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Arnold Kling  
PERMANENT LINK | OCTOBER 2, 2008

The International Angle

Arnold Kling
Cochrane and Rogoff on the PBS... How Government Used Fannie and...

The Daily Telegraph reports,


We now know that it was French finance minister Christine Lagarde who begged Mr Paulson to save the US insurer AIG last week. AIG had written $300 billion in credit protection for European banks, admitting that it was for "regulatory capital relief rather than risk mitigation". In other words, it was underpinning a disguised extension of credit leverage. Its collapse would have set off a lending crunch across Europe as banking capital sank below water level.

It turns out that European regulators have allowed even greater use of "off-books" chicanery than the Americans. Mr Paulson may have saved Europe.

Tyler Cowen has been telling us to watch for international shoes to drop.

I think that the U.S. has two advantages over Europe. One is that our banking system is more fragmented. We can tolerate a lot bank failures, including some big ones. The other is that I think we have better regulatory policies and better quality staff at the relevant agencies. That's not to say that we should feel smug or sanguine.

The phrase "for regulatory capital relief rather than for risk mitigation" is a polite way of describing what I call the cesspool of rent-seeking and regulatory arbitrage. I wonder if Freddie Mac, Fannie Mae, and the big investment banks made campaign contributions in Europe, too.

CATEGORIES: Finance: stocks, options, etc.


TRACKBACKS (2 to date)
The author at PrestoPundit in a related article titled YOU AND I WEREN'T BAILING OUT AIG, writes:
    we were bailing out European bankers.  Wonderful.... [Tracked on October 3, 2008 5:17 AM]
COMMENTS (3 to date)
mgroves writes:

Speaking of smugness, get a load of this piece from Der Spiegel, if you haven't already: http://www.spiegel.de/international/world/0,1518,581502,00.html

"...the era of turbo-capitalism is coming to an end..."

Posted October 2, 2008 9:32 PM
R Richard Schweitzer writes:

As noted elsewhere, and in the Telegraph, there has been no source of confirmation as a basis for the asserted French request.

However, the subsequent request of the French President for an EU-wide capital backup (300bn Euros)gives some added credence to the assertion.

The effects of AIG as a counter-party to default swaps were for the principal purpose of creating the appearance of compliance with Basel II, rather than transfering default risks - or so it now appears to ECB regulators. Now looking closer, the regulators are apparently focusing on the "quality of capital;" an issue long neglected abroad and at home.

Posted October 2, 2008 10:55 PM
cent21 writes:

It appears to me that the USA has a lot on the line, as the leader of the free world and the leading proponent of free markets.

If US financial institutions are percieved to have precipitated this crisis - and as they say, when the USA sneezes the rest of the world catches pnemonia. Really, the headline story around the world is that Wall Street's greed and recklessness has put the global economy at risk. That would be a really difficult story to counter if there is another period of global malaise as in the 1930s.

My gosh, $300 Billion of credit protection that was sold on fraudulent premises, by an American company? And what of the rest of the $60 Trillion derrivatives marketplace?

Posted October 3, 2008 12:43 AM
Comments for this entry have been closed
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