NU Online News Service, Aug. 6, 1:50 p.m.EDT

American International Group officials are looking favorably atfederal oversight as they say they are preparing for regulation bythe Federal Reserve Board in addition to state regulation.

Robert Benmosche, AIG president and chief executive officer, onFriday says of the Federal Reserve Board's oversight, “in a way, wesee it as a big positive.”

It is believed that AIG will come under Federal oversight as asystemically important financial institution (SIFI) under aprovision of the Dodd-Frank financial services reform law oncefederal ownership of the company dips below 50 percent.

Benmosche brought the issue of federal regulation to the frontburner during a conference call with financial analyst on Fridaymorning following AIG's second quarter earnings announcement.

“We really don't know when we will be regulated but we dobelieve we will be regulated by the Federal Reserve, probably,” hetold analysts. “That seems the most likely candidate and we'reputting an enormous amount of effort and cost to make sure that weare Fed-ready.”

However, the final level of Treasury ownership depends on howmuch the Treasury gets for the remainder of the offering.

Analysts believe that the new offering announced Friday aftermarkets closed, will still leave Treasury owning 54 percent of AIGstock, above the 50 percent threshold needed to trigger federalregulation of AIG.

Another factor is that the Treasury has granted the underwritersa 30-day over-allotment option with respect to approximately 24.6million additional shares of AIG common stock, which could dipTreasury's ownership further.

In his comments, Benmosche says AIG has made a comprehensivestudy of how it will be impacted by federal regulation, and thatits only concern is whether it should divest itself of its Wilton,Conn.-based thrift.

He acknowledged that AIG “is giving thought to whether weshould now close the bank we have because we're concerned aboutthat aspect of it, and an insurance company invests verydifferently than a bank would.”

But aside from that issue, he continues, “thisis really about making sure we have a really good process and goodcontrols, especially in the risk management arena, very goodcontrols around how we determine [how] we can handle a bump in thenight that happened in 2008, for example.”

He says AIG has “discussed internally” the effects the VolckerRule could have on us, and “so there is a little concernthere.”

The Volcker rule, which is still being drafted, would severelylimit the ability of financial firms to invest in private equitydeals for their own account.

Currently, the Treasury Department holds 61 percent of AIG.Treasury's ownership stems from federal intervention in 2008through the Federal Reserve Board when the company ran intofinancial trouble over its investments in credit defaultobligations. The Fed agreed to provide $182.3 billion in cash aidto AIG in return for 79.9 percent of its stock.

The Fed and the Treasury ultimately provided more aid throughspecial purpose vehicles created by the Fed, guarantees on itscommercial paper, and aid through the Troubled Asset Relief Programand other Treasury programs.

The Fed's investments have been paid off, either through thesale of AIG assets contained in the SPVs, or through acquisition ofAIG stock by the Treasury in return for cash that ended the Fed'sinvestment.

AIG has been working hard to bring down the government'sinvestment as soon as possible, hopefully by the fall, and Friday'snight announcement was part of that.

Other insurers, both property and casualty and life, are alsoexpected to be designated SIFI, but they are fighting it tooth andnail, and enlisting the help of members of Congress to supporttheir position.

They could be eligible for Fed regulation either by beingdesignated SIFI or because they own thrift holding companies.

A number of insurers which operate thrifts are moving to eitherdivest their thrifts or reduce their involvement with them. Theseinclude Prudential Insurance Co., Massachusetts Mutual InsuranceCo. and W.R. Berkley.