This guy doesn't even understand his own field. Basically, the whole article can be summed up "AIG is really naughty." When he actually attempts to describe why they are really naughty, the article falls apart (like a house of cards??) After doing some cutting edge research, he posits:
The word “arbitrage” usually means taking advantage of a price differential between two securities — a bond and stock of the same company, for instance — that are related in some way.
This is about the worst explanation of arbitrage (aside from hedge fund marketing pieces) I have read. Notice he is attempting to describe convertible arbitrage. But that only works if the bond converts into stock, not just any stock and bond of a random company. What's the point of explaining the concept with an example, if you clearly don't even understand the definition?
This bizarre definition is supposed to serve as a framework for the naughty things that AIG did:
When you start asking around about how A.I.G. made money during the housing bubble, you hear the same two phrases again and again: “regulatory arbitrage” and “ratings arbitrage.”
later he describes the details of this regulatory "arbitrage":
And because A.I.G. had that AAA rating, when it sprinkled its holy water over those mortgage-backed securities, suddenly they had AAA ratings too.
Despite all the buzzwords and weasel-words, this is nothing new in finance. A large and storied company is guaranteeing a bond and charging a fee. The problem is that investors bought it and more importantly, the ratings agencies, who are essentially government enforced monopolies, never batted an eye.