An hour and a half into trading, American International Group (NYSE:AIG) is up by 0.3%: so far handily beating the market, if not quite keeping pace with its financial sector peers, as investors continue to shrug off last week's surprising news from the federal government.
Really, you shouldn't have
On Wednesday, the Financial Stability Oversight Council designated AIG a SIFI, or "systemically important financial institution." Other American financial giants currently designated SIFIs include Bank of America (NYSE:BAC), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), and JPMorgan Chase (NYSE:JPM).
The FSOC is part of the Financial Stability Council, which was set up as part of 2010's Dodd-Frank Wall Street Reform and Consumer Protection Act. Per the FSB: "SIFIs are financial institutions whose distress or disorderly failure, because of their size, complexity and systemic interconnectedness, would cause significant disruption to the wider financial system and economic activity."
Foolish bottom line
In other words, SIFIs are companies that are too big to fail. AIG and GE Capital are the first non-banks to be designated as SIFIs. What does this mean for the insurance giant, or even a bank designated a SIFI, in practical terms?
SIFIs have to hold more capital in reserve against runs, asset writedowns, credit crunches, or any of the other kinds of things that can grip a financial institution in the heat of an economic crisis. But capital held in reserve is capital not out there working -- and making more capital -- for either the business or its shareholders.
In addition to the SIFI designation, last Tuesday, three bank regulators proposed even stricter capital rules for all the country's banks: double what's required now. It's not clear that this move will affect AIG, it not technically being a bank, but now that the insurance giant has been designated a SIFI, it's far from out of the question that AIG too could be required to hold more capital in reserve.
There's a strong case to be made that the feds had no business designating AIG a SIFI: The division that triggered the government bailout, AIG Financial Products, is currently in the process of winding down its once-considerable operations. AIG is very much on the road to becoming what it once was: an insurance company.
But a $182 billion bailout, even one the American taxpayer turned a profit on, isn't easily forgotten. And the name AIG still conjures the worst images, along with Federal Reserve chairman Ben Bernanke's famous quote: "[AIG] was a hedge fund ... attached to a large and stable insurance company."
There's no reason in particular for AIG to be performing like it is today, especially when there's no clear market wave to be riding, expect perhaps investor trust in the fundamentals of the company, which -- when strong -- are the best reasons to be invested in any organization.
The Motley Fool recommends American International Group, Bank of America, and Wells Fargo. The Motley Fool owns shares of American International Group, Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo and has the following options: long January 01 2014 $25 calls on American International Group. Try any of our Foolish newsletter services free for 30 days.
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