I cannot comment on whether or not foreign regulators were superior, but the critical thing about what AIG did was allow foreign banks to look better/less riskier than they actually were, in essence fooling the regulators:
"The regulatory arbitrage was even seamier. A huge part of the company's credit-default swap business was devised, quite simply, to allow banks to make their balance sheets look safer than they really were. Under a misguided set of international rules that took hold toward the end of the 1990s, banks were allowed use their own internal risk measurements to set their capital requirements. The less risky the assets, obviously, the lower the regulatory capital requirement.
"How did banks get their risk measures low? It certainly wasn't by owning less risky assets. Instead, they simply bought A.I.G.'s credit-default swaps. The swaps meant that the risk of loss was transferred to A.I.G., and the collateral triggers made the bank portfolios look absolutely risk-free. Which meant minimal capital requirements, which the banks all wanted so they could increase their leverage and buy yet more 'risk-free' assets. This practice became especially rampant in Europe. That lack of capital is one of the reasons the European banks have been in such trouble since the crisis began."
"The regulatory arbitrage was even seamier. A huge part of the company's credit-default swap business was devised, quite simply, to allow banks to make their balance sheets look safer than they really were. Under a misguided set of international rules that took hold toward the end of the 1990s, banks were allowed use their own internal risk measurements to set their capital requirements. The less risky the assets, obviously, the lower the regulatory capital requirement.
"How did banks get their risk measures low? It certainly wasn't by owning less risky assets. Instead, they simply bought A.I.G.'s credit-default swaps. The swaps meant that the risk of loss was transferred to A.I.G., and the collateral triggers made the bank portfolios look absolutely risk-free. Which meant minimal capital requirements, which the banks all wanted so they could increase their leverage and buy yet more 'risk-free' assets. This practice became especially rampant in Europe. That lack of capital is one of the reasons the European banks have been in such trouble since the crisis began."
More details here: http://www.nytimes.com/2009/02/28/business/28nocera.html?ref...