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1、IssueAnalysisAPublicPolicyPaperoftheNationalAssociationofMutualInsuranceCompaniesSeptember2009TheFinancialCrisis,SystemicRisk,andtheFutureofInsuranceRegulationByScottE.Harrington,Ph.D.ExecutiveSummaryTheburstingofthehousingbubbleandresultingfinancialcrisishavebeenfollowedbytheworsteconomic

2、slowdownsincetheearly1980sifnottheGreatDepression.ThisIssueAnalysisconsiderstheroleofAIGandtheinsurancesectorinthefinancialcrisis,theextenttowhichinsuranceinvolvessystemicrisk,andtheimplicationsforinsuranceregulation.Itprovidesanoverviewofthecausesofthefinancialcrisisandtheeventsandpolicie

3、sthatcontributedtotheAIGintervention.Itconsiderssourcesofsystemicrisk,whetherinsuranceingeneralposessystemicrisk,whetherasystemicriskregulatorisdesirableforinsurersorothernon-bankfinancialinstitutions,andtheimplicationsofthecrisisforoptionalfederalchar-teringofinsurersandforinsuranceregula

4、tioningeneral.CausesoftheFinancialCrisisFactorsthatcontributedtothecrisisinclude:•Federalgovernmentpoliciesencouragedrapidexpansionoflendingtolow-incomehomebuyerswithlowinitialinterestrates,lowdownpayments,andlaxlendingcriteria.•Government-sponsoredandprivateresidentialmortgage-backedsecur

5、ities,rapidgrowthincreditdefaultswaps(CDS),andrelatedinstrumentsspreadexposuretohousepricedeclinesandmortgagedefaultswidelyacrossdomesticandglobalfinancialinstitutionsinacomplexandopaquesetoftransactions.•Bankholdingcompaniesaggressivelyexpandedmortgagelendingandinvestment,oftenthroughoff-

6、balancesheetentitiesthatevadedbankcapitalrequirements.Leadinginvest-mentbanksinvestedaggressivelyinmortgage-relatedinstruments.•LehmanBrothers,AIG,andotherorganizationsbecamemajorwritersofcreditdefaultswaps.Whencoupledwithhighleverage,CDSprotectionsellersbecamehighlyvulner-abletomortgagede

7、faults.•Muchresidentialmortgagelendingshiftedtoan“originateanddistribute”model,whereoriginatorsretainedlittleriskonthemortgages.Subprimemortgageoriginatorswereoftennewentrantswithlittlereputationalcapitalatrisk.ScottE.HarringtonistheAlanB.MillerProfessorofHeal