Insurance Quotes & Advice

The credit rating firm Moody’s Investor Services believes that there is a fair likelihood that the U.S. government will recoup most, if not all of it’s $182 billion bailout to American International Group(AIG).  There have been a number of out spoken critics of both the Federal Reserve and the U.S. Treasury over their handling of the matter and the huge risk to taxpayers the government took on.

The government has restructured it’s bailout to the embattled insurance giant a number of times and continued support for the company will be in their best interest.  Many analysts believe AIG is out of the danger zone unless the economy goes into a relapse.

It’s has had two straight quarters of profitability and as the stock market continues to stabilize, that should improve their position going forward.  AIG has also slowed the pace of it’s asset sales in order to seek higher prices when markets improve.

A highly leveraged position though insurance contracts called credit default swaps provided spectacular profits earlier in the decade, but those bets turned disastrous in the wake of the subprime collapse and nearly lead to their collapse if it weren’t for the government’s intervention.  One of the so called “too big” to fail firms, AIG’s collapse would have sent shock waves through an already reeling financial system.

Once it’s restructuring plan is complete and it repays the government back, many believe AIG will remain a profitable company albeit at a much smaller scale than it’s former position as the world’s largest insurer.

A lot of attention is being paid currently to credit default swaps(CDS) and what type of regulations should be implemented to get them under control.  CDS played a pivotal role in nearly bringing down AIG, formerly the world’s largest insurer.

Many critics have likened CDS a ticking time bomb and a financial Armageddon waiting to happen.  AIG is a perfect case of what can happen when things go bad, although much of their liquidity issues and subsequent bailout had to do with their drops in credit ratings.

Some state regulators are pushing to CDS regulated as an insurance product and it has recently become a heated topic with good arguments on both sides of the fence.  While many agree that CDS are insurance like contracts there are many differing opinions on whether they are actually insurance.

The huge growth in CDS and derivatives in general helped fuel a great credit boom as many financial institutions increased their leverage levels to take advantage of the new financial products.  The big problem with the product is that while it serves a useful role when the economy is going well, they can prove disastrous when the economy goes into the tank.

Much of the problem is that most of the sellers of CDS don’t have adequate collateral to fund their potential liabilities.  The major attraction of the product is it’s ability to generate large amounts of financial leverage but as mentioned above, that can be a double edged sword, magnifying both gains and losses.

However, while I agree that CDS definitely needs to be regulated, I can’t help but wonder if leaving it the hands of fifty different state regulators is the best choice.  The words over matched comes to mind and I think that this is something that would probably be best regulated at the federal level.