Downtown Lawyer

After news of the AIG bonuses was released, the Obama administration requested additional oversight of AIG, which has several different branches including insurance, and other companies that have received federal bailout money.  During his recent press meeting, President Obama noted that regulations from the 1940s were outdated and needed to be reformed.  The debate over whether insurance companies should be regulated by the states or the federal government is not new.  However, with the outrage over the bailout in general and AIG’s actions specifically, the Obama administration and those in favor of federal regulation may now have the political capital to achieve the goal of federal regulation of insurance companies.

Background of State Regulation

Under general principles of constitutional law, any authority not specifically granted to the federal government in the United States Constitution is reserved to the states.  In 1868, the Supreme Court followed this principle in Paul v. Virginia by favoring state regulation of insurance companies.  In 1945, Congress also adhered to this principle by passing legislation that stated the states would have control over insurance regulation.  Even with this history, advocates of federal regulation have always existed.

Recent Debate

After the federal government committed $85 million to bailout AIG because “it was too big to fail,” John Sununu, a Republican senator from New Hampshire, Tim Johnson, a Democratic senator from South Dakota, Melissa Bean, a Democratic congresswoman from Illinois, and Ed Royce, a Republican congressman from California, wrote an opinion that was published in the Wall Street Journal on September 23, 2008.  In the opinion, the legislators argued that the AIG bailout was necessary because of the lack of comprehensive, federal oversight of insurance companies.  AIG and other insurance companies like it, they argued, have immense assets and cover multiple countries.  Because of their size, these insurance companies cannot be adequately regulated by one state, with jurisdiction only to its state borders. 

In response, state regulators spoke out against federal regulation at their annual meeting.  The state regulators argued that state regulation has done an excellent job of regulating insurance, but that AIG’s problems related to its financial holdings, which are federally regulated.  The state regulators noted that the U.S. Office of Thrift Supervision regulates the AIG holding company that needed financial assistance, while AIG’s 71 insurance units are regulated by the states.  They argued that the insurance units, by contrast, were the healthiest parts of AIG, which allowed the Federal Reserve to approve the $85 million bailout.

State Investigations into AIG Bonuses

Many were upset by the lack of a federal response to the AIG bonuses, but, in truth, the federal government had little authority to question AIG’s actions.  Congress ordered hearings.

On the state level, attorneys general of Arizona, Connecticut, Delaware, Illinois, Kentucky, Louisiana, Maine, Michigan, Mississippi, Montana, Nebraska, New Jersey, New Mexico, New York, Ohio, Oklahoma, Oregon, Pennsylvania, Texas, Washington, and West Virginia have launched investigations into AIG’s expenditures and bonuses.  Each of these states have demanded names and documents related to the bonuses.  Because the bonuses related to AIG’s financial holding company, it is unclear what authority these states have to compel AIG to comply with their requests.  AIG has countered that the employees are entitled to the bonuses under state contract law.  Many employees are voluntarily returning the bonuses based on the public’s response.

Conclusion

These issues are complicated, as is everything related to the bailouts and the recession.  Even with little understanding of the intricate details, many individuals are outraged over taxpayer dollars being given to the same employees who caused the company to experience financial difficulties.  Whether these circumstances will allow advocates of federal insurance regulation to succeed in their goal remains to be seen.