Local Insurer: Fed Regulator No Answer to Outrage over AIG
INSURANCE
Norwalk Hour
Tait Militana
Boston University Washington News Service
3/17/09
WASHINGTON – Outrage over bonuses paid to executives at the American International Group spilled over at a Senate hearing on insurance regulation Tuesday, while industry leaders sought to install a federal regulator to prevent future systemic failures.
Following a weekend report that $165 million in bonuses had been paid from taxpayer money used to prop up the insurance giant AIG after its near collapse, Sen. Chris Dodd, D-Conn, demanded answers from the Federal Reserve about how it tracks the federal rescue funds that have already gone to AIG and other financial industry recipients.
“The American people are outraged, and so am I,” Dodd said. “We also want answers regarding where the Fed has been on conditions for these types of bonuses since this rescue effort first began.”
Sen. Jon Tester, D-Mont., said AIG’s use of taxpayer money for bonuses is unacceptable and the company would be broke if the American people had not bailed it out.
“If this is the way Wall Street and AIG and all of the others continue to do business, we can’t help them with any amount of money,” Tester said. “This is ridiculous.”
The Senate Committee on Banking, Housing and Urban Affairs, of which Dodd is chairman, met with insurance leaders on how to modernize the insurance regulatory system.
In light of AIG’s near failure, several witnesses called for a federal regulator to oversee the insurance industry and help prevent collapses like the one AIG faced last year.
William Berkley, the CEO of W.R. Berkley Corp. in Greenwich, said the current system, in which each state independently regulates its own insurance market, lets too many companies like AIG slip through the cracks.
“The state-based insurance regulatory structure is inevitably fragmented and frequently not well-equipped to close the regulatory gaps that the current crisis has exposed,” Berkley said.
However, critics of a federal regulatory system say that AIG was an anomaly and cannot be considered for federal regulatory reform because it is too large and spans too many industries.
According to Dodd, there are nearly 4,000 insurance companies in the country. He said diverse international companies like AIG represent only a small percent of the industry.
“What happened at AIG should not, in my opinion, be confused with the industry with which it is most closely associated, the insurance industry,” Dodd said.
Spencer Houldin, president of Ericson Insurance Advisors in Washington Depot, said at the hearing that insurance has been hurt less by the financial crisis than many other industries have. He said the industry is sound and major changes to the regulatory system are not needed.
“Unlike other financial services markets, the insurance market, particularly property-casualty, is stable and does not need risky indiscriminate change of its current regulatory system,” Houldin said.
According to Houldin, the problem with AIG was its overseas gambles with credit default swaps that a federal regulator would not be able to catch anyway.
“Federal regulation isn’t the panacea,” he said.
Dodd said the immediate issue is trying to get back the bonuses paid to AIG. He expressed disappointment that the restrictions on bonuses and other compensation under the Troubled Asset Relief Program do not apply to the money the Fed distributed to AIG.
“We wrote restrictions on executive compensation at the time, and the idea that this wouldn’t apply to money coming out of the Federal Reserve is a sore point, to put it mildly,” Dodd said.
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