No one's doing a better job than Tom Maguire in explaining the AIG madness. The mainstream media is reporting utter nonsense for the most part. Today he adds to this reputation with a close look at what caused AIG to fail. The regulated old insurance business lost far more than the derivatives business. Last weekend AIG released information about the amounts and recipients of roughly $100 billion of its government loans from September to December 2008. The utterly unreported surprise is that the staid, boring, heavily regulated insurance businesses managed to run up losses on securities lending requiring $44 billion of government support. By way of contrast, the credit derivatives widely blamed for bringing down the world's financial system were consuming $27 billion of support; municipal investment agreements (essentially, deposits) made by municipalities with AIG Financial Products took another $12 billion, and maturing debt took $13 billion. Perhaps a table will help:
Government support of AIG - Where Did The Money Go
Securities lending: $44.0 billion
AIG Financial Products
Credit Derivatives - collateral $22.4
Credit Derivatrives - cash hedges 5.0
Municipal Investment Agreements 12.1
Maturing Debt 12.5
The recipients of payments for the securities lending is a Who's Who of global finance and reeks of systemic risk; here are the top names:
Barclays $7.0 billion
Deutsche Bank 6.4
BNP Paribas 4.9
Goldman Sachs 4.8
Bank of America 4.5
Why so little attention paid to the losses in the regulated side of the business?
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.
We don't need more regulation. We need more competent people to enforce the regulations we already have.