Monday, 9 March 2009

AIG - the doomsday machine

Remind me again; who was supposed regulate the American insurance company AIG? It is difficult to understand how one company seems to have the potential to destroy the international capitalist system. Bloomberg today provided a stark assessment of the destructive capacity of this firm:

American International Group Inc. appealed for its fourth U.S. rescue by telling regulators the company’s collapse could cripple money-market funds, force European banks to raise capital, cause competing life insurers to fail and wipe out the taxpayers’ stake in the firm.

Meanwhile, Reuters reports that European banks are keeping suspiciously quiet about AIG:

European banks declined to discuss a report that they were beneficiaries of the $173 billion bail-out of insurer AIG that has sparked political furor in the United States.Goldman Sachs, Morgan Stanley and a host of other U.S. and European banks had been paid roughly $50 billion since the Federal Reserve first extended aid to AIG, the Wall Street Journal reported on Friday.

French banks Societe Generale and Calyon on Sunday declined to comment on the story, as did Deutsche Bank, Britain's Barclays and unlisted Dutch group Rabobank.

If only we could turn the clock back, imagine how much regulation there would be.


Jeff from Ashburn said...

AIG - digging the deepest money pit in history. The Fed hasn't stopped digging yet.

Chris said...

Ah, well, that is a fraught question. Insurance is a state-level concern, which means that there are fifty regulators. In fact this is similar with the banks where the state office of thrift management declares a bank dead and the FDIC as receiver who then passes the deposits to another bank and takes on the bad assets to sell. This all usually takes a weekend which is why the FDIC reports dead banks on a Friday so by Monday the customers are automatically transferred to their shiny new bank and no disruption occurs.

This is also political. For example, in Washington State, the insurance commissioner is an elected position. So, in a sense, AIG has fifty regulators plus the federal government. It is all about as clear as mud.

Ralph said...

The question remains whether AIG has run out of political capital? Once it well-connected trading partners are made whole will the government let AIG die? If the company cannot generate new business it may not be a going concern anyway. To learn more go to

dearieme said...

As I understand it (complete amateur, I confess) those CDS thingies were intended to act as insurance but they weren't called "insurance" so that they escaped the state regulators. It's not much of a regulatory system where such an obvious stunt defeats it. There were also - have I got this right? - dirty dealings in Congress back in the time of Slick Willie/Rubin/Summers et al., to ensure that CDSs weren't regulated in any other way either.

Anonymous said...

dearieme, not quite. CDS's are no more "insurance" than an option on a stock. Just because lazy journalists run to the first analogy doesn't make it true. Also "unregulated" is untrue, it certainly isn't a free for all - if you have ever seen the documentation that is produced for these things you'd understand... - and the products mainly exists BECAUSE of regulation - in particular restrictions on the **credit quality** of fund investments and also Basel 2. In AIG's case it was able to literally leverage it's AAA rating to write any number of these contracts as it wasn't required to put down any collateral when writing them. Imagine being able to get an unlimited supply of chips in a casino... Oh and finally, the unit that traded these things was based and regulated in the UK.