American International Group was characterized as part of the world of “shadow banking” that played a key role in the catastrophic economic downturn of 2007-2009 by Federal Reserve Board chairman Ben Bernanke today in a speech where he discussed the Fed’s response to the financial crisis.
He said AIG’s problems in the fall of 2008 exposed weaknesses in the statutory and regulatory framework for the “shadow banking sector”, and “meant that in practice they were inadequately regulated and supervised.”
He put AIG in the same category as Bear Stearns and Lehman Brothers, both of which had severe financial problems, and said their problems severely damaged the financial system.
He also said that the shadow banking system played a far greater role than the subprime housing market in making the 2007-2009 economic crisis far more serious than the “dot-com” bust in 2000.
Bernanke made his comments at a conference on “Rethinking Finance” sponsored by the Russell Sage Foundation and The Century Foundation.
He said that the “insurance operations of AIG were supervised and regulated by various state and international insurance regulators, and the Office of Thrift Supervision had authority to supervise AIG as a thrift holding company.”
However, he said, “oversight of AIG Financial Products, which housed the derivatives activities that imposed major losses on the firm, was extremely limited in practice.”
The Fed was barred by a provision of the Gramm-Leach-Bliley Act of 1999 from overseeing insurance holding companies.