AIG, The Fed, & Financial Collapse

Almost a month ago, in the November 27/28th weekend edition of the Wall Street Journal, Peter J. Wallison of the American Enterprise Institute wrote a thought-provoking piece regarding the "lack of candor" surrounding the federal government's reasons for bailing out AIG.

He wrote,

"Since last September, the government's case for bailing out AIG has rested on the notion that the company was too big to fail.

Last week's news that this was not in fact the motive for AIG's rescue has implications that go well beyond the Obama administration's efforts to regulate CDSs and other derivatives."

According to the TARP's inspector general, Neil Barofsky, Geithner did not, in fact, believe AIG's credit default swap exposures were "a relevant factor" in the rescue.

Wallison's point is that, based upon the government's initial reasons for bailing out the insurer, Congress has rushed through some bad new regulatory legislation promulgated on the theory of unsupervised interconnectedness of large financial institutions.

If this weren't the reason for AIG's "rescue," then what was? And why are we so worried about something that Geithner contends wasn't the reason for taking over privately-owned AIG?

This sort of quasi-Constitutional, quasi-political question has somehow escaped notice in all the furor over private sector companies- insurers, commercial and investment banks- which were simply distributing the government's own flawed, low-quality mortgage-backed securities.

Perhaps that fact that the two major architects of Fannie Mae's and Freddie Mac's demise, Barney Frank and Chris Dodd, are in charge of all things financial in Congress, has a lot to do with why there has been no in-depth investigation of a Republican administration's concerns over interconnectedness that, upon closer inspection, was actually nowhere to be found.

Considering Congress' headlong rush to another piece of bad legislation, this time redrafting financial sector regulations, it would be a good time to pause and go through the AIG debacle slowly, with a fine-toothed comb, to learn exactly who was worried about the insurer, and why.