I heard about the Fed’s bailout of AIG last night while sitting in the stands at Yankee Stadium (watching the White Sox defeat the Yankees, the desired outcome). The seats in front of me were occupied by Wall Street types, all expressing a great deal of relief that the Fed had come to it’s senses and done the right thing. Now the markets would settle down and they could get back to making money.
My reaction was somewhat different.
AIG’s failure was a direct result of it’s exposure to billions of dollars of liabilities from insanely complex financial instruments it sold to banks and other financial firms. These instruments were neither fish nor fowl; neither bonds nor insurance policies they were not subject to any regulation or oversight. None.
When things were good, the lack of onerous regulatory oversight was great; it allowed the free market to price, assess risk, and trade without the friction and inefficiency inherent in the oversight process.
This morning the ‘cost’ of regulation looks like a pretty good deal compared to the $85 billion taxpayers are paying to save AIG. I’d also note that our (we taxpayers’) ultimate liability may be a lot more than $85 billion. We own AIG and if it needs more capital, we’re going to provide it.
It is going to be interesting to watch how the financial industry reacts to this disaster. And disaster it is; the largest Federal takeover of a private company on record. Will they welcome oversight and regulation, seeing it as a necessary cost of doing business or will they chafe under the ‘burden’ of that oversight?
The broader issue is the impact of the disaster on government policies and politics. In the health insurance market, the GOP has been advocating a dramatically reduced role for regulators, calling for an end to mandated benefits, Certificate of Need processes, and prohibitions against the interstate sale of policies. This would almost certainly result in insurance companies filing their policies in those states with the least amount of regulation and the lowest capital requirements.
Individuals buying those policies would have to hope any problems would be quickly and competently addressed by an insurance department in some other state, led by a commissioner unconcerned with the problems of citizens living outside his/her voting district.
The current climate does not favor de-regulators, a dynamic that may well influence how voters feel about the candidates’ health reform proposals.
Sep
17
Unless the entire board of directors of AIG is replaced with democratically elected board members chosen from their largest stockholders, (now taxpayers)we will continue to see multi-million dollar salaries for CEOs who will continue to destroy the American economy in favor of short term stock prices. Of course this will continue because we won’t demand that laws be changed that govern corporations, nor will we demand a return on our investment, (how about we now get the AIG profits in the form of tax rebabte?),and we certainly won’t demand oversight or a return to regulation. While you and I and all the other primary tax payers in this country will demand oversight and a return to regulation of all financial institutions, the lobbyists who work for AIG and other Wall Street concerns will continue to funnel money to politicians to continue with their greedy ways.
This looks like a temporary fix. It will allow AIG to operate for another 2 years, allowing the “big boys” to slavage their investments and have time to exit before AIG goes out completely. Same story as usual.
Could not have said it any better,Valerie. How right you are on everything.
I agree we need more regulation here, but I wonder about the capacity of government to do this . Current regulators in the financial industry seem “captured” by the industry, and short of crisis managment there are no big picture solutions.. I think the concern over regulatory capacity is also relevant in the context of any health insurance reform at both the state and federal levels.