Michael Lewis has written an extraordinary piece on the AIG failure for Vanity Fair. As with most of his work, the article is informative, funny and written in an easy to follow manner. When you have time read the whole thing.
As Lewis relates, the problems at AIG (and particularly AIG Financial Products, the unit that was excoriated in the infamous "bonus payments" of a few months ago) were not the result of some ingenious evil scheme hatched by devious masters of the universe. The AIG implosion was, rather, the result of some incredibly dumb decisions, a lot of greed and the inexplicable regulatory failure of government agencies. That the government failed in its mission to regulate Wall Street and the financial sector should surprise no one. And before any stereotypes like "wealthy bankers/ Republican Party" take root let it be known that this was a truly bipartisan fiasco until 2006, at which time the Democrats cornered most of the political cash (particularly from AIG).
In short, AIG blew up because it had underwritten massive risk via credit default swaps (CDS) with other major investment banks. In these CDS trades, AIG basically insured other investment firms against losses they might incur on trillions in mortgage bond holdings. These "insurance contracts" were unregulated on the insurance side, hence the failure of state insurance regulators to step in and stop the practice. However, no one should assume that New York state insurance regulators were unaware of what AIG was doing. The unregulated aspect of CDS was the fig leaf regulators hid behind as AIG publicly boasted about their business.
However, the SEC and the Federal Reserve had no such fig leaf to hide behind because the counter parties to AIG's massive insurance bets were the largest commercial and investment banks in the world. It is certainly in the purview of those agencies to question counter party risk at places like Goldman Sachs, Bank of America and Morgan Stanley. But apparently they didn't ask the right questions and $180 billion tax payer dollars later the right questions are still not being asked. As Lewis notes:
At no point did anyone from the U.S. Treasury or the U.S. Congress, or any of the various New York State authorities that had gotten involved, call them up, much less visit A.I.G. F.P.--as, say, someone might who was genuinely curious to know what, exactly, had happened there.
The AIG failure is Exhibit A as to how ineffective and unresponsive government regulation can be in a rapidly evoloving industry such as finance. It is also a testament to the unmitigated disaster that can result when politicians and bankers both have regulators on a short leash. Congress has a thing for holding widely publicized and televised hearings after a disaster has occurred. But conducting actual oversight of regulators to prevent disasters? Not so much. Are you sure you want these people in charge of health care?
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Congress
Tags: AIG, Congressional Oversight
Comments (14)
Two short leashes, one neck... (Below threshold)1. Posted by JLawson | July 8, 2009 1:53 PM | Score: 4 (4 votes cast)
Two short leashes, one neck = disaster waiting to happen.
1. Posted by JLawson | July 8, 2009 1:53 PM |
Score: 4 (4 votes cast)
Posted on July 8, 2009 13:53
2. Posted by Bob | July 8, 2009 2:08 PM | Score: 5 (5 votes cast)
The difference between unregulated capitalism and strict government oversight of business is often (if not always) that the latter offers a false sense of security. The price of this false security is not only the cost of the regulation itself but a general lack of self-protection and the natural instinct of the regulated to find ways to fool or avoid the regulators.
2. Posted by Bob | July 8, 2009 2:08 PM |
Score: 5 (5 votes cast)
Posted on July 8, 2009 14:08
3. Posted by J.R. | July 8, 2009 2:40 PM | Score: 6 (6 votes cast)
So naturally the answer from our President and congree will be....more regulators!
3. Posted by J.R. | July 8, 2009 2:40 PM |
Score: 6 (6 votes cast)
Posted on July 8, 2009 14:40
4. Posted by J.R. | July 8, 2009 2:40 PM | Score: 3 (3 votes cast)
of course that should read "congress" above.
4. Posted by J.R. | July 8, 2009 2:40 PM |
Score: 3 (3 votes cast)
Posted on July 8, 2009 14:40
5. Posted by hermie | July 8, 2009 2:54 PM | Score: 7 (7 votes cast)
And who was the guy at the NY Fed in charge of regulatory oversight of this fiasco?
That's right! Our current 'genius' Secretary of the Treasury.
5. Posted by hermie | July 8, 2009 2:54 PM |
Score: 7 (7 votes cast)
Posted on July 8, 2009 14:54
6. Posted by Rick Caird | July 8, 2009 3:23 PM | Score: 6 (6 votes cast)
Regulators are almost always behind the curve. Not only that, they are invariably captured by the industry being regulated. With that understanding, it is amusing to see the left (as long as Bush was President) claiming all we needed was more regulation. They would never bother to explain how to do that, but they were sure it was all Bush's fault.
Rick
6. Posted by Rick Caird | July 8, 2009 3:23 PM |
Score: 6 (6 votes cast)
Posted on July 8, 2009 15:23
7. Posted by James H | July 8, 2009 3:31 PM | Score: 1 (7 votes cast)
Thanks for the link. It's good reading.
I find it rather disturbing that regulators failed in this area. High finance -- a business complicated enough that even its practitioners don't fully understand it -- is an area that demands effective regulation and oversight.
7. Posted by James H | July 8, 2009 3:31 PM |
Score: 1 (7 votes cast)
Posted on July 8, 2009 15:31
8. Posted by JLawson | July 8, 2009 3:44 PM | Score: 5 (7 votes cast)
"High finance -- a business complicated enough that even its practitioners don't fully understand it -- is an area that demands effective regulation and oversight."
And yet, we continually put it in charge of people who only seem to have a talent for getting elected.
Seems like a dumb-ass move to me, for some reason...
J.
8. Posted by JLawson | July 8, 2009 3:44 PM |
Score: 5 (7 votes cast)
Posted on July 8, 2009 15:44
9. Posted by GarandFan | July 8, 2009 4:49 PM | Score: 5 (5 votes cast)
Hey, at least the Congressional "Now that the horse is out of the barn" Hearings would provide a couple of days distraction and intertainment for the sheeple.
9. Posted by GarandFan | July 8, 2009 4:49 PM |
Score: 5 (5 votes cast)
Posted on July 8, 2009 16:49
10. Posted by Oyster | July 8, 2009 5:52 PM | Score: 3 (3 votes cast)
If you want to see a graphic that really drives the point home in regard to just how big the failures were, go here. If the whole graphic doesn't show on your monitor, scroll to the right for a real eye opener.
10. Posted by Oyster | July 8, 2009 5:52 PM |
Score: 3 (3 votes cast)
Posted on July 8, 2009 17:52
11. Posted by Oyster | July 8, 2009 5:56 PM | Score: 4 (4 votes cast)
And these are just the bankruptcies - not the ones "bailed out".
11. Posted by Oyster | July 8, 2009 5:56 PM |
Score: 4 (4 votes cast)
Posted on July 8, 2009 17:56
12. Posted by 914 | July 8, 2009 6:16 PM | Score: 0 (6 votes cast)
Its alright if We go another 50 trillion in debt. Just so Michael TM Jackson gets a proper Sharptongue send off and a day of the year proclaimed a National holiday. A day on which all level 3 offenders are given amnesty.
You see, Congress has way more important things to do besides thier "jobs".
12. Posted by 914 | July 8, 2009 6:16 PM |
Score: 0 (6 votes cast)
Posted on July 8, 2009 18:16
13. Posted by James H | July 8, 2009 9:35 PM | Score: 0 (2 votes cast)
The big weakness, actually, this that for a long time (and I think still), financial companies essentially had carte blanche to choose their own regulator; and often, they'd go for the weakest regulator ...
13. Posted by James H | July 8, 2009 9:35 PM |
Score: 0 (2 votes cast)
Posted on July 8, 2009 21:35
14. Posted by Trajan | July 9, 2009 1:17 AM | Score: 0 (2 votes cast)
Let's not forget Barney Frank and his ilk.
They legislated things that practically
guaranteed a doomsday in the housing market.
This bastard should be burned at the stake.
I'm sure he has an appropriate gown for
immolation....ala Jeanne D'Arc.
14. Posted by Trajan | July 9, 2009 1:17 AM |
Score: 0 (2 votes cast)
Posted on July 9, 2009 01:17