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.
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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.