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Potomac Watch: WASHINGTON-

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Whatever our political views, the recent word that the Federal Reserve Board of New York will be able to retire soon, as well as make a profit on, two facilities used to aid American International Group in 2008, should bring a sigh of relief to those whose living depends on the insurance industry being regulated in its present form.

It also implies that the Federal Reserve Board, as well as Obama administration and Bush administration officials, made the right decision to aid AIG when the crisis arose in 2008 despite the fact that the federal government was barred by law from regulating insurance companies. It also says that, ultimately, AIG will be returned to the private sector in good financial health.

Everyone agrees that the company’s insurance subsidiaries were the collateral for everything going on at AIG Financial Products (AIGFP), the basis for the high AIG credit rating. Its liabilities included huge bets on mortgage-backed securities (MBS) backed in some cases by mortgages of dubious quality, as well as more exotic collateralized debt obligations also backed by mortgage securities, as well as $2.77 trillion in credit default swaps (CDS).

Moreover, there is a strong view that CDS should have been regulated as insurance products, and capitalized as such. 

And, the world wants to forget that the New York Insurance Department wanted to upstream $25 billion into the black hole of the parent only a couple of days before Treasury Secretary Henry Paulson intervened.

The world also doesn’t want to remember that $3 billion of that federal aid went to bail out its American General subsidiary.

In fact, more than $70 billion in high quality reserves held by the AIG life insurance subsidiaries to back life insurance policies were being used to collateralize investment in speculative MBS through trading done by AIGFP.

The Fed and Treasury devoted vast resources to helping AIG return to financial health, and Congress can point to no role in helping out.

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In fact, Congress acted as a detriment. Its members worked overtime, both to protect state regulators who were asleep at the switch, and to publicly rebuke federal officials as a means of distancing themselves from the fact that AIG was probably the largest contributor to federal campaign funds of any company or group in the financial sector.  

Members of Congress held federal regulators responsible for the huge salaries that were being paid to AIG executives, even though in most cases these salaries were provided through contracts entered into long before federal regulators had the authority to oversee AIG.

In other cases, Congress denounced federal officials for high salaries paid to AIG executives who were being brought in to fix the problem or to people who played little role in the actions that brought the company to its knees.

It is unforgiveable that members of the House Financial Services Committee called out Treasury Secretary Timothy Geithner, who, as both Treasury secretary and before that as president of the New York Fed, was required to deal with issues he was barred by law from either dealing with, or learning about, beforehand.

“You should resign!” and, “I have no confidence in you,” were amongst the public comments members of the Financial Services Committee  used in addressing Geithner during his appearances before the panel. Paulson, too, was strongly criticized when he appeared before the committee to defend his actions regarding AIG in particular, and the federal bailout of ailing firms in 2007 and 2008, in general.

In retrospect, it also appears terribly unfair that former Fed Governor Donald Kohn was subject to such intense grilling over the Fed’s decision to have AIG buy back CDS issued to foreign banks. Indeed, given the current focus on Europe, especially France, Greece, Spain and Germany, what could have happened if AIG had not been ordered to buy CDS sold on $374 billion in MBS sold by various U.S. investment banks is too horrible to contemplate.

If there is a lesson to be learned from the terrible events of 2007 through 2009, it is that politicians are always at their most skilled when they seek to shift the blame to others for their most disastrous and selfish actions. It is so sad that the voters just don’t get it.