R)
10 Secretary of Commerce – Wilbur Ross (R)
11 Secretary of Labor – Alex Acosta (R)
12 Secretary of Health and Human Services – Tom Price (R)
13 Secretary of Housing and Urban Development – Ben Carson (R)
14 Secretary of Energy – Rick Perry (R)
15 Secretary of Education – Betsy DeVos (R)
16 Secretary of Veterans Affairs – David Shulkin (I)
17 Secretary of Homeland Security – Elaine Duke (I)

ART BIZ | Sales at Art Basel, Miami Beach

Art Basel, Miami Beach, 2016. Attendance was down.
In an uncertain world, buyers were cautious, but still eager.

Dec. 4, 2016–My mother, artist  Hilda van Stockum, used to talk up art as an investment.

She said that art, unlike most other investments, can be appreciated by its owners while they wait for it to appreciate.

I have from time to time posted on what is selling at some small art galleries that I frequent.

These minnows in the art sea can be measured against the giant whale that is  Miami Beach's 15th Art Basel, which ends today.

From this huge marketplace, the biggest single primary art show in the world, we get a snapshot of what 269 galleries from 29 countries sold in less than a week.

This year the political shocks have forced people to rethink what we know about the world we live in. This surely affected Art Basel sales.

In a word, the art market is softer than in 2015. Robin Pogrebin of the NY Times headlined a story about the art fair with Paul Kasmin Gallery's star $6 million sale of Lee Krasner’s Another Storm (1963) to a private collector. This is one of the Krasner's five largest paintings. Pogrebin quoted Kasmin as saying that buyers have an eye on the long-term marketplace, looking for art that is "rare, good or new".

Mnuchin Gallery in New York City.

One frisson of interest occurred in Miami Beach when it was announced that Steven Mnuchin would be appointed Treasury Secretary, the position Alexander Hamilton first occupied, in the administration of Donald Trump.

Steven is the son of dealer Robert Mnuchin, former long-time Goldman Sachs trader, whose gallery at 45 East 78th Street has carried his name since 2013.

A report I tweeted by Alexander Forbes of Artsy confirms what Pogrebin reports, that medium-priced art work (roughly the $10,000-$100,000 range) continued to sell at steady rate, but buyers in an uncertain U.S. and British marketplace were less inclined to take risks acquiring unknown artists or paying very high prices for the work of known artists.

Artsy quotes Steven P. Henry, director of Paula Cooper gallery, as saying that people buy more art when they feel good, and right now they don't feel good. At Art Basel dealers seemed to be using the fair as an advertising platform for future sales as much as a venue to close—to a great extent sales were made before the fair opened. Here are some major sales, the first one already mentioned:

• Lee Krasner, Another Storm (1963), as mentioned via Paul Kasmin Gallery, $6 million. Nick Olney of the gallery said: "We were very excited to have this to announce to the world in a very physical way that we’re working with the [Pollock-Krasner Foundation]. I haven’t found hesitancy [among buyers]; it’s maybe just less impulsive."
• Roxy Paine, 41-foot-tall sculpture Compression (2016), $2 million.
• Iván Navarro, five works, $50,000 to $150,000.
• William N. Copley, Under the Stars (Hommage à Picabia) (1994), $185,000.
• Herrera via Logsdail, Untitled Estructura (Blue) (1966/2015) and Ave Maria (2011), $450,000 apiece. Also several works on paper.
• Roy Colmer, also via Logsdail, spray-gun work, $50,000, and
• Anish Kapoor, art, £500,000–£700,000.
• Marco Maggi, from Brazilian Galeria Nara Roesler, three related paintings–BIG DATA (North and East), 2016 for $42,000 each, and BIG DATA (West), 2016, $36,000.
• Maggi, Complete Coverage on Oiticica (March, Turner Box), 2016, $14,000.
• Tommy Ohtake, untitled painting, 1965, $160,000.
• Julio Le Parc, three works (Alchimie 339: En spirale huit couleurs, 2008 / 2016, €150,000; Continuel mobile transparent, 1962 / 2016, €290,000; and Continuel Mobile rouge, 1962 / 2016, €190,000.
• Maya Lin, Silver Pearl (2015), $150,000; several small Joel Shapiro sculptures, $125,000; two pieces out of Tara Donovan’s Composition (Cards) series, $65,000; five works on paper by Yoshitomo Nara, $30,000-$65,000; Nigel Cooke, a painting, $50,000, and Leo Villarreal, editions of Cloud Drawing (2016), $85,000 apiece. All via Pace, directed by Ben Strauss-Malcolm.