[Vision2020] Could A.I.G. Happen Again?

[Art Deco]

  [image: The New York Times] <http://www.nytimes.com/>

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December 23, 2012
Could A.I.G. Happen Again?

The United States government recently sold the last of its shares in the
American International Group, more than four years after it bailed out the
insurance giant with a package of assistance that eventually totaled $180
billion. In announcing the sale, the Treasury Department also
said<http://www.treasury.gov/press-center/press-releases/Pages/tg1796.aspx>that
the government had a “positive return” of $22.7 billion — a sum that
fails to take into account tax breaks A.I.G. received as a ward of the
state. But whether the government profited from the bailout is not
important. The truly vital issue is this: Could this happen again?
Unfortunately, the troubling answer is yes.

A.I.G., whose chief business is insuring consumers and businesses,
collapsed in 2008 because of reckless speculation by a subsidiary, A.I.G.
Financial Products. That unit bet big on the housing and credit boom with
credit-default swaps, which are financial instruments that mimic insurance.
By the time it collapsed, the division had guaranteed nearly $80 billion in
mortgage securities, often for large investment banks and hedge funds. The
government stepped in to bail out A.I.G. because its failure could have
dealt mortal blows to other financial institutions that the company had
agreed to protect from losses.

In the aftermath of the financial crisis, policy makers in Washington,
London and elsewhere began working to address the shortcomings exposed by
A.I.G. Congress passed the Dodd-Frank reform law that imposes new controls
on financial activity but leaves it to regulatory agencies, such as the
Securities and Exchange Commission and the Commodity Futures Trading
Commission, to fill in the details.

While those agencies have made some progress, like requiring derivative
trades to be more transparently traded and reported, they have completed
just one-third of the
rules<http://www.nytimes.com/interactive/2012/12/11/business/Deconstructing-Dodd-Frank.html>required
by the law. The things regulators have yet to finish include
imposing limits on the size of bets investors can make using credit default
swaps and other exotic financial instruments, and also requiring investors
to maintain sufficient reserves to make good on all of those bets.

Another cause for concern is that American, European and Asian policy
makers have not sufficiently coordinated their regulation of financial
derivatives. That means investors looking to escape regulations in one
country can do so by moving their trades to another part of the world. The
derivatives business is global and its regulation must also be
international. One of the reasons the A.I.G. Financial Products unit
escaped the notice of regulators was that it was based in London, where it
operated under a French banking license. At the very least, U.S. agencies
must regulate the trading activities of the foreign branches and
subsidiaries of American financial institutions.

The blame for regulatory delays falls, in part, on an unrepentant financial
industry that has fought against regulation at every turn, on Capitol Hill
or in the courts. It has, for instance, sued the C.F.T.C. to block a rule
that would have limited the size of investors’ positions in certain
derivatives.

Such shortsighted opposition hinders rules that would help restore
long-term confidence in the financial system and the economy, which is in
everybody’s interest, including banks and investors. But ultimately, the
blame for the slow progress rests with the Obama administration and policy
makers in Europe and Asia, too.

After the Depression hit, the United States created several regulatory
agencies like the Securities and Exchange Commission and the Federal
Deposit Insurance Corporation that helped maintain relative financial
stability and prosperity for almost seven decades before deregulation
chipped away at their effectiveness. It is imperative that policy makers
speed up the rules to help correct critical vulnerabilities in the
financial system.




-- 
Art Deco (Wayne A. Fox)
art.deco.studios at gmail.com
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