AIG Mess Was Avoidable: Regulator

The massive government bailout of AIG (AIG Quote) might not have been necessary if the giant insurer had been required to hold capital against its massive derivatives liabilities, according to a top U.S. derivatives regulator.

Testifying before a Congressional committee Thursday, Gary Gensler, chairman of the Commodity Futures Trading Commission, said he is seeking authority to impose new capital requirements on participants in unregulated derivatives markets. He looks likely to meet resistance from large banks such as JPMorgan Chase (JPM Quote), Goldman Sachs (GS Quote) and Morgan Stanley (MS Quote), who fear such requirements will hurt their profits.

Asked what this authority might accomplish in terms of preventing the type of financial meltdown that occurred last year, Gensler said one example is that AIG would have had to set capital aside against its book of credit default swaps, a type of derivative contract written extensively by AIG and which was instrumental in its failure. ...