Recently, the top watchdog in New York's financial regulatory arm announced that it would be reopening a probe into American International Group Inc (NYSE:AIG)'s handling of its ill-fated credit-default swaps that lead the company to the brink of bankruptcy. But the insurance behemoth is fighting back, stating that the regulators are behind the times and not first in command. The tussle highlights an issue that faces many New York-based firms, which investors should see as a potential long-term hindrance of operations.
AIG vs. NYDFS The New York Department of Financial Services is the top watchdog for the state, so naturally, it has a heavy caseload with all of the firms on Wall Street. But with the financial crisis highlighting some of the shortcomings of federal oversight, many federal regulators have upped their involvement in the watchdog duties.
This is precisely where the conflict between AIG and NYDFS comes into play. AIG, which was labeled as a Systemically Important Financial Institution this summer for its central role in the financial crisis, contends that the NYDFS will need to accept a back-seat role in regulation of New York companies, especially since the insurer has been working in tandem with the Federal Reserve since its bailout in 2008.
The NYDFS claims that though the insurer was overseen by the Office of Thrift Supervision (a now defunct regulator), it always had full authority to regulate AIG Financial Products, the division that placed risky bets on the housing market through CDS, collateralized debt obligations, and residential mortgage-backed securities. The current probe is looking into the risk management of the remaining portfolio from AIGFP, which was reduced from $1.8 trillion to $116 billion, a 93% reduction.
Juggling Since regulators have been ramping up their activity following the financial crisis, a multitude of problems arise when more than one regulator is demanding information or corrections to company risks. In the case of AIG, CEO Robert Benmosche has stated that the company is monitored by the Fed and has eight Fed employees within the company. He's also stated that the insurer has cooperated with all NYDFS inquiries, but that the watchdog may not consider that sufficient.