UNCOVERED: AIG Financial Products Wasn't The Only Division At AIG Selling Credit Default Swaps
Feb 1, 2010 at 5:40 PM
DailyBail in AIG, aig, aigfp, cds, credit default swaps, derivatives, derivatives, insurance

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.


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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