The anachronism that is state-based insurance regulation has basically gotten a pass in the financial crisis—what with all the problems in federally based banking regulation.

But a 19th-century holdover it surely is, and the Times’s Mary Williams Walsh does a nifty job of highlighting just one of its problems in a good get this morning that discovers that AIG’s London-based Financial Products unit wasn’t the only part of that sprawling black box of a company selling dangerous credit default swaps. A Delaware-based unit was, too:

Though the Delaware division had a much smaller portfolio of those swaps than the London unit, and its portfolio did not pose a similar risk to the world financial system, the very presence of the swaps in a regulated insurance company points to a weakness in insurance oversight.

Quite right. One problem is whether state insurance regulators are even equipped to oversee such complex and dangerous financial products as CDS. Answer: no. Second, state regulators, as the Times points out, can’t even agree on whether CDS are insurance at all and whether they should be regulated as such, meaning that issuers be required to set aside reserves to pay potential claims.

Delaware says no:

“I don’t think an insurance commissioner should tread on the toes of the banking industry,” said Karen Weldin Stewart, the commissioner in Delaware. “This started out as a bank product.”

A former insurance New York top regulator (appointed by Eliot Spitzer) says yes:

Eric R. Dinallo, New York State’s insurance superintendent when A.I.G. imploded, said he believed credit-default swaps were insurance and should be regulated as such.

Interestingly, a predecessor as New York insurance superintendent, ex-Goldman vice president Neil Levin, ruled against regulating CDS as insurance in 2000, according to Matt Taibbi’s “Vampire Squid” tome (on which I opined here.) To say that state regulation is not exactly uniform is to put mildly. (*SEE UPDATE BELOW.)

The issues of state-based insurance regulation go much deeper than even this serious blindspot. Just ask Hurricane Katrina victims and even AIG’s run-of-the-mill policyholders, as I did for the Washington Post and later as a Katrina Media Fellow for George Soros’s Open Society Institute. For many policyholders, insurance regulation might as well not exist at all.

I know business-news outlets are already stretched, but state-based insurance regulation needs a much closer look from the press.

For background, here’s a review of Bloomberg’s superb 2007 expose, “The Insurance Hoax,” and a look at dispute between Bloomberg and the insurance industry.

The Times story offers an excellent peek into yet another scary regulatory void. More, please.

(*UPDATE: I realize after posting that Neil Levin was the Port Authority executive director who died in the 9/11 World Trade Center attacks, a connection I hadn’t made before. A New York Times obituary is here. I took out a sentence saying that the differing decisions on CDS show “the difference in perspectives between a regulator who came from Goldman Sachs and one who came out of Eliot Spitzer’s office” and a bit of snark: “Hmm, who was right there?” Given the circumstance, the tone is not respectful or appropriate. I of course regret not making the connection beforehand.)

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Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.