If you’ve been paying attention to the meltdown of the large US financial institutions, you might have noticed a curiosity in the news about AIG.
If we go back a year, the first players to begin taking hits were the large banks like Citigroup and the bond insurers like AMBAC and MBIA. The latter was covered in real time by Atrios who coined the term "The Big Shitpile" for the mess. To date they’ve survived because the financial market players understood the magnitude of the ripple effects should either fail. Enough new private capital flowed in to keep them alive.
As the underlying problem (precipitated by the innovative mortgage products* that the "smartest guys in the room" created) worked its way through the system, the largest mortgage lender, Countrywide, failed, and again, the private sector, Bank of America, stepped in. Then Bear Stearns with JP Morgan Chase to the rescue with a substantial amount of help from the FED. Then came the "too big to fail" players: Fannie Mae and Freddie Mac. BofA rescued Merrill Lynch. However, the bankruptcy filing of Lehman Brothers looks as if this is the sign that the financial resources of the private sector have been exhausted. That interpretation appears to be confirmed by the federal bailout of AIG.
The curiosity is that as while NY banks/brokers were being hammered and the Dept. of Treasury was actively engaged in propping them up, we never heard anything from David Patterson, the Governor of NY. But he popped up as AIG began teetering. Why? Because AIG is an insurance company and while recent federal deregulation has allowed banks to sell insurance products and own insurance companies, the regulation of insurance companies remains a function of states and not the federal government. And New York has been the most powerful state in the regulation of interstate insurance companies.
Before the passage of Glass-Steagall that prevented the commingling of commercial and investment banking operations, there was the New York state "Appleton rule" that prevented multi-line insurance companies doing business in New York from selling insurance that guaranteed the value of investment products such as stocks and bonds. This one rule protected insurance policyholders after the stock market crash in 1929. (Without that rule, the life insurance policy my grandparents purchased might have been worthless when my grandfather died and left a widow with five young children in the depths of the depression.)
State insurance regulators throughout the country restrict where insurance companies may park their excess cash until claims must be paid. Insurance companies may not invest in high risk/speculative investments that could damage their ability to pay on policyholder losses. Thus, for a very long time, insurance companies didn’t park their large surplus cash in hedge funds, junk bonds and venture capital schemes. They were not vulnerable during the dot-com bust. So, what went wrong at AIG? And why the hell is New York dumping this POS on the nation; the states and not the fed is supposed to take over their failing insurance companies.
It appears that AIG engaged in criminal activities. It was illegal for them to guarantee various forms of CDOs. That was in violation of Appleton. AMBAC and MBIA as mono-line insurers broke no law when they guaranteed some of The Big Shitpile. They were merely incompetent and stupid (so much so that it never occurred to legislators/regulators that laws/rules were necessary to prohibit them from participating in such risky activities). AIG was criminally incompetent and stupid. But AIG’s criminal incompetence appears to have extended beyond violating Appleton.
Not only did AIG insure some of The Big Shitpile but it invested in it as well. Not merely passively by buying Fannie Mae and Freddie Mac bonds but also actively as the big banks and brokers did by holding residential property CDOs. (I’m sure the AIG accountants and attorneys found ways to make it technically legal for AIG to invest in CDOs and hide it from the insurance regulators.) A triple whammy at AIG. The crooks at AIG, like those at all the other failing financial institutions, will walk away with their ill-gotten gains. Americans now own the largest and one of the shittiest insurance companies --an assessment that I made long before AIG’s meltdown and before Maurice Greenberg's indictment -- and that $85 billion is an investment on a par with the bridge to nowhere. Where this nation will end up for sure if 70 million morons choose McCain/Palin in November.
(Sen. Dodd seems not to realize that by the time we get to the bottom of what he calls the foreclosure crisis that we will be well into a depression. It's a debt and credit crisis, maybe the mother of all debt/credit crises, Senator.)