Day By Day

Wednesday, March 18, 2009

Who Broke AIG? -- Tom Maguire Knows

The party line, issuing from the White House and being repeated over and over in the media and in Congress is that the current crisis is the result of insufficient government oversight and what is needed now is increased regulation of business activities. But inconvenient facts keep popping up to counter this self-serving account.

Banks and insurance companies are in themselves stringently regulated so the argument doesn't work very well when applied to them. But the market in derivative trading is largely unregulated and so the finger of blame has been pointed there. Tom Maguire, however, has taken a close look at how AIG bailout funds have been distributed and notes that the largest payments [representing the scale of distress] occurred in highly regulated institutions and not in the unregulated securities trading firms. He analyzes the figures, notes that media reporting on the nature of the crisis has been shamefully wrong, and wonders why the American people are being lied to. He concludes:

Why the misdirected coverage? My guess is that we are seeing an unholy alliance of insurance regulators who would rather point the finger at unregulated credit derivatives, people who always favor more regulation as the answer to everything, and public officials who don't want people to wonder whether other staid, boring insurance companies that don't do credit derivatives might still have huge problems in their core portfolios. Since securities lending lacks the glamour of M&A or international "Master of the Universe" trading, the media is easily distracted.
Read the whole thing here -- it's an eye-opener.