Why A.I.G. May Not Be Able to Avoid the Volcker Rule

The American International Group, of all companies, wants to avoid a rule designed to stop risky trading.

A.I.G.'s chief executive, Robert H. Benmosche, said on CNBC on Tuesday afternoon that the company was thinking of taking steps that could shield it from the Volcker Rule. Part of the Dodd-Frank financial overhaul legislation, the rule is intended to stop speculative trading at financial firms that enjoy federal support.

Mr. Benmosche's remarks came a day after the Treasury Department sold a large amount of shares to bring its stake in A.I.G. well below 50 percent. The sale was seen as an important milestone. The Treasury Department originally poured tens of billions of dollars into A.I.G. after its enormous speculative bets soured in 2008 and threatened the standing of the financial system.

At first glance, it might not seem right for a company that made cataclysmically dangerous trades to now elude curbs on risky wagers.

Mr. Benmosche has a rea sonable sounding justification for not wanting A.I.G. to be subject to the rule. He says it does not really fit insurance companies, which take long-term positions in securities to match the long-term nature of their obligations to holders of their insurance policies. And Volcker may undermine A.I.G.'s ability to take such positions.

“The Volcker Rule, as a rule, doesn't really work for insurance companies as it does for banks,” Mr. Benmosche said on CNBC. “Some of the investments they want to prohibit, an insurance company has to make because of long liabilities.”

In theory, A.I.G. can get out of the Volcker Rule simply by selling a small bank it owns. On Tuesday, Mr. Benmosche said A.I.G. was planning to do just that.

Only it is not so simple. Even if A.I.G. sells the bank, it could still be subject to Volcker-like limitations on proprietary trading.

Here is why: A.I.G., because of its large size and its activities, is almost certainly going to classified by regulators as a “systemically important” financial institution. It would then become subject to oversight by the Federal Reserve. And the Volcker section of Dodd-Frank clearly says that systemic firms could also be subject to curbs on proprietary trading â€" even if, like A.I.G., they are not banks or do not have bank subsidiaries.

That catchall feature of the Volcker Rule was recognized by MetLife in its latest quarterly filing of financial results with the Securities and Exchange Commission. MetLife also wants to sell its bank to sidestep the Volcker Rule. But in the filing it said the rule “nevertheless imposes additional capital requirements and quantitative limits” on trading done by nonbank firms deemed to be systemically important.

So why would a company go to the length of selling a bank to avoid the Volcker Rule if it would probably be subject to something very much like Volcker anyway?

One reason may be that it buys some time. MetLife's filing says that it does not become subject to trading curbs until two years from the date at which it becomes designated as a systemically important firm. That designation could occur this year.

Another reason may be that selling a bank puts an insurance company in a position of relative strength when negotiating with a regulator over trading positions.

Regular banks simply have to comply with the Volcker Rule; there is no other option for them. But with a nonbank financial firm, regulators would first have to review the firm's activities, and then make a decision on whether certain trading curbs have to be imposed.

This process might give the insurance company more opportunities to push back than if it were a bank. So if an insurer wanted to conduct proprietary trading under the guise of insurance activities, it might find it easier to shield that activity from regulators.

The fact is, A.I.G. already appears to be acting with more tr ading freedom than even Wall Street firms. This was seen in sales of toxic assets that used to belong to A.I.G.

The Federal Reserve Bank of New York this year sold all of the securities it acquired from A.I.G. in the bailout, through auctions facilitated by Wall Street banks.

Some of those banks said new bank regulations prevented them from holding the assets for a long period. A.I.G., by contrast, bought $7 billion of its old assets from the New York Fed and now holds them on its balance sheet, potentially for the long-term.

And taxpayers effectively helped finance those trades through the Treasury Department's large infusion of equity funding into A.I.G.

On Tuesday, Mr. Benmosche said A.I.G. welcomed oversight by the Fed. He said regulation would show A.I.G.'s clients that “somebody's watching over our shoulder making sure we don't do what we did before and cause these problems.”

That sounds very noble. But by selling its bank, and trying to avoid the Volcker Rule, A.I.G. may actually end up making it harder for regulators to look over its shoulder.