AIG: Stealth or Regulatory Incompetence?

In the last GlobalRiskBlog, quotes from Geithner and Bernanke which seemed to blame the AIG CDS fiasco on its ability to fly below the regulatory radar were prominently featured. This morning we read that such a notion is being disputed by one of their own! On Thursday, Scott Polakoff, acting director of the OTS (AIG's primary regulator) appeared before the Senate Banking Committee and agreed that the perception that London-based AIG Financial Products exploited a lack of supervision was incorrect. So what is it then? A 2007 GAO report said that OTS "lacked the needed expertise to regulate complex financial products like credit default swaps". Polakoff admits that some of the issues and problems at AIG were identified but steps taken were insufficient to head off disaster. Doesn't it always seem to work that way? A lack of urgency ultimately winds up blowing up in your face and upon reflection the problems seem so crystal clear. Think about 9/11 or consider baseball's battle with performance enhancing drugs. In a similar way, times were good and people were happy. Warnings went unheeded or were met with symbolic or half-measures. Yet, when disaster struck everything was reconsidered and the vigilance pendulum swung completely in the other direction. Naturally, it will be the same this time.

The links:

• US experts clash on who can monitor risk. While lawmakers seem to agree that the financial regulatory system is broken, they are not necessarily all in the same boat as to how to repair it.
• The Washington Post chronicles the Obama administration's quest to put a valuation on toxic assets at the heart of the crisis.
• Uh oh. Merrill Lynch says its risk officers discovered a trading "irregularity". Beleaguered chief Ken Lewis can't be happy.
• All sizzle and no steak? Paul Krugman is growing impatient with Obama and Geithner.
  
• The CDS market is killing Buffett and Immelt.
• In an obvious blow to Geithner, two picks for top jobs at Treasury have withdrawn from consideration. Deputy Treasury Secretary choice Annette Nazareth and International Affairs Undersecretary pick Caroline Atkinson have decided to stay put.
• Philly Fed President Plosser says the Fed needs a better roadmap to deal with crisis.
• Times Online has some good outtakes on the crisis from Mervyn King.
• Sen. Dodd is moving to allow the FDIC to borrow up to $500B from the Treasury.
• William D. Cohan has written House of Cards, the first of what should be many looks at the collapse of Bear Stearns. James Freeman reviews the book for the WSJ.
• And finally, just in case you missed it, the Daily Show's Jon Stewart proves once again that Hell hath no fury like talk show host scorned. His guns are blazing at CNBC in this video.