Treasury Secretary Henry Paulson was highly critical of American International Group’s oversight, calling for federal regulation of insurance companies during an appearance on “Meet the Press” on Sept. 21.
In his comments, Paulson called AIG “very much a hedge fund on top of insurance companies.” AIG, he said, was a “classic example” of the need for “new regulations, new policies.”
Paulson earlier this year called for a radical revamping of insurance regulation, starting with the establishment of a federal Office of Insurance Information, and ending up with an optional federal charter. He said the current crisis reinforces his earlier view about inadequacies in regulatory oversight.
“We have a patchwork regulatory system that is outdated, is not a credit to our country, and doesn’t match the financial world we are dealing with today,” he said. “What has gone on here is terrible. And it is inexcusable and we need to deal with it.
“It would have been, in my judgment, unthinkable to have AIG declare bankruptcy,” he said, adding that the carrier was “a few hours away from declaring bankruptcy” when a deal was struck with Treasury and the Federal Reserve to extend an $85 billion line of credit in return for 79.9% of AIG’s equity.
“Something like this [bailout] in my judgment should never have happened,” Paulson said. “But we did this to protect the taxpayer. And this was something we are going to deal with in the future in terms of our regulatory system.”
Citing the differences between AIG and Lehman Brothers, which the government earlier in the week allowed to fail, “what the government did [with AIG] is come in, in a senior position, assume the debt well ahead of the shareholders in an $85 billion funding facility, to allow the government to liquidate the company in a way in which we are avoiding a real catastrophe in our money markets,” Paulson said.
He acknowledged that “it is going to take some time to figure out” how to revise regulation of the financial system, “and do it carefully and well.”
He then talked about the blueprint for regulatory change he unveiled on March 31, and the importance for more comprehensive regulation of all financial institutions.