It will soon be George Washington’s birthday, which brings back memories of the cherry trees and hatchets I learned about in my youth.

However, while celebrating the holiday, I am also very much cognizant that there is a flip side to telling the truth, i.e., that it sometimes puts one’s head on the chopping block.

I feel like I’m doing that when I say that people are barking up the wrong tree in basing their justification for continued state insurance regulation on the fact that American International Group’s problems related to activities only at the holding company level, where the company was supposedly regulated by a federal agency, the Office of Thrift Supervision.

This issue is being raised now against the background of a barrage of steps undertaken by the new Obama administration to stabilize a financial services sector reeling from the impact of overleveraging, rampant speculation and irresponsible lending–and the reviews of the initial steps taken last fall to combat it.

And, wherever one turns, wafting over all the buildings where the crisis is being talked about and acted on is a big cloud spelled A-I-G.

For example, in discussing the thinking behind the Obama administration’s game plan for resuscitating the final sector, the Washington Post reported on Feb. 8, “Some senior [Obama administration] officials now view AIG as a cautionary tale.

“The company has been forced to sell valuable business units into a market that is lackluster at best,” the article said.

“In addition, AIG has promised nearly a billion dollars in retention pay to employees it says are vital, only to be scolded by lawmakers for wasting taxpayer money,” the article continued. “Insurance brokers have become reluctant to push the company’s products. The brand has been badly tarnished, reducing the government’s ability to return the company to private investors.”

Additionally, a report by the board overseeing the Troubled Asset Relief Program shows that the government’s investment in AIG was the worst decision made under the TARP, and that the value of the government’s investment in AIG declined 63% within 6 weeks of the time the money was expended.

And unlike the wife’s tale being spun by supporters of state regulation, the OTS, whatever the claim, was only distantly involved in regulation of AIG.

For example, the investigation by then-New York Attorney General Eliot Spitzer that resulted in massive write-downs and restatements by the company in 2006 involved to a great extent the value AIG placed on derivatives it held at the holding company level.

The work that resulted in the restatements was conducted by the New York Insurance Department, the Securities and Exchange Commission and the Department of Justice, not the OTS.

And the hits to earnings in mid-2008 that resulted in the stock plunge and the need for an emergency infusion of cash and takeover by the government were prompted by securities lending speculation in life insurance subsidiaries by AIG’s investment unit. This business managed money for AIG’s own insurance companies and outside investors.

The life insurance subs that held the troubled securities include American General, Variable Annuity Life Insurance Company, United States Life Insurance Company, AIG Life Insurance Company, American International Life Assurance Company of New York, AIG Annuity Insurance Company, American Life Insurance Company and various SunAmerica life companies.

AIG ran into trouble when it lent securities to investors and used the cash it received as collateral to buy residential mortgage-backed securities. When the residential MBS plunged in value, investors asked for their collateral back. AIG was not immediately able to return the collateral and was forced to supply cash, sending the value of its stock plunging, reducing liquidity, its ratings and then, its ability to raise cash.

It was this problem, not the problem created by the credit default swaps held in the holding company, which resulted in the crisis that necessitated federal rescue.

Over the next few weeks, numerous meetings will be held in Washington as various groups seek to turn the facts of the AIG debacle to their own ends.

But, as the Obama administration seeks to stabilize the financial sector–with its own fate at stake and with little help from Republicans–facts, not fancy, will govern their actions.

The future regulatory structure of the insurance industry will not be known until next year, perhaps late in the year. But, as this is decided by the administration and Congress, all with an eye on public opinion, it is crucial that we all base our opinions and planning on what Congress and the administration are likely to do based on the facts, not on our hopes.