Where Was the Systemic Risk?
The concentrated nature of the payments that have been made to counterparties that were detailed in Part II of this commentary naturally raises the question whether the interrelationships among these few firms, combined with the fact that all but one of the top five recipients were also primary dealers, was the main reason that the Fed and Treasury stepped up in the AIG case. More broadly, because of the interest in installing a systemic risk regulator in the US, the challenge is to devise an operational definition of a “systemically important institution” that is robust and dynamic and that could be used to identify when and under what circumstances government intervention in the affairs of a private-sector financial institution would be justified. This issue was touched upon in my colleague David Kotok’s recent Commentary, in which he pointed out the vague nature of the current public discourse on systemic risk. He characterized the present approach as one of “knowing it when you see
