Re: [tlug] Open-source Japan

["Stephen J. Turnbull" <stephen@example.com>]

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.  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.

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.

I don't know if that scheme is practical, but it's like, you know,
democracy, ... one of those ideas that sounds great in the poli sci
texts but we won't know if it actually works until  somebody tries
it. ;-)