U.S. Lawmakers Fault States for AIG Collapse

State insurance regulators are angry that four members of Congress who support federal oversight of the industry are blaming states in part for the collapse of insurance giant American International Group Inc., an event that escalated the financial crisis on Wall Street.

“This is not a time for political opportunism,” Joel Ario, Pennsylvania’s insurance commissioner, said of the lawmakers. “I’m disappointed in the political chutzpah of some people.”

Connecticut insurance commissioner Thomas Sullivan said state insurance regulators , attending their annual fall meeting in the Washington, D.C., area on a range of issues including AIG, “were shocked” to read a Sept. 23 Wall Street Journal op-ed by U.S. Sens. John Sununu (R-N.H.) and Tim Johnson (D-N.D.) and U.S. Reps. Melissa Bean (D-Ill.) and Ed Royce (R-Calif.).

The lawmakers wrote that the billion federal bailout of AIG was proof that Congress should approve their two-year-old legislation to strip states of their authority to regulate insurance companies. Instead, they propose that insurance companies have the option to choose a federal or state regulator. The proposal has split the insurance industry; large companies generally endorse it while small insurers generally oppose it.

Without such a change, the four lawmakers warned, “it is likely that the federal government (ie. the American taxpayers) will be forced to pay for more bailouts in the future.” They argued that the bailout of AIG, a holding company with 71 subsidiaries that operate under state laws, shows the oversight job has become too complex for states alone. State officials said the U.S. Office of Thrift Supervision regulated the holding company.

State insurance officials accuse the lawmakers of exploiting the financial crisis to drum up support for their bill, which was introduced long before the problems on Wall Street. They say AIG’s 71 insurance companies under their supervision are the healthiest part of the company’s finances and were a key reason that the Federal Reserve Board approved the bailout of the company in the first place. Those insurance companies are likely to be sold to raise the money needed to pay off the loan.

“What got the Fed in the end to make this loan was the value of the insurance (company) assets,” Ario said. “The real story is, state regulation shined.”

Neither the House nor Senate version of the bill has cleared a committee, and action is unlikely before Congress adjourns this year.

The lawmakers, who are members of financial services committees in the Senate and House, receive their largest share of campaign contributions from individuals and political action committees representing the insurance, securities and investment industries, according to the Center for Responsive Politics. The donations come from people on both sides of the debate over creating a single federal insurance regulator.

Royce, asked about state officials’ assertions that they had nothing to do with AIG’s collapse, said in a statement that while state insurance regulators did all they could to prevent the deterioration of AIG, each state only has authority over the companies within its borders. No one oversees both the holding company and its subsidiaries, which Royce called “a clear systemic blind spot in the state-based system.”

If a federal regulator were in place before AIG imploded on Sept. 16, the California congressman said, “the federal government would likely be billion richer.”

Jonathan Lipman, a spokesman for Illinois’ Bean, referred a reporter to a statement that said the bailout of an international company with more than trillion in assets proved that insurance regulation is “too complex, too interconnected worldwide to allow the limited resources of state regulators to serve as the only option for oversight.”

The lawmakers’ criticism is the first time states have been blamed for some role in the financial collapse. Congress and other officials are rushing to stem the financial crisis before they turn to pinning down exactly what happened, who is responsible and how they can tighten regulation and oversight.

States have at least two financial responsibilities. They have regulated the insurance industry since it began in the 1860s. They also oversee the banking and securities industries, sharing responsibility with federal agencies.

The Bush administration in March released a proposal similar to the lawmakers’ that would allow insurance companies a choice between being regulated at the state or federal level, the same dual system that banks have. The proposal to launch an Office of National Insurance was part of acomprehensive plan by Treasury Secretary Henry Paulson to overhaul the nation’s financial regulatory system. Congress is reviewing the plan.

Large insurance companies, many represented by the American Insurance Association, say the dual system would cut costs and the red tape of needing 50 states’ approval. They say it also would allow them to offer more product choices at lower costs for homeowners’, life and auto insurance. Health insurance is not part of the proposal.

Smaller firms, represented by the Property Casualty Insurers Association, prefer the current state-run system. If there were two regulators, they say, consumers and insurers alike would be confused about who oversees which of their policies and who is ultimately accountable if they have a dispute.

Consumer groups such as the Consumer Federation of America, and state officials fear insurers would cherry-pick the weaker regulator of the two.

“The oversight will really be lacking,” said Sandy Praeger, the Kansas insurance commissioner and president of the National Association of Insurance Commissioners.

State insurance officials say they welcome a discussion about regulation as long as the industry and Congress do not link it to the AIG bailout.

“The government didn’t bail out an insurance company,” said Roger Sevigny, New Hampshire’s insurance commissioner. “There weren’t any insurance company subsidiaries of AIG in trouble. The government bailed out AIG and its financial holdings.”

Ario and New York insurance commissioner Eric Dinallo are heading a working group of state insurance commissioners to oversee the sell-off of AIG’s profitable insurance divisions to pay back the government’s billion loan over the next two years.

The sell-off presents no major regulatory hurdles and can be completed within the two-year term of the loan, said Dinallo, who has experience dealing with Wall Street as chief of the investment protection division of the New York attorney general’s office under Eliot Spitzer. Spitzer named Dinallo insurance commissioner in April 2007.