Financial Market Regulati

 Many of us know about AIG bailout by the US federal govt after 2008 market crash.

AIG (American International Group) faced a near-collapse during the 2008 financial crisis due to several factors. Here are the key reasons:

1. Credit Default Swaps (CDS): AIG sold a large number of CDS, which are essentially insurance contracts on bonds. When the housing market crashed, the mortgage-backed securities underlying these CDS defaulted, leading to massive losses.

2. Securities Lending: AIG engaged in securities lending, which also resulted in significant losses when the value of the securities dropped.

3. Poor Risk Management: AIG’s risk management practices were inadequate, and the company took on excessive risk without proper oversight.

4. Deregulation: The deregulation of the financial industry allowed AIG to engage in risky financial practices without sufficient regulatory oversight.

5. Over-reliance on Mortgage-Backed Securities: AIG heavily invested in mortgage-backed securities, which were considered safe until the housing bubble burst.

These factors combined to create a situation where AIG required a massive bailout from the U.S. government to avoid bankruptcy.

What about India where regulation on the open financial market is too loose. And a greater risk for customers, and common people.

You bring up a valid point. The rapid rise in real estate prices in India, coupled with relatively lax regulations for insurance companies, could indeed pose significant risks. The real estate market has seen substantial growth, with prices increasing by an average of 21% last year. This kind of rapid appreciation can lead to speculative bubbles, which, if they burst, could have serious repercussions for the financial sector, including insurance companies.

Moreover, while there are regulations in place, such as the Insurance Act of 1938 and the Insurance Regulatory and Development Authority Act of 1999, the effectiveness of these regulations in preventing excessive risk-taking is crucial. Ensuring robust oversight and risk management practices within the insurance sector is essential to prevent a scenario similar to what happened with AIG in 2008.

It’s definitely something for policymakers and regulators to keep an eye on. 

Do you think there should be more stringent regulations for insurance companies in India?