Risky Trading Wasn’t Just on the Fringe at A.I.G.

[FarCenter]

By MARY WILLIAMS WALSH
Published: January 31, 2010
Ever since the American International Group nearly collapsed, the conventional wisdom has been that the exotic derivatives that drove it to the brink were the product of a lone, unregulated subsidiary in London. The Federal Reserve chairman, Ben S. Bernanke, called the London branch “a hedge fund, basically, attached to a large and stable insurance company.”

But the suggestion that A.I.G.’s core insurance business did not dabble in derivatives is not quite true. One of its biggest insurance units, incorporated in Delaware, was also dealing in the derivatives known as credit-default swaps, according to regulatory filings with the state.

Though the Delaware division had a much smaller portfolio of those swaps than the London unit, and its portfolio did not pose a similar risk to the world financial system, the very presence of the swaps in a regulated insurance company points to a weakness in insurance oversight.

There is a continuing dispute over whether such swaps are insurance products or something else; who, if anyone, should regulate them; and whether insurers should have to set aside reserves to secure the promises that swap contracts make. A.I.G.’s insurance business did not set aside such reserves.

Efforts afoot now in Washington to strengthen financial regulation tend to focus on banking, with insurance, which is regulated by the states, almost an afterthought. The Senate Banking Committee plans to consider a financial regulatory overhaul on Tuesday. The House has already passed a measure that would create a national office to gather information on insurance but would leave insurance regulation to the states. The bill does not treat credit-default swaps as a form of insurance.

“You have this blind spot on insurance companies,” said Christopher Whalen, a co-founder of Institutional Risk Analytics, a research firm.

The National Association of Insurance Commissioners says insurers were the third-biggest issuers of credit-default swaps, after banks and hedge funds, with 18 percent of the market in 2007.

“We have a desperate need for federal regulation and federal disclosure by the insurance companies,” Mr. Whalen said. “But even after A.I.G., we still don’t have a proposal for federal regulation, or even enhanced disclosure, and that’s the dirty secret here.”

<SNIP>http://www.nytimes.com/2010/02/01/business/01swaps.html?th&emc=th

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I'm doubt whether the Federal Government will tackle the insurance companies. They are unlikely to want to turn over that flat rock and see what scurries out. The insurance business is one of the sleasiest corners of American finance.

[Eric J in MN]

1. Ban credit default swaps.

Society doesn't need them.

The "modern Credit Default Swaps were invented in 1997 by a team working for JPMorgan Chase."

http://en.wikipedia.org/wiki/Credit_default_swap

[FarCenter]

2. Better would be to restrict CDS buyers to only buying CDS on loans that they own

And I'd also restrict short selling to only short selling stock actually owned (not just borrowed).

[jmowreader]

5. IOW you want to ban short selling

Shorting stock is selling low then buying high rather than the other way around. The only way you can do it is to borrow the stock.

Regular short selling didn't destroy the economy. NAKED short selling, also known as "failure to deliver," destroyed the economy. And I think you can understand why.

Let's say you're that baldheaded prick Ralph Williams from the used car ad that was on here last week. You sold the same station wagon to thirty different people, even though you didn't ever have it to start with. That's naked car selling and it's illegal for the same reason naked shorting is.

[jmowreader]

3. Better: regulate CDS

People like to call Wall Street the world's biggest casino. That's not exactly true.

As we learned in Ocean's Eleven, the Nevada Gaming Commission requires a casino to hold in reserve enough cash to cover every chip in play on its floor. If a casino has $5 million in chips on the floor, it needs to be able to cover them all. CDS are different: the person who buys one doesn't have to own the mortgage it's insuring, and the person who sells one doesn't have to own enough money to make the CDS owner good if the underlying mortgage defaults.

That needs to change.

[Joanne98]

4. "The National Association of Insurance Commissioners " OMG

FUCKERS!