Raise the Hammer

A Smith,

Financial regulation would have prevented this credit crisis. What caused it? A little thing called a Credit Default Swap (CDS). What is this? "Insurance" without the bother of insurance regulation, which requires a certain amount of capitalization based on the amount of insurance that you offer. You know, so that you can actually pay out a significant portion of what you've guaranteed that you can.

How did things go wrong? Well, they were unregulated, so there were no limits to what they could "insure". What happened? Well, Lehman Brothers got a margin call of $20,000,000,000 due to the sub-prime mortgages going bad. For some strange reason, they couldn't pay up and so went down (wouldn't have anything to do with the former CEO of their main competitor being Treasury Secretary). That led to the current problem, which is that banks will no longer lend to each other either overnight or over the weekends, thus they have to keep more capital in-house, which means they can't offer it to you and I the way they would have before. Why won't they lend to each other? Well, they have no way of knowing if the bank they lend the money to will be around tomorrow. Kind of puts a damper on the desire to lend...

How did AIG get involved in this? Well, they dabbled in CDSs to the tune of about $440,000,000,000. How did they get there? Well, insurance regulators refused to let financial regulators into their turf, yet they didn't have a clue as to what they were looking at, so they ignored it.

If AIG had gone under, that $440,000,000,000 would have wiped out thousands of businesses, instead of just the few that have gone under.

How did these CDSs come about again? Oh yeah, because insurance regulations were too restrictive. The companies needed more freedom to make money, so they got around them. Can you honestly argue that it's been a net positive?