American Insurance Group Inc. is too big to succeed, according to an open letter sent Wednesday to the insurance firm from business magnate Carl Icahn.
Icahn, an investor with a net worth of more than $20 billion, recently accumulated a large stake in AIG and said the firm should split into three companies separating its mortgage, life and property insurance.
In the wake of the 2008 financial crisis, AIG is the smallest of three insurance companies that became designated systematically important financial institutions by the federal government. Aimed at avoiding another financial crisis, SIFI status requires AIG and its peers to hold higher amounts of reserve capital and makes them subject to more regulations.
It may make the system safer, but those rules also make it harder for AIG to give competitive returns to its shareholders. By breaking into three companies, these rules can be avoided, Icahn says, giving AIG more flexibility to compete.
AIGs problems highlight an economic tension that arrives from Dodd-Frank regulations: stricter rules reduce the economic fallout of a financial giant collapsing, but they also make it harder for such companies to succeed.
Aside from banks and insurance firms, General Electric is the only company to have thus far been given SIFI designation. In response, GE announced in April that it would sell off most of its investment wing, GE Capital, in order to flee from the regulations.
According to research group Zacks, the SIFI regulations not only impede capital deployment by these companies but will also tighten their operational and financial flexibility, resulting in additional compliance costs, which would ultimately be a burden on lower-income consumers through higher product pricing.
If these new federal regulations that came out of the Dodd-Frank reform act of 2010 give larger companies a competitive disadvantage, in a way, that's a success. Icahn calls these regulations a "tax on size," and cites congressional testimony as evidence of their intent.
(SIFI) can make the system safer by providing an incentive for designated companies to change their structure or operations so they can reduce the risk they pose and change their designation and the amount of oversight, Sen. Elizabeth Warren, D-Massachusets, said in a March committee hearing.
Banks, which dominate the list of SIFI institutions, have so far been comfortable working within the new rules. But many on the political left have been urging for Washington to "break up the big banks," and if AIG becomes more successful by breaking up, it could making operating at smaller levels a more attractive model in the long-term.
Some critics, like Jon Berlau of The National Review, have argued that SIFI will do the opposite: That by explicitly labelling the largest institutions as "structurally important," they receive a competitive advantage because investors will assume that bailouts are guaranteed in case of another financial crisis.
Earlier this month, Edward Lazear chief economic adviser during the Bush Administration argued that giving companies SIFI label is a misdiagnosis of the 2008 financial crisis. The U.S. should be more concerned with limiting the borrowing and lending practices, not the size of companies doing the borrowing.
Financial crises are pathologies of an entire system, not of a few key firms, Lazear said in The Wall Street Journal. Reducing the likelihood of another panic requires treating the system as a whole, which will provide greater safety than having the government micromanage a number of private companies.
Icahn, an investor with a net worth of more than $20 billion, recently accumulated a large stake in AIG and said the firm should split into three companies separating its mortgage, life and property insurance.
In the wake of the 2008 financial crisis, AIG is the smallest of three insurance companies that became designated systematically important financial institutions by the federal government. Aimed at avoiding another financial crisis, SIFI status requires AIG and its peers to hold higher amounts of reserve capital and makes them subject to more regulations.
It may make the system safer, but those rules also make it harder for AIG to give competitive returns to its shareholders. By breaking into three companies, these rules can be avoided, Icahn says, giving AIG more flexibility to compete.
AIGs problems highlight an economic tension that arrives from Dodd-Frank regulations: stricter rules reduce the economic fallout of a financial giant collapsing, but they also make it harder for such companies to succeed.
Aside from banks and insurance firms, General Electric is the only company to have thus far been given SIFI designation. In response, GE announced in April that it would sell off most of its investment wing, GE Capital, in order to flee from the regulations.
According to research group Zacks, the SIFI regulations not only impede capital deployment by these companies but will also tighten their operational and financial flexibility, resulting in additional compliance costs, which would ultimately be a burden on lower-income consumers through higher product pricing.
If these new federal regulations that came out of the Dodd-Frank reform act of 2010 give larger companies a competitive disadvantage, in a way, that's a success. Icahn calls these regulations a "tax on size," and cites congressional testimony as evidence of their intent.
(SIFI) can make the system safer by providing an incentive for designated companies to change their structure or operations so they can reduce the risk they pose and change their designation and the amount of oversight, Sen. Elizabeth Warren, D-Massachusets, said in a March committee hearing.
Banks, which dominate the list of SIFI institutions, have so far been comfortable working within the new rules. But many on the political left have been urging for Washington to "break up the big banks," and if AIG becomes more successful by breaking up, it could making operating at smaller levels a more attractive model in the long-term.
Some critics, like Jon Berlau of The National Review, have argued that SIFI will do the opposite: That by explicitly labelling the largest institutions as "structurally important," they receive a competitive advantage because investors will assume that bailouts are guaranteed in case of another financial crisis.
Earlier this month, Edward Lazear chief economic adviser during the Bush Administration argued that giving companies SIFI label is a misdiagnosis of the 2008 financial crisis. The U.S. should be more concerned with limiting the borrowing and lending practices, not the size of companies doing the borrowing.
Financial crises are pathologies of an entire system, not of a few key firms, Lazear said in The Wall Street Journal. Reducing the likelihood of another panic requires treating the system as a whole, which will provide greater safety than having the government micromanage a number of private companies.
