NU Online News Service, Oct. 8, 11:38 a.m.EDT

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NEW YORK–While warning against imposingadditional laws and new federal overseers on an alreadyheavily-regulated insurance industry, Maurice Greenberg, AIG'sformer chief executive, said rating agencies need governmentsupervision, while credit default swaps should be regulated asinsurance.

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"We blame management, of course, for the excesses that led toour financial crisis, but where were the regulators?" said Mr.Greenberg, currently chair and CEO of C.V. Starr & Company.

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Contending that "regulators have the right to come in andexamine a holding company," he said that "if they had done theirjobs," the economic meltdown set off last year by reckless creditdefault swaps, based on collateralized debt obligations made up ofill-considered subprime mortgages might not have occurred or atleast been less severe.

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AIG was faced with a crippling collateral crisis and acceptedfederal bailout funds to keep the company afloat last year thanksto trading in credit default swaps.

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"I don't recall any regulator coming to look at the [insurance]holding companies, and if they did, it was a very superficial job,"he added during a speech last night at the St. John's UniversitySchool of Risk Management.

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"Now we're talking about what new regulations and regulators weneed," he said. "To me, that's the wrong approach. There arealready plenty of regulations on the books. The problem was intheir lack of implementation. So don't throw the baby out with thebathwater."

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Instead of overreacting during a post-crisis panic by passing aslew of new federal laws and creating additional regulatory bodies,he suggested that "we ought to appoint a blue ribbon panel of somewise people to look at what happened, whether existing regulatorsdid their jobs, and whether we really need more regulations or justbetter regulators."

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However, he was more bullish about imposing new regulations whenit comes to rating agencies and credit default swaps.

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"You have to regulate the rating agencies," according to Mr.Greenberg, citing the fact that high ratings mistakenly granted tocertain "toxic" securities helped set off a chain reaction thatnearly crashed the economy.

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"The conflict is so apparent when you have to pay for a rating,"he said. "And you should have to pass a test to be allowed to dothis job."

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He urged regulators not to ban trading in credit default swapsbecause "there is definitely a need for this product." However, headded that CDS "ought to be regulated as an insurance policy, withreserves behind it." He said "there should also be a public,transparent exchange, with a standard form imposed so that everyoneunderstands what is being bought and sold."

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Mr. Greenberg said the way Washington has responded to theeconomic crisis has soured him on the prospect of federalregulation for insurance. "For years, I have favored an optionalfederal charter," he noted. "But given what's happened in this lastdebacle, I'm not sure we wouldn't be better off with stateregulators."

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He said that "if you look at the landscape in Washington today,I don't feel like I'm in America, with a federal czar regulatingexecutive pay, and the government contesting bonuses that werecontractually guaranteed. I think I'll take my chances with thestates."

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Mr. Greenberg said "risk management must change" in theinsurance industry and across the economy, suggesting that allcompanies "should have a Risk Management Committee of the board,and not in name only. It should be staffed with competent peoplewho meet frequently because it has to be current, and it has to beable to challenge management on issues of concern."

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He noted that AIG, under his leadership, had establishedenterprise risk management throughout the organization, but did notexplain how that system after he left had failed to detect or deterthe ill-advised credit default swaps in AIG's Financial Productsunit that nearly bankrupted the company and prompted its ongoingfederal bailout.

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Mr. Greenberg left his AIG posts in 2005 in the midst of anaccounting scandal over the use of bogus finite reinsurance dealsto artificially bolster the company's balance sheet. The scamresulted in criminal convictions of four people–one from AIG andfour from General Reinsurance, including former CEO RonFerguson.

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Mr. Greenberg was cited as an unindicted co-conspirator in thatcase. In August, he paid $15 million to the Securities and ExchangeCommission to settle a securities violation allegation pertainingto the same situation, and a New York State civil fraudinvestigation is ongoing.

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Mr. Greenberg said he is not sure "whether holding companieswill survive" the political fallout from the economic crisis–and ifthey do, "under what restrictions" they will operate. He wonderedwhether "we'll see more monoline companies, financed by separatestock."

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His old company, AIG, has rebranded its property and casualtycarriers as Chartis, and the company has talked about a publicoffering to raise additional financing.

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"If the holding company survives as an entity, what kind ofcapital and disclosure rules will it face?" he said. "If holdingcompanies do survive, they probably won't be allowed to stray veryfar from their insurance roots."

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He warned against imposing too many restrictions, however,saying that "there is a reason why holding companies came intoexistence–diversification," adding that such a goal was sound, ifproperly executed.

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On Oct. 9, responding to a National Underwriter query,the New York Insurance Department e-mailed a response to thevarious assertions and suggestions made in the speech, stating that"we agree with most of Mr. Greenberg's major points."

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"State regulation of insurance is superior to federalregulation. Credit default swaps should be regulated and backed byreserves. And AIG's holding company was not adequately regulated bythe Office of Thrift Supervision," the department said.

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"Indeed, OTS admitted in testimony to the U.S. Senate that itwas responsible for regulating both the holding company and theunit that sold credit default swaps, and that it failed to carryout those responsibilities adequately," the department added.

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(This article was updated on Oct. 9.)

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