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The Next AIG Problem

The New York Times has a great piece on the huge liabilities facing AIG's many insurers. The problem appears to be that AIG's various companies have insured the liabilities of all of AIG's other various companies. American Home's Finances, for instance, has $26.3 billion in assets and $140.6 billion in potential liabilities. That may all turn out to be fine, if all of AIG's other properties prove solid. But if not, it could start a chain reaction across the company.

Part of the problem here is that insurance companies are still subject to state, rather than national, regulation. This is one of those obvious points of weakness in the regulatory system that's not getting addressed because it didn't directly contribute to the recent financial crisis. But it could contribute to the next, or to the worsening of this one, and in any case, it's well worth changing.

By Ezra Klein  |  July 31, 2009; 12:05 PM ET
Categories:  Financial Crisis  
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No, Mr. Klein, the problem is not state rather than federal regulation. At least some states have fairly strict rules which actually protect consumers. In today's federal world, federal regulation most often means watered down regulation that is almost no regulation, relying in the entities involved to "self police", and removing the right to sue if genuinely injured even if the injured person's state regs allow lawsuits.

What really needs to be done is to have insurance companies sell insurance, investment companies concentrate on investments, banks provide banking services and loans and mortgages - as separate entities, and all of them be subject to strict rules and oversight and leverage requirements. One reason firms like AIG are "too big to fail" is that they were allowed, through relaxed (very relaxed) federal rules, to combine several often competing purposes under one umbrella and allowed to become "too big".

And, of course, under non-existant federal regulation and damn little oversight, AIG came up with some really wierd Las-Vegas-style "insurance" to protect investment gamblers. The gamblers got paid off with tax dollars, but the rest of us, who didn't gamble, are paying.

In today's world, putting anything under federal regs means the lobbyists can concentrate their efforts and money in one place, more often than not to the benefit of what the late Molly Ivins called "big bidness" rather than the benefit of the consumer/voter.

Posted by: vklip | July 31, 2009 12:41 PM | Report abuse

vklip has it mostly correct (that business lines should be separated), but state regulation is very uneven and state regulatory bodies are often captive even more than federal ones.

"The Evil" is the concept of the 'holding company' for financial entities. All the two big to fail financial companies have many (dozens to hundreds) of subsidiary companies where they can cross-deal and hide financial outrages. In particular, the special purpose entities (SPE) are off-balance sheet, are ringfenced to prevent accountability/responsibility in the event of holding corp. errors/bankruptcies, and generally are vehicles for fraud on their stockholders and the public.

I can't see a cure except rigid (in law, not regulation) size and diversity limits - which is extremely unlikely under either state or federal regulation.

The insurance companies decades ago had written into federal law that that they couldn't be federally regulated, yet they act as one coordinated entity when they want to even though they may have state subsidiaries.

"Corporate Personhood" should be eliminated and outlawed, and 'too big to exist' limits should be in place at the national level. Rockefeller's Standard Oil monopoly was the personification of evil and it was broken up. Today's mega-corps are even worse.

Posted by: JimPortlandOR | July 31, 2009 1:33 PM | Report abuse

AIG should be broken up so that it's no longer "too big to fail".

I'm shocked that after th 180 billion dollar bailout we haven't done that yet.

Posted by: atlliberal | July 31, 2009 2:02 PM | Report abuse

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