Regulators can't agree on what the real systemic threat was from AIG
Article: "The Latest AIG Story", WSJ
Yesterday I posted some skepticism on the story that was being told about how a bankrupt AIG would have caused a collapse of our financial system. This morning the Wall Street Journal raises the same question in an Editorial piece. They begin with the following question:
Will regulators ever coherently explain why AIG could not be allowed to go bankrupt in September of 2008?
Great question. If fact it is THE question. And the WSJ goes on to say:
This topic probably deserves another hearing on its own.
Ya think?!
So, the story told yesterday differs from the one that was told previously:
At yesterday's House hearing, Secretary of the Treasury Timothy Geithner and predecessor Hank Paulson said they didn't bail out AIG to save its derivatives counterparties. Instead, said Mr. Geithner, the now-famous 100-cents-on-the-dollar buyouts of credit default swap contracts were necessary to prevent a further downgrade of AIG by credit-ratings agencies.
In other words, the danger wasn't to Goldman Sachs and Societe General and the other institutions that bought Credit Default Swap insurance from AIG. It was the individual holders of insurance policies, like you and me, that would be hurt by the downgrade of AIG by credit-ratings agencies.
But this fear does not hold water because, as the editorial points out, the US had already seized AIG:
Remember, the Federal Reserve Bank of New York, where Mr. Geithner was president, had by that time already seized AIG. We're guessing that a ratings agency is pretty comfortable with the creditworthiness of a firm 79.9%-owned by Uncle Sam. Yet Mr. Geithner is saying that the same credit raters that applied triple-A ratings to tranches of junk mortgages somehow got the yips when the world's most respected borrower was standing behind AIG.
OK - holding this credit-rating red herring aside, what was the danger that a downgrade would bring:
Yesterday, however, Messrs. Geithner and Paulson went further than ever in stating that the real systemic risk was to AIG's heavily regulated insurance businesses.
So the danger was not in the unregulated derivatives business, but in the regulated insurance business. Is that so?
Their testimony directly contradicts that offered to Congress by former New York Insurance Superintendent Eric Dinallo, who was AIG's principal insurance regulator at the time.
Last year Mr. Dinallo told the Senate that "The main reason why the federal government decided to rescue AIG was not because of its insurance companies."
Hmmm. Very interesting contradiction. Maybe someone should actually try and sort this out. Maybe Congress - who authorized the money - should try and understand if they were duped.
