In Session 2 so far, a lot of the questioning has been directed at the structural deficiencies of regulatory agencies. One large revelation has been the way in which many financial firms are able to manipulate and de facto pick which agency it would like to be regulated by. This leads, as Chairman Phil Angelides points out, to firms picking the weakest agency it can find.
The weakest agency, it turns out, was the Office of Thrift Supervision, which was primarily in charge of regulating AIG. Angelides asks Clarence Lee, a former managing director at OTS, why the agency consistently failed to follow up on concerns that it itself identified. In April 2008, for example, OTS raised concerns about AIG’s derivatives exposure, and promised an "in depth" investigation, but never investigated. During the run up to AIG’s downfall, they didn’t do much beside write AIG a supervisory letter.
In OTS’s defense, the agency was limited in its police power since AIG FP (Financial Products), the division dealing with these derivatives, was a separate subsidiary of AIG. It wasn’t necessarily a bank or insurance agency, which limited OTS’ power to act. But this argument ultimately fails because OTS can still take action on the holding company, AIG, and could have put pressure on the parent company to coerce its subsidiary to alter its portfolio.