NYS Insurance Commissioner Eric Dinallo lays out what he sees as the 4 key elements of the AIG collapse:
1. Insurance policyholders at AIG were protected by reserves that each of the insurance companies are required to hold by state regulation;
2. Unregulated use of credit default swaps and other high-risk instruments by AIG Financial Products, [an unregulated] noninsurance unit with wildly insufficient reserves, caused AIG to stumble and threatened the financial system.
3. By September 2008 the Federal Reserve acted to protect the financial system from what it believed to be an imminent risk of catastrophic damage from AIG Financial Products;
4. In November 2008, when the Fed restructured its AIG financing, including the termination of tens of billions of credit default swaps and the widely criticized purchase (at par) of the underlying securities, the Fed had over $70 billion already at risk with AIG and was appropriately considering the value and operations of AIG’s insurance companies.
Dinallo further notes that “the essential lesson of AIG is the need to reform financial regulation.” Stating the obvious, he notes that “Financial institutions should be required to hold adequate reserves so they can deliver on their [derivative and swaps] guarantees.
Dinallo concludes: “Oh, and financial institutions should not be allowed to select their own regulator.”
What I Learned at the AIG Meltdown
WSJ, FEBRUARY 3, 2010