AIG didn’t blow up because psychopathic speculators in their financial products group were running a totally unregulated betting shop in high-flying hedge fund style.

AIG went broke guaranteeing MBS (Mortgage Backed Securities) and CDOs (Collateralized Debt Obligations). The MBS were rated AAA by government regulated and approved ratings agencies. The CDOs were rated AAA because they were built on the AAA MBS bonds. AIG was furthering a market in CDO bonds that the government wanted to expand. The government was happy with the operations of AIG.

Much of the MBS may have been privately issued, but they were entirely similar to the MBS issued by Fannie Mae and Freddie Mac, called GSEs (Government Sponsored Enterprises).

Fannie, Freddie, and all other issuers were directly regulated by the House Financial Services Committee (Barney Frank and Maxine Waters among others) and a special regulator OFHEO. Fannie Mae and Freddie Mac were specifically put outside the regulation of the SEC, outside the influence of the Bush administration, and under the captive OFHEO.

Congress maintained close oversight of what Fannie, Freddie, and others were doing, and approved of it. Congress created OFHEO (The Office of Federal Housing Enterprise Oversight) especially to regulate FanFred. The much larger and more visible SEC (Securities and Exchange Commission) was available, but Congress wanted its own regulator.

OFHEO was captive to House congressional committees, and outside the influence and control of the Bush administration. All of the private issuers of MBS and CDOs were under the same regulatory regime. This was the regulatory regime that Barnie Frank and Chris Dodd were running.

The House committee regulating banking and financial services (the Financial Services Committee) did not object, and actually encouraged more lending to subprime borrowers.

Barney Frank (D. MA) has served as ranking (most senior) Democratic member on this committee at least since 1992, and has chaired the committee since 2007 in the Democratic majority.

There is a long history of Barney Frank proclaiming that all was well with Fannie and Freddie, and no further oversight or inquiry was needed.

It is laughable that more government “regulation” will have a good effect. Our difficulties arise from trust in government regulation, and that regulation was designed to specifically do things that were MORE risky and MORE systemic than any group of independent agents would do in a free market.

We Guarantee It

The government found a way to spend as much as it wanted, by guaranteeing the debts of off-budget government agencies, called GSE’s. The current bailouts and huge budgets continue to serve the self-interest of politicians and government aligned groups.