The Hill today has some details about how little oversight American International Group (AIG) had before it blew up, requiring a $180 billion taxpayer-funded bailout. Evidently, “in the eight months before AIG received a taxpayer bailout…top officials at the firm’s main federal regulator paid scant attention to the troubled insurer”:
Then Office of Thrift Supervision (OTS) Director John Reich and then Deputy Director Scott Polakoff held no meetings dedicated to AIG until a 45-minute conference call on Sept. 15, according to a review of 2008 calendars. The next day, AIG got $85 billion as part of a bailout that has since more than doubled. Overall, a review of calendars for six key agency officials…indicates that AIG garnered little attention from high-ranking OTS officials in Washington.
For what its worth, OTS has already said that it did a lousy job keeping track of AIG’s activities. But this report also speaks to the larger problem of gaps in the regulatory framework.
The trouble with a firm like AIG is that it is immensely complicated, and operates in many different spheres within the financial system. It began as an insurance company, but wound up grafting on a hedge fund and selling credit default swaps (CDS), which are not a traditional insurance product. Thus, it falls cleanly under no agency’s direct jurisdiction, and trying to blame one agency for the company’s downfall doesn’t really get to the crux of the problem.
So what can be done to ensure that a second AIG doesn’t come along? Yesterday, Treasury Secretary Tim Geithner took a good first step by announcing that he “is asking Congress to extend its oversight of the financial system to include the shadowy market of derivatives,” including CDS. Under the plan “companies like AIG would have to prove they have enough reserve capital to support the sale of derivatives.” Provided that regulators actually follow through with their responsibilities, this will certainly help.
Also, this is one more reason that the financial system could use a systemic risk regulator, which would be able to watch for systemically dangerous financial activity, regardless of where it’s originated. An entity watching for systemic risk would provide one more buffer against firms crossing into new territory. And after seeing what these firms were able to do to the economy, we can use all the buffers that we can find.