Friday, September 25, 2009

The G20 and Financial Reform

The Guardian yesterday posted my thoughts on the G20 discussions on the need for financial oversight reform. G20 leaders are looking at reining in the outlandish pay packages that rewarded banker for taking on excessive risk. But the most important task facing regulators is getting on top of the burgeoning trade in derivatives:
But it's the large, unregulated systemic risks that keep regulators up at night. Consider the case of AIG. As last year's financial contagion metastasised, US regulators found they had little legal leverage until the insurance giant was bailed out with $85bn in return for an 80% stake in the company. Insurance companies are regulated by the 50 states, a balkanised system that is unlikely to change.
But it wasn't AIG's traditional insurance lines that got the giant in trouble. Even though AIG's financial products group had its tentacles in nearly every global financial institution, the only federal regulatory agency that had any jurisdiction over the company was the
office of thrift supervision. The OTS is a small agency that oversees savings and loans, like the one portrayed in the classic Jimmy Stewart film It's a Wonderful Life. There was no agency that had regulatory oversight on AIG's billions in credit default swaps, for which the firm had not set aside any reserves.
Other reforms would be useful; getting oversight of unregulated derivatives is essential.


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