Bob Benmosche, the chairman of AIG, is no fool. Interviewed on CNBC last week, he was asked whether he was concerned that his firm might be designated as a Systemically Important Financial Institution (SIFI) by a council of federal regulators established under the Dodd-Frank Act. After designation, AIG would be “stringently” regulated by the Fed, as required by the act, because — in theory — if it failed (again) it could create instability in the US financial system.
But chairman Benmosche was not worried. It would actually be great news for AIG. Citing the fact that the Federal Reserve is and will be examining AIG’s books, he noted that “when we go out and say we’re strong, we’ll have them as a voice of the good housekeeping seal that says they are strong.”
He’s right, of course. With the government behind it — reassuring the markets as to AIG’s strength and taking every step to make sure this SIFI doesn’t fail — AIG will be a powerhouse in selling insurance.
Now think about that when you hear the great hew and cry of the folks who purport to be worried that the big banks are too-big-to-fail (TBTF). They denounce the funding advantages these banks get because of the markets’ belief that the government will not allow them to fail. Think, too, about the competitive advantages that Dodd-Frank crony capitalism is now giving to AIG. Who could resist buying insurance from a firm the government will not allow to fail?
Most of the folks who are busy denouncing TBTF voted for the Dodd-Frank Act, which in effect authorizes the Treasury, the Fed, and other federal regulators to create new TBTF firms in other fields, like insurance, where it never existed before.
If TBTF is as bad as they say, how can it make any sense to extend it?