The Daily Telegraph reports,

We now know that it was French finance minister Christine Lagarde who begged Mr Paulson to save the US insurer AIG last week. AIG had written $300 billion in credit protection for European banks, admitting that it was for “regulatory capital relief rather than risk mitigation”. In other words, it was underpinning a disguised extension of credit leverage. Its collapse would have set off a lending crunch across Europe as banking capital sank below water level.

It turns out that European regulators have allowed even greater use of “off-books” chicanery than the Americans. Mr Paulson may have saved Europe.

Tyler Cowen has been telling us to watch for international shoes to drop.

I think that the U.S. has two advantages over Europe. One is that our banking system is more fragmented. We can tolerate a lot bank failures, including some big ones. The other is that I think we have better regulatory policies and better quality staff at the relevant agencies. That’s not to say that we should feel smug or sanguine.

The phrase “for regulatory capital relief rather than for risk mitigation” is a polite way of describing what I call the cesspool of rent-seeking and regulatory arbitrage. I wonder if Freddie Mac, Fannie Mae, and the big investment banks made campaign contributions in Europe, too.