The AIG Bailout 101: An Explainer

Both TPM and Atrios recommended reading JOE NOCERA’s NYT piece on the AIG bailout. So I did, and now I’m tell you to read it. Nocera’s piece has by far the best explanation of how AIG gamed the system and caused the housing bubble.

CLICK HERE

There’s lots of important parts of the article, seriously read it, but this one jumped out:

When a company insures against, say, floods or earthquakes, it has to put money in reserve in case a flood happens. That’s why, as a rule, insurance companies are usually overcapitalized, with low debt ratios. But because credit-default swaps were not regulated, and were not even categorized as a traditional insurance product, A.I.G. didn’t have to put anything aside for losses. And it didn’t. Its leverage was more akin to an investment bank than an insurance company. So when housing prices started falling, and losses started piling up, it had no way to pay them off.

Keyword: Regulation. Or more importantly, a lack of regulation incentivizes bad behavior. Contrary to popular conservative belief, rules are important to maintaining a stable environment. Or should I say, oversight is critical to preventing systemic abuses.

I’m not sure why this is a controversial concept. We don’t rely on the honor system to prevent murder, so why would we rely on it to prevent fraudulent economic scams?

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s