An underlying factor in the current economic collapse is the regulatory neglect in Washington. While conservatives use the term "deregulation," it is in fact neglect by elected officials and government officials responsible for watching out for all Americans. The question that I am pondering is, "Why?" We all have our beliefs and suspicions about what caused this mess but let’s take a look at some of the facts here, particularly those related to money and influence in Washington DC. See Preemption, Deregulation, Disclosure, Oh My at Global Investment Watch.
AIG’s Rap Sheet and How it Made "Bail"
AIG is the world’s biggest insurer. It was also a huge Credit Default Swap insurer/underwriter. The terms of CDS require collateral to be posted, depending upon such factors as credit rating and credit spreads. As home prices fell, spreads widened, and companies went down, AIG’s collateral requirements went up significantly.
The Federal Reserve Board authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.
The Board determined that a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.
In 2007, AIG paid $126 million in fines to the SEC and Justice Dept. for deals it structured for outside clients that allegedly violated insurance accounting rules. The company also came under the glare of then New York Attorney General Eliot Spitzer for its role in bid-rigging with broker Marsh & McLennan, which led to the ouster of Hank’s son Jeffrey as CEO.
Earlier this year, investigators initially focused on two transactions involving Berkshire Hathaway’s (BRK ) General Re Corp. unit. The deals essentially amounted to a $500 million loan that was dressed up on the books as premium revenue. That allowed AIG to boost its sagging reserves at a time when investors thought they were too low. However AIG never assumed any of the risk associated with insurance underwriting. On Mar. 30, the company acknowledged that "the transaction documentation was improper" and should never have been classified as insurance premiums.
But problems continued with the company, According to BusinessWeek, in March of 2008, the company itself identified several problems. These included transactions with supposedly independent companies that were in fact controlled by AIG; bond transactions that may have allowed it to claim gains without actually selling the bonds; misclassified losses; and questionable estimates on deferred acquisition costs. Investigators and state regulators are looking into some 60 transactions involving these and other possible accounting shenanigans. "Greenberg strived for a steadily rising stock price," says a source in Spitzer’s office. "He used mechanisms now being revealed as deceptive and improper."
Getting It’s Way in Washington
If you or I were to pull some of the financial stunts that AIG has done in the last few years, we would be doing time. Sometime in the distant future, we would face a parole board begging for mercy. Not AIG. From the casual observer, it would seem that AIG managed to get the parole board to let it walk and give it a huge wad of pocket change to solve its problems.
Regulators in Washington sat on the sidelines while AIG and others merrily maximized short term profits without any serious efforts were made to control this obviously risky behavior.
Why?
One factor may be the influence peddling that AIG undertook with its lobbying efforts in the nation’s capital.
According to OpenSecrets.org, since 1998 the company spent a total of $145,874,600 in lobbying fees to in-house staff and consultants in Washington. In addition, the company spent an additional $9,153,251 in contributions to sitting legislators. Considering the investment in Washington, this bailout represents a whopping 54000% return on investment (ROI).
And who pays for all of this?
We do.