Re: [tlug][OT] Free markets

[Edward Middleton <emiddleton@example.com>]

Stephen J. Turnbull wrote:
> Edward Middleton writes:
>
>  > Were do you see AIG[1] fitting into this?
>
>  > My understanding[2] was that they were offering what is effectively
>  > (but presumably not legally) an insurance instruments CDS[3],
>  > through a banking unit as a way to avoid capital requirements and
>  > stringent risk assessments imposed on insurance agencies.
>
> Not legally, because to qualify as insurance legally you have to sell
> it as a retail commodity to the insured.  So what Lloyd's of London
> does is clearly "insurance" by any reasonable definition.  But they're
> not regulated, AFAIK, and that's because each contract is negotiated
> separately as a "bet" between the client and one or more "names".
>
> AIG presumably got into CDS because they thought they were pretty
> expert at assessing risk.

It was AIGFP[1] a financial services company.  I imagine the insurance
companies under AIG would have been far more conservative in both their
assessments of the risk and the capital needed to back such bets.  Alico
the insurance company, at least in Japan, is suppose to be doing well.

>   But the kind of thing that's involved in a
> default swap is hard to commoditize on the customer side, each one is
> individual.  So ... not regulated as insurance.
>   

So there is inherently a high level of uncertainty, i.e. risk.

> I think the "right" way to deal with this kind of problem is to force
> these "deal makers" to stand on their own.  The problem is that people
> think AIG is too big to fail, so if AIG stands behind their CDS
> subsidiary, you don't have to worry about the CDS business either.
>   

Well it would be democratic?  But would it lead to highly over regulated
markets, an increase in trade barriers and a long drawn out depression?

Edward

1. http://en.wikipedia.org/wiki/AIG_Financial_Products