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Banks could be risking billions on insurance on European debt

In this photo illustration a man removes euro currency bills from a wallet on June 21, 2011 in Berlin, Germany.

Jeremy Hobson: AIG: the company that had to be rescued by the government to the tune of almost $200 billion during the financial crisis.

Well, guess what? The company -- which we taxpayers still own 77 percent of -- just reported a quarterly loss of $4 billion, its biggest since 2009.

Now this time around, the losses are due more to the bad economy than risky bets. Back in '08, AIG had been selling insurance on mortgage investments, and it didn't have the money to pay up when mortgages went bad.

But as our senior business correspondent Bob Moon reports, many of the biggest names in finance are getting into a very similar game.


Bob Moon: It was back in 2008 that insurance giant AIG found itself on the hook to cover billions of dollars in "insurance" on bad loans. Former regulator Lynn Turner told Congress then, few saw it coming.

Lynn Turner: I don't think the company ever was honest with the investors about the potential impact of these things.

Now, American banks are making bets on how Europe's debt crisis will play out. But Stanford professor Darrell Duffie sees no need to sound alarm bells.

Darrell Duffie: There's no reason to believe that they've done silly things and taken excessive amounts of risk of this type.

Duffie concedes, though, there's no way to know for sure, since reforms passed by Congress are still being sorted out by regulators.

Duffie: For the time being, we don't really have great visibility on who's bought insurance from whom.

The banks say not to worry -- they've got insurance on their insurance. But hedge fund manager Peter Tchir says the uncertainty is uncomfortably reminiscent of three years ago.

Peter Tchir: Here we are with the same situation. I think that's a big failure on the part of the regulators.

By one account, U.S. banks could be risking many billions more in insurance protection on shaky European debt, than the loans they've actually made to those countries.

I'm Bob Moon for Marketplace.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.

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