Shopping for Regulators

by Robert Waldmann

Jeff Girth asks “Was AIG Watchdog Not Up To The Job?”

Short answer — no.
Slightly longer answer — that depends, do you think their job was to regulate or to make sure that no one else regulated ? They seemed to think it was the second and managed.

In 1999, Congress passed legislation allowing banks, insurance companies and securities firms to compete with each other. The new law allowed for a range of possible regulators, from the Federal Reserve to the Securities and Exchange Commission, depending on the mix of financial services a company chose to offer. Holding companies that owned one or more thrifts had the possibility of being regulated by the OTS.

“There was a stampede by commercial and financial firms to get a thrift charter,” said Bart Dzivi, a former counsel to the Senate Banking Committee and now a financial-institutions lawyer in Northern California, “so that OTS could be their consolidated supervisor.”

AIG, like other companies, fell under grandfathering provisions in the 1999 bill and received approval late that year from the OTS to own a thrift in Delaware.

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In a March 2007 report on financial regulation, the Government Accountability Office looked at the OTS and found “a disparity between the size of the agency and the diverse firms it oversees.” The report noted a lack of specialized skills at the OTS, which had just one insurance specialist to oversee several insurers such as AIG.