The AIG Effect: Congressional Fire Turns to Quiet Debate

When American International Group Inc. threatened to drag down the rest of the U.S. financial system in September of 2008, the floodgates of blame swung open. The rhetoric began boiling on Capitol Hill, and when the regulators and former officials of AIG began appearing before Congress, the accusations from lawmakers were often harsh.

On Oct. 7, 2008, the House's Oversight and Government Reform Committee conducted one of several congressional hearings on AIG, having two of the company's former chief executive officers testify -- Martin Sullivan and Robert Willumstad.

Willumstad, who was at the helm for just a few months, told the panel: "Looking back on my time as CEO, I don't believe AIG could have done anything differently. The credit default swap contracts had been in place for years. The market seizure was an unprecedented global catastrophe."

And Sullivan, CEO before him, said, "In 2006 and in early 2007, AIG was enjoying great success, and those of us within the company's management had tremendous confidence in our company's future."

The members of Congress jumped on them and AIG. Rep. Mark Souder, R-Ind., said, "This unbridled greed, this callous abuse of trust of hardworking Americans' savings is just so disgusting it's hard to put into words. ... You left your company so exposed that when a little bit of softness came to the economy ... you go belly up and stick everybody else in America with it, and you're saying, 'Oh, it was a market tsunami,' as if you didn't help cause it."

Carolyn Maloney, D-N.Y., said, "You were generating fees, making all of your employees rich, wrecking a great company, and tearing down our economy, and now turning to the taxpayers and asking us to bail you out. I think you should be apologizing to the American people for your mismanagement."

And from then-Rep. Chris Shays, R-Conn.: "They thought they were selling insurance, when in fact they were betting the company's soul in a high-stakes game of Russian roulette."

The other witnesses that day -- former New York Insurance Superintendent Eric Dinallo and the U.S. Securities and Exchange Commission?s former chief accountant, Lynn Turner - -also unloaded on the insurance giant. Turner said, "AIG ... blamed its problems on accounting rules, which required it to disclose losses to its investors. This is like blaming the thermometer folks for a fever."

The fires of Congress had been stoked. Cameras were rolling. Steve Bartlett, a former congressman who is president and CEO of the Financial Services Roundtable, thinks that's when mistakes were made -- in the angry rush to fix problems. "Congress became part of the problem," he said. "It became a feeding frenzy." He said Congress began tearing apart the company with "wild, blind passion" after the taxpayers had already become its major owners. "The government response compounded the problems, rather than fixed it." Members of Congress -- his former colleagues -- were "making market decisions based on how they looked on C-SPAN."

Dinallo resented the effect on the insurance world. "What bothers me about the whole AIG episode the most ... is a broad misunderstanding bordering on the inappropriate that people would use it as an argument that there needs to be federal regulation of insurance," he told the committee. "AIG is Exhibit A for how well the states did, not how poorly they did. And that has to be said clearly."

But Bartlett doesn't agree. He said Congress should look at regulating insurance -- which he said is a third of the financial market -- more than it is. "I think it's a failure of will." He said Congress "does itself and the country a disservice" if they don't modernize and consider federalizing insurance regulation.

After all the congressional shouting in late 2008, the industry has largely escaped major reform under the proposals of the Obama administration and the Democratic leadership of Congress. The potential Office of National Insurance and Consumer Financial Protection Agency may have some limited effect, as could a systemic-risk regulator if the largest insurance companies are designated as risky. But there are few direct changes proposed for the state-by-state regulatory system now in place.

"It's not really being dealt with," said Hal S. Scott, director of the Committee on Capital Markets Regulation and a professor at Harvard Law School. "It's basically leaving the system as is, which God knows has problems with 50 states regulating the insurance industry.?

Bartlett said he thinks Congress has been genuinely working toward action on regulation. But it's being made less urgent by time and apparent improvement in the economy.

Scott, who testified at a Senate regulatory hearing in early August, isn't as optimistic, believing the will to act is being sapped by sunnier financial news. He argues that structure of financial regulation has to change. "I'm not optimistic we're going to do much about that," he said. "What are we doing to make sure we don't have AIGs in the future? Not much."

It's unclear what Congress will end up doing, and whether the insurance industry will feel any impact at all, just as it was unclear in those early days just what was happening with AIG. Bartlett said he was watching the initial news of AIG's peril from his treadmill. "I just couldn't believe it," he said. As the stock plummeted, he bought some, thinking it was a safe investment at a good price. "It just goes to show that the people who know the most know the least," he said.