Should France have saved AIG?
Updated on 30 March 2009
EXCLUSIVE: Faisal Islam writes on how Paris and London failed on AIG, and what it means for the G20.
"Who should have stopped AIG?" is a question to which world leaders will provide no answer in the coming week. But perhaps they should ponder in a brief moment the story of the insurance company that thought it was a bank.
Its unit in Mayfair, AIG Financial Products, was the central hub for trades of Credit Default Swaps on super senior tranches of Asset Backed Security Collateralised Debt Obligations. Obviously.
There were tens of thousands of these contracts which essentially insured the value of packages of debt. In essence AIG was lending the credibility of the top credit rating earned by its behemoth parent company to all sorts of dodgy toxic rotting mortgage and corporate loans.
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It used the fact it was an insurance company to skirt around the requirement to hold a reasonable amount of capital to pay out on these trades. And it was the only company big enough to take on the business of the world's banks and hedge funds in mammoth scale.
The White House, the US congress, and Ben Bernanke have been making increasingly incandescent noises about what went on at AIG-FP in London.
'The FSA should have noticed that AIG's name was popping up all over the place, and should taken a more piercing look as a result'Shirley Beglinger, insurance regulation expert
"The FSA should have noticed that AIG's name was popping up all over the place, and should taken a more piercing look as a result," says Shirley Beglinger, who is an expert on insurance regulation.
I put this point to Lord Turner, the FSA's chairman. Did the FSA fail on AIG?
"I don't think we did as regards AIG. Because although some of the execution was done through the London office, the legal entity on which this was booked and really should have been regulated more effectively was the American legal entity.
"I think the Americans all understand that what happened with AIG was probably the worst case in the world of something literally falling between the stools of the regulatory process," Lord Turner told Channel 4 News.
'I think the Americans all understand that what happened with AIG was probably the worst case in the world of something literally falling between the stools of the regulatory process'Lord Turner
Channel 4 News has been speaking to AIG insiders. They reveal that regulators from the Banque de France, France's central bank were the prime regulators, visiting twice yearly. That is because the infamous AIG-FP was a branch of Banque AIG, a tiny operation in Paris.
In theory the FSA, under EU rules, has to allow a branch of a European bank to open in the UK without regulating its assets (remember Icesave?). That is a part of the global financial system that Lord Turner now believes is untenable.
Nonetheless you have a story of a tiny company making astonishing world-threatening gambles, but falling operating in the cracks of regulation between France, the UK and the US, and between insurance regulators and bank regulators.
So here is the unpalatable truth. Companies such as AIG may need to be regulated by a global regulator. Or they need to be banned from engaging in cross border regulator-dodging, and ultimately reined in from unstoppable tide of financial globalisation.
That dilemma lies behind the vaguer declarations we will hear at the G20. Expect a fudge.
A disproportionate amount of regulator-dodging pops up in London in various guises. The FSA will now be rather more intrusive with the branches of foreign banks that pop up in London expecting to be left alone.
Another reason why global finance won't be the same again.
