Sorry, I missed this response when you posted it.
I think we're in a no-win situation. Congress exempted this type of insurance from normal insurance regs, allowing AIG to run the oldest type of insurance scam. The huge firms that bought the insurance have told us in other contexts that they are amazingly sophisticated investors, but now they want us to bail them out - they shouldn't be responsible for their own actions.
I think the law allows AIG to protect the traditional insurance subs from proceedings against the finance sub, so I'm not so worried about ships not moving. (We've got some posters who know a lot more about bankruptcy than I do. Maybe one of them will clarify this.)
Ok, firstly, Insurance is regulated by the States, not the fed. No state in my knowledge would allow this credit default swaps to be sold by AIG.
So, AIG after Glass-Stegall was knocked out by the Graham-Bliley disaster, set up a financial services arm. Now insurance companies can dabble in banking and securities, formerly forbidden under Glass Stig. This essentially allowed these three different businesses, tightly regulated to sort of merge and comingle with each other. Remember Citi with Travelers?
OK, so the financial arm is basically unregulated and they call their product "credit default swaps" to avoid calling it insurance. Out of the realm of the ability of state insurance regulators to control. So basically no one controls them, they are based in Conneticutt, but sell their product out of London. No one can touch, no one knows what they are doing, the Sec is impotent, the fed bank of ny is useless, no one knows what is going on or wants to know or is sure of what to even do.
All of this is observed by a few people in the know who view this follie and warn the world of what is to come, but is ignored by the regulators, since the regulators are not sure of what they regulate anymore.
Ya got me so far?
Now in retrospect, this was all set up this way purposely primarily by wall street to tap into the banking and insurance industry and sell and trade derivatives emanating from their products. In order to do so, you weaken any regulations impeding this three way marriage. Wall street is like a vampire, they look for products to sell, look for anything to package and peddle and suck them dry. You following me camera guy?
Ok, also in order to do this you have to "grease" the political wheels to weaken the regulations and permit the marriage of the holy trinity of wall street, banking and insurance. Wall street is the vampire here, remember that.
Payoffs are made to certain politicos, the mantra of "deregulation" is touted throughout the land, saying regulation impedes the brave new world that is to come and you make sure that the Sec, the NY Fed bank, and others do not have adequate staff to oversee the "blood sucking" walls street perpetuates on the banks and insurers.
So there you have it.
Jug