AIG Saved – Now What?

The Fed got smart and saved AIG. At one point this company was one of the ten largest in the world, with assets over $1 trillion, worth more than $200 billion, with more than 100,000 employees. Now it is 80% owned by the U.S. government. Ouch.

AIG, however, insures millions of people, and has made billions in guarantees to other financial institutions. It is not that they were too big to fail,; they were too critical to fail. Where do we go from here?

I am not a huge fan of stifling government regulations. Having toiled in the securities industry for many years, I can’t tell you how onerous these regulations can be. However, using a loophole called Regulation D, hedge funds have been able to conduct their business virtually uncontrolled by any government regulations at all. This free-for-all fueled much of what we are enduring today.

Reg D allows organizations who are comprised of “sophisticated investors” to conduct their affairs outside of the traditional regulations that were put in place to protect the “little guy.” Unfortunately, this exception allowed the unregulated, hedge fund industry to grow so large that it could not help but whipsaw the entire economy. Oil prices were artificially raised, commodities and currencies were manipulated, and the stock market’s risks were exacerbated beyond reason. New industries were spawned that were more like the Robber Baron days than today’s traditional financial markets.

As we emerge from this turmoil, you can expect to see the hedge fund industry fall under much greater scrutiny than ever before. Because, like it or not, it is often the little guy that pays for their mistakes, not just their investors.

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