Financial Crisis's Non-Economic Impact on States

States were already facing big revenue hits before Wall Street started to melt down. The fall of AIG might portend regulatory effects on states as well.

Four members of Congress (two Dem, two GOP; two Sen., two Rep.) have suggested that the federal government $85 billion bailout of AIG means it is high time to allow the feds to regulate the insurance industry. From Stateline:


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.)...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.

Not surprisingly, state insurance commissioners disagree:

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.'

This is unlikely to be the only shoe to drop in terms of non-economic impact on states of the financial meltdown.