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« INTERVIEW: Nouriel Roubini With Felix Salmon On US GDP, Chinese Economic Statistics And Greece (VIDEO) | Main | Hitler Finds Out Scott Brown Won The Massachusetts Senate Race (Comedy Video Genius) »
Monday
Feb012010

UNCOVERED: AIG Financial Products Wasn't The Only Division At AIG Selling Credit Default Swaps

Mary Williams Walsh at the NYT reported yesterday that Alico, a division of AIG was aggressively in the business of selling CDS to customers away from the eye of state insurance regulators.  Chris Whalen who is quoted in the article, calls it a 'regulatory blind-spot,' and hints that there might be similar exposures buried within other global insurance giants.

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By Mary Williams Walsh

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.”

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Continue reading at the NYT  >>

 

 

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Reader Comments (8)

Gobias says...SOCIALISM IS DANGEROUS...from POLITIKEN.DK

The Danish Security and Intelligence Service (PET) may be prevented from supplying information about an alleged terrorist plot against the Danish Jyllands-Posten newspaper to American prosecutors in an ongoing U.S. case.

“We naturally cannot supply legal help with a view to effectuating a death sentence,” the Danish Justice Ministry writes in an email to Politiken.

Gobias tells the Danes, what if the United States said..."Sorry Denmark, with can't help you with those pesky Nazis who have you by your socialist balls if it means killing any lovable Germans. It would be as the Danes say..."a legal grey zone".

COME ON DENMARK, GROW A VIKING PAIR. YOU GUYS ONCE RULED ALL OF EUROPE AND BEYOND. THIS IS WHY I DON'T BELIEVE IN EVOLUTION.
Feb 1, 2010 at 11:18 PM | Unregistered Commentergobias
Gobias,

The Danes are telling the Great Satan to get lost. How big do you want those balls to be? Anyhow, the Danes, like most of Europe, resisted the Nazis the best they could. Even when the Nazis told them to round up their Jews, the Danes told the Nazis to get lost, too. If memory serves, the Danes did a pretty good job of saving their Jewish citizens. And anyhow, in the case you're talking about, some Danish newspapers published some cartoons that (let's be honest) few American editors have the cojones to publish. I'd say the Viking balls are still intact.
Feb 1, 2010 at 11:56 PM | Unregistered CommenterJames H
James, don't be silly. If you know the history of the German occupation of Denmark and how quickly they did it, you should not be commenting unless you intended to show your ignorance. The Danish Resistance was brave and commendable but you don't know the history of the Resistance either so I won't bother trying to fill you in.

You seem to have done little to no research on the cartoons either.

I read the Copenhagen Post and the Politiken DK almost every day. Please, stick to things you know about.

Sorry DB, I know that was a bit harsh.
Feb 2, 2010 at 12:22 AM | Unregistered Commentergobias
James, don't be silly. If you DON'T know...
Feb 2, 2010 at 12:24 AM | Unregistered Commentergobias
Thanks, Gobias. That was very informative.
Feb 2, 2010 at 12:47 AM | Unregistered CommenterJames H
The picture above epitomises the essence of the American financial breakdown; EVERYONE was gambling like crazy and laughing it up like there was no tomorrow. Except there WAS.

Take my neighbor for example (no really, PLEASE take him!). The bastard bought his home at the peak of the market on a landscaping job salary. Forget the fact that the motherfucker packed it with 23 people and parks 17 cars on his lawn. The REAL problem is that the senor hasn't paid his property taxes in 4 YEARS (public records search, I love you). I'm guessing he probably hasn't paid his MORTGAGE either for the same amount of time.

Multiply the example of Pancho here by the HUNDREDS of THOUSANDS and you'll understand the EXTENT of the fraud. And obviously douchebags like him come in ALL colors & nationalities, I am after all an equal opportunity-despiser.

The USA is FUBAR.
Feb 2, 2010 at 12:54 AM | Unregistered CommenterRecoverylessRecovery
James...take a community college course or read up on you own.
Feb 2, 2010 at 12:57 AM | Unregistered Commentergobias
Gobias, LOL. You come back for MORE. Unbelievable.
Feb 2, 2010 at 1:07 AM | Unregistered CommenterJames H

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