Is AIG’s Reinsurance Side a House of Cards, Too?
The other day, Atrios pointed to this passage, explaining that AIG was reinsuring some of its own insurance businesses.
Thomas Gober, a former Mississippi state insurance examiner who has tracked fraud in the industry for 23 years and served previously as a consultant to the FBI and the Department of Justice, says he believes AIG’s supposedly solvent insurance business may be at least as troubled as its reckless financial-products unit. Far from being "healthy," as state insurance regulators, ratings agencies and other experts have repeatedly described the insurance side, Gober calls it "a house of cards." Citing numerous documents he has obtained from state insurance regulators and obscure data buried in AIG’s own 300-page annual reports, Gober argues that AIG’s 71 interlocking domestic U.S. insurance subsidiaries are in hock to each other to an astonishing degree.
Most of this as-yet-undiscovered problem, Gober says, lies in the area of reinsurance, whereby one insurance company insures the liabilities of another so that the latter doesn’t have to carry all the risk on its books. Most major insurance companies use outside firms to reinsure, but the vast majority of AIG’s reinsurance contracts are negotiated internally among its affiliates, Gober says, and these internal balance sheets don’t add up. The annual report of one major AIG subsidiary, American Home Assurance, shows that it owes $25 billion to another AIG affiliate, National Union Fire, Gober maintains. But American has only $22 billion of total invested assets on its balance sheet, he says, and it has issued another $22 billion in guarantees to the other companies. "The American Home assets and liquidity raise serious questions about their ability to make good on their promise to National Union Fire," says Gober, who has a consulting business devoted to protecting policyholders. Gober says there are numerous other examples of "cooked books" between AIG subsidiaries. Based on the state insurance regulators’ own reports detailing unanswered questions, the tally in losses could be hundreds of billions of dollars more than AIG is now acknowledging. [my emphasis]
Masaccio pointed me to these two passages in AIG’s 10K, which sound like they may describe what Gober is talking about:
Various AIG profit centers, including DBG, AIU, AIG Reinsurance Advisors, Inc. and AIG Risk Finance, as well as certain Foreign Life subsidiaries, use AIRCO as a reinsurer for certain of their businesses, and AIRCO also receives premiums from offshore captives of AIG clients. In accordance with permitted accounting practices in Bermuda, AIRCO discounts reserves attributable to certain classes of business assumed from other AIG subsidiaries. (10)
AIRCO acts primarily as an internal reinsurance company for AIG’s insurance operations. This facilitates insurance risk management (retention, volatility, concentrations) and capital planning locally (branch and subsidiary). It also allows AIG to pool its insurance risks and purchase reinsurance more efficiently at a consolidated level, manage global counterparty risk and relationships and manage global life catastrophe risks. [my emphasis]
So AIG admits that its got a company, AIRCO, that is reinsuring its own insurance, and AIRCO is using a Bermuda accounting trick to limit the reserves it holds for this reinsurance.
In the Newsweek article above, AIG points to state insurance regulators giving AIG a clean bill of health, but as one of them admits, state regulators only regulate state-based contracts–not shit created to exploit Bermuda loopholes.
In response, Eric Dinallo, New York state’s superintendent of insurance, said he thought "the operating companies of AIG, particularly the property companies, are in excellent condition." But Dinallo admitted he had examined only 25 of the domestic AIG companies and added: "There are problems with state insurance regulation. I’ve been a proponent of us revisiting it."
So it sure sounds like AIG may be hiding its own special version of reinsurance shitpile in Bermuda.
Which is why I was concerned about this paragraph in a letter Edward Liddy sent to Elijah Cummings in December explaining why AIG is offering bonuses to its "healthy" insurance side (these are the bonuses to some 4500 people above and beyond the bonuses to AIGFP people).
Recently, some reinsurers have begun requesting provisions which would allow them to cancel reinsurance contracts upon the departure of critical AIG employees. Having appropriate reinsurance coverage in place is essential to the risk control for AIG’s operations. Without appropriate reinsurance cover, the magnitude of losses on catastrophic events would seriously injure the financial strength of the company. In addition, AIG plays a vital role in providing risk coverage to many institutions around the world. AIG’s risk appetite would be severely impacted without appropriate reinsurance.
Of course, what Liddy didn’t tell Cummings is that some of these reinsurance companies are shell games constructed within AIG.
I’m developing an increasingly gloomy belief that every single one of these bonuses–the AIGFP ones we’re all talking about, but also the 4500 bonuses to people in the so-called "healthy" insurance side–are tied to an amazing financial fraud. And we, the taxpayers, are bribing these people to stick around their fraud long enough to try to undo it.
I’m betting the money is already out of the country and the executives will shortly follow.
Further, all these bonus’s may just be a bright, shiny object.
Boxturtle (We should be taking passports and issuing ankle bracelets to AIG executives)
My point is that they may be a bright shiny object of a different kind–they serve as a sign saying “Look here! Amazing fraud taking place here!”
And they may be a shiny object, but they’re also the key to forcing the government to come clean with us about the underlying stuff.
I’m not a financial guru. In fact, how you manage to take what looks to me like nonsense and translate it to “This is really what they’re doing” amazes me.
Spitzer may be our best bet to sort this out. I’m watching for congress to try to do something in the fine print that would force SPitzer to back off AIG. Congress is between a rock and a hard place, angry voters on one side and major contributors on the other. Spitzer could care less about either and that likely frightens key politicians.
I have a friend who works in Data Processing for AIG. He’s been told to work from home, not to display the company logo and be very alert to his surroundings. There are normal folk who work for AIG and they’re getting scared.
AIG is starting to worry about mob violence more than legal consequences. They’ve covered their legal a$$e$ pretty thoroughly and clearly they think think congress will cover whatever they’ve missed. The image they fear is Spitzer on the steps of AIG with an angry mob behind him. And the shadow of the guillotine on their executives windows.
Boxturtle (Rhubarb, hot water bottle, hippopotamus)
Though one of the things AIG is doing with their warnings to employees is instilling fear in them to make sure they don’t speak to the press. NO offense to your friend, but he’s being treated to DickCheney fear-mongering to keep him silent.
He received a very stern memo long ago (likely, everybody did) reminding to refer all press inquires to public relations.
You may be correct about AIGs creating the paranoia, but his impression is that the AIG executives are being driven by the scared lower ranks on this.
I worked for lexis during the people finder issue. Even after we set up a way for people to remove themselves from our databases (though not from the public record databases where we got the info), we still received threats. I had nothing to do with the project, but I was quite concerned for my safety during that time. Many were, but to my knowledge absolutely nothing ever came of it.
Mob violence is scary. Even if it never happens.
Boxturtle (BUUUUURRRRNNNN the
witchaccountant!)I am not sure I hold such high esteem for Spitzer helping. I was surprised to learn he was a close friend and oldest friend of Jim Cramer.
I’d rather it was Fitz, but right now Spitzer is the best hope we’ve got.
Boxturtle (You may scream now)
When Cramer had his hedge fund Spitzer was a long term client.
They were best friends from college too.
God help us.
Oy.
I’m not sure the world has a large enough supply of pain-relievers for the headache that this will be.
They bet all our money…
When Enron happened, we should have known there would be a next time. The punishment is not severe enough. The regulations mean nothing.
Nice that 9-11 redeployed so many FBI agents from the financial fraud unit to Homeland Security Counter Terrorism Unit.
Interesting timeline element. Or not. Just “cowinkidiny”.
There may be more bright shiny objects than we are realizing.
If this is true, eg: AIG’s real insurance biz is as vapid as their unregulated insurance derivative “book of business”… aka the Enron model, we’re in worse shape than I thought. And I think I’ve had maybe most doom & gloom econ expectations of anyone I know.
Hard to know where to start thinking about this, unfortunately mostly rear view mirror recriminations…. again. Most prominent for me: I pulled every dime of my life’s investment from US stock markets after Enron. I figured if those guys could get away w/100% fallacious accounting, there were others.
The CDS meltdown confirmed that fear. If AIG pulled this off in regulated markets as you suggest, even worse. And if both those premises true, can’t help but wonder which of our other (re)insurance giants are/have done the same thing.
I’ve been waiting for a while to see Insurance Co’s “assets” reflect +/- 90% worthless mortgage bond paper, as that stuff is showing up more and more in places we were told it didn’t exist. A lot of it is indirect: eg. packaged into other “securities” not identifying the CDS stuff directly.
…
Don’t want to hijack your thread, but one other thing needs to be said IMO: we (US) have undertaken spending massive amounts of $$ borrowed on future earnings (taxes) to finance TARP/”recovery” package/purchase “toxic assets”. We know most of what Paulsen did was executed w/out anything approaching a thorough understanding (accurate accounting) of what was what. Those who cried for such accounting before funding these guys were shot down by both sides, dems/repubs.
Now, just like Enron, coming home to roost. And just like Enron, US public doesn’t get an accurate picture until every last dime is sucked out of the system. Every last fucking dime.
I thought it was time months ago, but (again if this true) it’s certainly time now to declare state of economic emergency, explain to US public exactly what repubs “free market” principles have wrought, and start funding essential services and real recovery programs by other means than current financial system… ’cause it’s a sinkhole.
More on the Enron resemblance from TPMMuckraker (based on a WaPo article from Dec. 2008):
Using ’special purpose entities’ for a shell game was a favored trick at Enron too.
Some of the money is offshore, and it needs to be retrieved.
Pray for Carl Levin’s continued good health, because he appears to be in the lead on this key topic.
The rest of it was probably illusory.
I did some consulting work a few years back at another insurance company — and it, too, had an arm in Bermuda. Maybe most all of them do. Regardless, I am of the opinion that AIG is not too big to allow to fail. Perhaps we just need to see how the chips fall — and those who were gambling with strange investments need to take their losses and go home. I might add that another friend who does underwriting in the insurance business has commented that if AIG goes under, much of its standard insurance risk will be assigned to other companies.
Investors have to be prepared to lose money, just like all the rest of us.
If this is as presented, the losses much more than “investors”. Insurance portfolios among the bedrock of safe investment in US (and most western) system. This would mean that asset base, built up over xxx years of paid premiums, appears gone.
That’s not investor’s money, that’s Joe Q.’s money… just another pile of America’s savings stolen behind facade of phony books.
EW, do you know much about bank holidays? I don’t, but my limited understanding of the process, was something along the lines of FDR closed the banks to prevent runs while officials went in to look at the books to see what they could do to straighten things out.
Is it possible for Obama to summarily freeze AIG’s operations (hence freezing any claims that could be made by counterparties), send in regulators to look over all of their books and then figure out how to separate the bad from the good, tell the gamblers involved in the bad to f*ck off, while doing what they can to legit purchasers of real insurance policies switched over to other companies somehow?
Throwing billions and trillions of dollars at a problem we don’t fundamentally understand is not only a spectacularly foolish thing to do, it could bankrupt the country to the point that when we finally do understand the full extent of the problem, we will be too broke to fix it.
I still cannot find a full history on Cassano. I think knowing his complete background would illuminate what is going down. Who are the people high up who “cooked” the books? Because this was not greed run out of control, this is systemic and organized.
Who are they associated with globally?
He really got his start back in the 80s, working for … Michael Milken at Drexel, Burnham Lambert.
Any further questions?
Go read this for a start on his background.
Like the article says: “Manhattan make, Brooklyn take.”
I know that much. And I do have further questions. I want to know more about his family and his history. All I can find out are the few facts in that article and that he worked for Milken.
There has to be more.
I told you it was a start.
I know. I am so sorry. I did not mean to sound snippy. Thanks for the links. I think it is no accident there is little to no info on him.
fabulous fleshing out of this in the Matt Taibbi piece linked over at Oxdown by Janushka
link
note to klynn – saw later yesterday you had hit that Deep Capture piece – what did you think ? difficult for me in parts as I am all but financially illiterate – would love your feedback. thx
gotta go ‘dogs – Have a FDL day and keep your progressive hand strong
Hearing going on.
These folks are addressing accountability. Talking numbers
http://www.cspan.org/Watch/C-SPAN_wm.aspx
So derivative traders sold derivatives (Ponzi scheme) to other Companies insured by AIG. AIG traded derivatives (Ponzi scheme) and insured itself, bought into TARP and sold the US devalued derivatives, paid the insurance companies (AIG) from TARP, and is going back to the trough for more. The ultimate Ponzi scheme or a circle jerk?
I sure hope some of the big brains here at FDL come to this live hearing that I believe was just announced recently. Talkin accountability fines arrest in the financial sector,
FDIC investigations etc
http://www.cspan.org/Watch/C-SPAN_wm.aspx
Four quick notes:
1. jdmackay @6 is quite right.
2. I told you about a week ago, EW, that you ought to pull your copy of Dickens’ “Martin Chuzzlewit” and re-read it, b/c we are seeing the insurance scandals of the 1830s all over again.
3. I’m thinking of a reported case or two I’ve read in the past in which appellate courts have noted the very handshake-deal, trust-based syatem which operates and rules in the reinsurance business. It’s very much an old-boys club. The cases I’m thinking about (which I cannot find at this instant b/c I’m in the middle of a project) also pointed out the extreme devastation that can (and does) take place when a dishonest person gets into the loop. One dealt with a guy who pocketed the premiums and the other dealt with an insolvent reinsurer.
We need to recall that Hank Greenberg only narrowly escaped indictment over a scandal at General Re and an accompanying AIG stock inflation scheme, as noted in this report from February 25, 2008:
The four AIG defendants who were convicted in that case got “relatively” light sentences. They got serious prison time but made out regardless, considering they had exposures of well over 100 years.
Just Googling “Greenberg AIG prison” also yields this article: one of the senior reinsurance executives from AIG (who, presumably, got his bonus) has jumped to rejoin Greenberg at Greenberg’s new company. Interesting, how he’s operating out of Bermuda, too:
Interesting – he just misses out on indictment and prison time and goes back in for more.
4. Should I be happy or sad I’ve never had enough to have to worry about where my money is invested?
Martin Chuzzlewit is available on line at Gutenberg.
Wasn’t someone named Starr (Ken’s uncle perhaps) the original founder of AIG back in the early 1900s?
Seems like Greenberg still feels tight with AIG.
Geithner’s top aide
“One of Obama’s opponents at that time was Mark Patterson, a lobbyist then for Goldman Sachs, the investment banking firm, which opposed the Frank-Obama initiative. Yet Patterson is now chief of staff to Treasury Secretary Timothy Geithner . . . “
http://www.motherjones.com/pol…..pay-reform
linked it in last thread – the waiver process suggests POTUS was well aware of who he was and what he did
While we are justifiably concerned with how we got into the mess we’re in and who
if anyonehas related criminal responsibility, we also have to how best to move forward. As Paul Krugman observed this morning in a blog post he made upon his return from “Yurp”, the administration has lost control of the situation. Given the damage to the credibility of President Obama’s econ team that has occurred, it’s not too soon to begin thinking about candidates to replace some of the key players, and especially Geithner and Summers. Paul Volcker’s name has been mentioned, but he’s going on 82 and also the few years of his career that weren’t spent in the government were in banking. Perhaps it would be a good idea to have someone in the Treasury Secretary position with experience in the “real economy” as well as in the financial sector and government.Former Secretary Paul O’Neill comes to mind. He has had a record of extraordinary competence in everything he’s done, not withstanding being canned by the Dubya administration. In fact the way that played out is in his favor. In his refusal to be silenced and drink the group-think kool aid he didn’t hesitate to publicly call bullshit on two men who’d been personal friends for decades, namely Cheney and Rumsfeld. As for the chair position in the inner circle of economists, how about someone like Krugman or DeLong? Any other ideas?
This is nice speculation, but not helpful. The gist of “not helpful” is twofold. First, firing now would be acting like George Steinbrenner firing Yogi a couple weeks into the (1985) season after the team got off to a slow start. Second and more importantly, the greed-head period on Wall Street and elsewhere has been so long that everyone who is anyone in that field (i.e., who would be qualified for the job) is infected with the same illusions and misconceptions that Geithner and Paulson and Bernanke and all the rest are.
The fact of the matter is the crap has not yet finished coming to the surface and will not for at least a year. People demanding an instant fix to this problem are being naive – it took almost 30 years to get made – and are making the task insuperably difficult by overstating expectations. (Said another way, they’re helping Rushbo.) And, people thinking things will go back to the way they were are just naive – they won’t. Things are going to be tough for a while.
Geithner needs to remember that Roosevelt’s first Treasury Secretary did not last a year; Morgenthau was not appointed until 1934 and then stayed through the entire Depression and War.
Unfortunately for us, Morgenthau was both a highly competent banker and someone in whom Roosevelt had a lot of confidence – confidence built over the years they had been neighbors on their respective estates outside NYC, before the Presidency. I do not see anyone in Obama’s circle who fills that role.
I agree about the cultural infection. I think that is the thing that gives rise to the anger. People want to know why banksters think the work they do is worth so much now that they have destroyed the system.
Former Secretary of the Treasury Paul O’Neil was just a bit pissed after he was sacked by Cheney/Bush Co. Ron Susskind’s book “The Price of Loyalty” sure shed the light.
What’s wrong with Stigletz or Krugman?
BO guaranteed this by placing his policies in dead center Wall Street when every indication… everything, was screaming it was broke beyond repair and, in fact, the sink hole it’s turning out to be.
Indications BO’s following the mess down the sink hole remain strong. From Today’s NYT, pg: 17 (I’m quoting from print edition):
Where to start w/that one… geezus.
A couple more quips from today’s NYT print. From front pg. continued on pg. 19….
I find that incredible. Most of those institutions destoyed themselves, either creating vapid “financial products” or buying them based on herd mentality w/managers evading due dilligence in determining those products were the junk they turned out to be.
Beyond that, “drive people away” Kramer says… to where? BofA? Citi? State Pension systems? Robert Allen seminars?
And lastly, I don’t know who Kramer is. But the notion he worked for BO’s election and now states these POV’s only further reinforces my notion, based on everything BO has done to date, that he went to bed w/these $$ guys and is lieing about the tryst.
That financial firm’s execs are in tears over losing bonuses of $m’s on top of 6(7?) figure salaries… forget the bonuses, obviously large portions of the salaries were paid out of fictitious paper profits… I dun’o. In criticizing BO’s actions from beginning, one of things I’ve said was, beyond the cascading financial problems, he faced a huge cultural problem.
That being, entire lack of consciousness about the larger reality of economy we live in and the very false assumptions of value so many have WRT their compensation w/in this US economy. Motivating a populace so entirely cross wired is hard enough in good times. It would have been tough enough after election, then tougher after inaugeration, but now having cast his lot w/the crooked $$ changers, it’s going to be monumental now.
Another FP NYT’s article on backlash against Dodd. Although this issue maybe unfair to him, what is most certainly obvious is he, Frank, and entire congress have utterly failed to understand vast reach of this mess, much less take real action to prevent further theft. Not to mention meaningful surgery removing financial institutional cancers and solid restructuring…
What has been apparent, even with somewhere north of $45t of US savings gone, is WS/Financial lobbyists are still significantly influencing fed gov action on this thing despite public as a whole not being informed of realities to date. In other words, their getting congress to finance their ongoing operations borrowing from future tax revenue.
Somehow, someway, we need fed officials barricaded from these guys and force fed realities of current situation… eg. an accurate accounting. This needs to include $$ going to fuel “recovery”, because we’ve lost so much of US economy offshore during the Bush crime spree that funneling more $$ into what currently exists is more of the same.
…
In light of AIG employee’s tears, I’d suggest considering larger realities of those affected by this who have no voice. From an article by James K. Galbraith on Washington Monthly yesterday:
Galbraith goes on to explain that seniors/retired have been hit worst, but have no voice. Those living on dividends have lost that income. Those dependent on retirement funding are about to, in varying degrees. And on top of that, the value of their homes has plumetted and, in many cases, left them w/property they cannot sell.
My parents (87/88 yrs old) are in this boat, I know many others in worse shape.
Yet we still have a large body of pundits decrying morality of “capitalism”, with arms in pockets of lawmakers, pulling strings of US gov to keep the flow into their corrupt pockets going. And BO says what they did was “perfectly legal”.
Go read Galbraith’s article. He summarizes almost everything I’ve said here in bits and pieces since last Sept., and he’s got it exactly right.
Our problems are systemic. The system has not been fixed, nor has attempt to do so even begun. We are in a world of hurt, and most people don’t have a clue yet.
Actually, EW, it was two weeks ago I told you “It’s 1837 all over again”. For the readership:
TPM called for comment, here, asking why it is that derivatives (CDOs, CDSs) avoid the automatic stay in bankruptcy such that the counterparty can go in and grab the issuing party’s assets, courtesy of Joe Biden’s Bankruptcy Amendments Act of 2005.
Think: “Martin Chuzzlewit” and Insurance Scandals of the 1830s.
I think a reasoned, if not rational, explanation for allowing derivatives and the counterparties to avoid the automatic stay of bankruptcy proceedings runs something like this: it goes back to their being a form of insurance (albeit a wholly-unregulated one).
The way things go, when bankruptcy arrives, is something like this.
A debtor goes into bankruptcy. Some of the claims against the debtor are insured (like that car accident he had a while back) and some are not (like a contractual debt) and some are “secured” debts (by collateral, like that home mortgage) and some are not (that contract debt again – no collateral). The automatic stay arrives upon filing the bankruptcy petition and that stops everything in its tracks: the car accident lawsuit, the mortgage foreclosure, and the contract debt collection suit.
Here’s what would happen next:
1. the mortgagee foreclosing on the mortgage would make a motion to lift the stay as to his foreclosure because, after all, he’s got collateral out there and he can complete the foreclosure and resell it. The parties go back and forth and ultimately the mortgagee gets his order and can continue the foreclosure.
2. The guy suing over the car accident makes a motion to have the stay lifted as to the car accident suit because the debtor was responsible enough to obey the law and have insurance. If the injured guy suing over the car accident has injuries which are estimated to be worth less than the face value of the policy (say, a broken arm – worth maybe $20k – when the policy covered up to a $500k), then the debtor had no personal exposure to that suit pre-bankruptcy and the relief from the stay will be granted (usually by the debtor’s consent). The insurance would cover the debt for the injury and have coverage left over. No problem – in effect, the potential liability for that injury would have been secured by the insurance policy, just like the mortgage was secured by the real property.
Suppose the debtor’s car insurance policy covered only $15k and the car accident plaintiff had that broken arm worth $20k. Different situation. The plaintiff would get relief from the stay, But Only Up To The Amount Covered By The Insurance. The remaining $5k owed for that broken arm would have been the personal responsiblity of the debtor prior to filing bankruptcy – he didn’t have enough coverage to pay for the injury he inflicted. Prior to the bankruptcy, the injured plaintiff would have been able to go after the debtor’s personal assets to make up the difference between what his injury was worth and what the insurance coverage. Because of the bankruptcy, the amount not covered by insurance would become another claim (unsecured) and get lumped into the other debts, like that contract debt.
In either situation, the creditor (injured plaintiff) has to show the Court that the insurance policy is “good” – that there is coverage and that the insurer is able to pay. If the policy is no good – then no lifting of the stay.
3. The unsecured contract creditor (and the plaintiff owed money for his broken arm where the debtor was underinsured) would not get relief from the stay. They would have to go through the whole bankruptcy and take their chances of getting anything or nothing at the end.
This oversimplifies, but also illustrates the principles involved.
What the 2005 Bankruptcy Bill appears to have done is to continue the charade of the derivatives being a form of insurance for some purposes, but not a form of insurance for others, all to avoid the regulation and reserve requirements involved in actually being real insurance.
It treats the derivatives as being insurance in allowing the counterparties to go right to the debtor and debtor’s assets despite the debtor’s filing for bankruptcy. In other words, the counterparties find themselves in the position of the plaintiff injured in that car accident, but (apparently) with the added advantage of not even having to first get an order from the Bankruptcy Court (by consent or not) – something the injured car accident plaintiff cannot do. The derivative counterparties just get to grab the debtor’s assets.
When that’s a car accident insurance policy, it’s not a problem because that money is there. The insurance company has things called reserves, rules concerning underwriting, and all the boring stuff that goes with being an insurance company but that also insures that the money will actually be there when it’s needed.
When it’s a derivative, on the other hand, the insurance might be the assets of the party owing money ( a box of contracts and some office furniture, I suppose) but there do not have to be any reserves or other underwriting criteria met, nor do any state or federal regulations involving insurance have to be met. This is where the derivative as being “not insurance” comes to the fore: the debtor never was required to set any reserves aside other than their promise to pay, something about as ephemeral as the breeze. Having to set aside reserves would have cut into the profit margins, perhaps so much as to make the derivative deal not worth the doing. (BTW, not setting aside money as reserves might help the company with a tax issue. There used to be a provision – I dunno if it’s still there – which taxed business entities’ that “retained profits” at a punitive rate. Often, the IRS considered reserves retained for self-insurance as “retained profits” and then tried to tax them. This was an old law and I’m not sure if it’s still in effect.) Of course, the derivatives issuer might lay off that liability through doing another deal – a form of reinsurance as it were, but one which suffers from the same failings and flaws as the initial deal.
For parties looking to make profit, saying you have insurance and then not having it has always been a good way of making what looks like a profit. It’s no different, really, than the contractor who, when asked for proof of insurance, says “I self-insure”. As an attorney, that’s a huge red flag because what it usually means in reality is that the contractor is saying “I’m undercapitalized and/or irresponsible enough to not be able to afford insurance, or greedy enough to want to keep those premiums for myself and, when you get hurt, tell you to go to hell because there’s no insurance.” When you press the guy saying “I self-insure” to “show me the money” (there are provisions in the law concerning where, how and how much he has to deposit to be truly considered as self-insuring*), you usually get some flavor of profanity.
In the car accident context I gave you before, the law requires that your policy have coverage for uninsured and underinsured drivers – if the other guy does not have (enough) insurance, there will be some for you from your own policy. But, because derivatives are not insurance, there is no requirement to protect the counterparty.
So, the derivatives boys got the law structured to facilitate selling them, and still avoid all the requirements of the law of insurance.
What we have, then, is a replay of the insurance scandals of the 1830s. Dickens did a great job on them in “Martin Chuzzlewit”. You should check it out.
–
To elaborate on Martin Chuzzlewit: a big part of the story was the rise of one of the characters from being a street hustler and thief to being the respected head an insurance company. His thieving and defrauding habits did not leave him but, having moved into the business of insurance, he now got to wear better clothes, live in a fancy house, ride in a carriage, have people call him “Sir” or “Guv’nor”, and have people come running to him money in hand, begging him to take it so as to write insurance.
Dickens (also formerly a court stenographer) wrote the book around the time of the great insurance scandals of the 1830s. These took place when suddenly many schemers like that character discovered they could write and sell policies of insurance that had absolutely no basis in reality (especially as to their reserves), take the premiums, pocket them and skip across the state line to do it again. In addition to being a large factor in the Panic of 1837 these were the impetus for some of the first (state-based) regulation of insurance, turning it from the Wild West into the boring field it was until the likes of today’s scammers came along. These scandals (and similar banking scandals) are also a reason banks and insurance companies love massive, solid, temple-like architecture. Buildings like that say “Solid” and “The Money Really is There”.
Thanks for your excellent illustration of the special status given the derivatives in the 2005 BAA (thanks Joe Biden!). I am curious though, if you have counterparties that can lay claim to more assets than exist, how are their claims processed? Does the bankruptcy law provide for an orderly transition, or is it a chaotic mad scramble among the counterparties to get there first before someone else beats them to the limited assets? If there is no bankruptcy court managing this process, how does this all get done?
Your comment suggests that the idea of a bank holiday approach to freezing AIG operations (and counterparty claims) is not an option. Is there any wiggle room in the law if the deals between AIG and their counterparties appear to be fraudulent?
Exactly.
Please put on Oxdown as a diary.
I think we need to rip Phil Gramm’s history apart. Every contributor, every associate, friend and get to the bottom of his motivation to repeal the Glass-Steagall Act.
Let’s find the “pattern by association”.
one of our diaries links to a rolling stone article that claims this entire process is a deliberate effort to decompose the monetary system specifically
So, what do AIG, Blackstone Group, Kroll Assoc., Enron all have in common?
It’s a lot do chew on, you have to wade through some tinfoil, but very interesting web of players, to say the least.
Seeing as AIG is considered both the biggest insurer and the insurer of last resort, every bloody Fortune 500 company is involved in some way.
Do you want to be more specific?
Just that there are some companies that have a lot of former CIA guys (Kroll) and criminal operations, Enron, Chairman of the CFR, Kissinger Associates…
Basically a nexis of super elites whose main concern is the exercise of power and AIG always is in the mix one way or another. Just interesting to note.
I wonder how the Carlyle Group missed this opportunity?
I wish I had your memory, ew, but I recall seeing something within the last 2-3 weeks -possibly a diary at kos – highlighting comments in a letter that I think was from Liddy to Treasury.
The letter included commentary about the “profitable” insurance side, and was warning that a run on people cashing in their life insurance, etc. was possible. The writer of the diary was basically asking “is the regular insurance business fucked too?”
I’ve tried searching around a bit, but I just can’t seem to find the article/diary/whatever it was.
Sorry, not very helpful, but I remember having a “holy shit” kind of moment.
On another note, apparently Obama reads emptywheel, because he referred to AIG as having explosives strapped on in his town hall the other day!
Re: AIG, it’s worth looking at what they are planning with restructuring/spinoffs.
http://www.advisor.ca/advisors…..40808_1884
Here you go, WW.
http://firedoglake.com/2009/03…..n-bonuses/
AIRCO. As in to disappear stuff into thin air? Yep.
At the live financial fiasco hearing Rep Al Green just said “public not privy” to financial fraud prosecutions that have taken place
Damn, been too busy to keep up with you. And yes, spot on. For the last dozen years the number of swaps used to improve bottom line performance increased, but the rest of the underlying insurance didn’t change.
Were they using the health and life insurance businesses, which have performance that is actuarially predictable, to leverage in swaps?
Have a friend with considerable background in reinsurance, will ask an opinion on this.
But I still think there’s an audit problem here, whether regulatory, internal or external; auditors should be noting that their statements are limited by certain understandings, and reading those statements should hint at whether they were seeing this intra-business churn.
Even if they weren’t using the actual funds they might have implied those were reserves and they were certainly using the AAA rating AIG earned with those funds. It was a fraud one way or another.
BTW, you know there may have been an issue with the timing of the bonuses, in sync with the annual insurance statements filed with regulatory and ratings entities. The statuatory reports are typically closed at the end of February each year, if memory serves.
I came to hate those fricking yellow books…
Now that’s what I have been talking about!! I would be willing to bet my house you are right and I would bet that many other financiers are in the same exact boat!!
Accounting fraud. All the way down to the little guy. There has to be some reason why they are lying on their books, in my statements, why they are covering up the truth.
I just hope someone knows what to do about it when the truth comes out in the end. Do you think Obama knows and is trying to buy time to figure out a solution or do you think he’s naive and doesn’t know? And keeps playing into the criminals hands blindly?
I think I answered my own question…poker player that he is.
Thanks ew.
digg is open.
A lot of these shenanigans may be legal. The good news is that if a Patrick Fitzgerald were given free rein and a mdoest budget, he could follow the abundance of AIG smoke to a probably illegal fire on the beach.
Investigating targets merely because they oppose your interests corrupts a legitimate prosecutorial function. But what little has been exposed about AIG’s business to date suggests such investigations are both legitimate, not vengeance or spite, and long past due.
As with Bush’s serial crimes, the problem won’t be that an overwrought investigator finds too little, but that she finds too much and we won’t know what to do with it. My answer to that is the one CEO’s have used for generations in response to the troubles caused by massive lay-offs: “You can’t make an omelette without breaking a few eggs.”
Yes, they are probably entirely legal, since the swaps were unregulated.
The fraud isn’t that they did the swaps; if they didn’t fully disclose the risks to auditors and to regulators, there’s a chance this is actionable.
Clearly Congress needs to put some speed and muscle behind regulations on this crap, at least as much speed/muscle as they put on the bill to tax the bonuses we paid.
The starting point is mortgage CDS/O’s. Risks most certainly were not fully disclosed, and plenty of leaked email shows Lehman was filled w/folks who knew this. Beyond that, the stated assets underlying ‘em were not assets at all, rather other WS house’s own “securities” cut from same cookie cutter.
I’d say that’s actionable.
The derivative trading of this stuff is a whole ‘nuther thing. At the very least, get forensic accountants digging in to find what’s there. Hard to believe it’s not riddled w/fraud. Even if not, to have these managers before public eye having to explain their monstrosities we’re beyond their comprehension (remeber testimony of S&P/Moody’s ratings arms a few months ago?)… eg. that they had no idea what the fuck they were doing… AFAIC that alone is worth plenty in molding public opinion to current realities and giving impetus to meaningful corrective measures.
I was wondering why if AIGFP was the troubled unit why so much bailout money was going to cover losses on the insurance side of AIG.
I know very little about the insurance industry but reinsurance looks to me like the same kind of financialization and dilution of risk we saw in the creation and use of CDOs and CDSs. The purpose of all these vehicles was to minimize risk by spreading it around. But in fact they have done the opposite and have even magnified it. This is because all of these Masters of the Universe thought the risk wasn’t real. So they created a bunch of strategies that conformed with regulations that governed risk or that would satisfy ratings agencies on paper but not in real life. And of course at the same time they were doing this, they also tried as hard as they could to deregulate themselves as much as possible.
But the risk they did not believe in was real and when there was a downturn no one had anything like the reserves needed to cover the losses stemming from it. They had taken the money they should have kept against a rainy day and invested it in bubbles where it disappeared when the bubbles burst. So because they are broke, what they (banks, hedge funds, insurance companies, etc.) have done is basically lie about the size of their reserves or get the government and taxpayers to make up their shortfalls.
EW – If you are correct, and it certainly looks like you are, then I’d say we’re looking at a National Security issue along the lines of Economic Treason – bringing down the Government by crippling the Economy through Conspiratorial Fraud.
If this is the case, the conspirators would have to have included:
– AIG Management/FP – the ‘insiders’ on the job
– Federal Regulators – ‘looking away’ from the Fraud
– the TARP Counterparties – the ‘beneficiaries’ of the scheme
– Bush, Paulson, Bernanke, and Geithner – the ‘architects’ and ‘deliverers’
The ‘green-lighting’ of the Theft occured on Bush’s watch. Bush became undeniably aware of it not later than 2007. But, rather than deal with the Reality of Thieves on the Loose on Wall Street, Bush, Paulson, Bernanke, and Geithner ‘cooked-up’ a plan to stampede US into giving away Our future taxes to ‘preserve’ the Financial System – a Financial System that they – more than likely – conspired to Rob in the Classic Bush way: “I’ll ‘look away’ while you fellas take it all – just continue to support me as the Maximum Leader with No Questions Asked.” Bush would do a Quid Pro Quo, imvho, on anything to save his own neck.
Bush and Paulson ’said’ it was a Credit/Liquidity Crisis (just like Bush ’said’ it was WMDs), but really the underlying problem was the Fraud perpetrated on US by the Conspirators – Bush, Paulson and the Counterparties, with the full cooperation of the Republican Party (the Southern Banks getting one-for-one Counterparty Money is the giveaway) and the Wall Street Lobbyists (who have the Senate in their back pockets.)
The ‘players’ all ‘knew’ what was happening, because they were the perpetrators, and they made sure they took care of themselves in the process, all the way down to the AIGFP Traders.
They All Knew.
If ever We needed a Powerhouse Investigation/Prosecution Team to root out A Scheme of Fraud that had the Power to topple US, now is the time.
Now thats a theory I’d like to sink my teeth into.
Holy Stimulus, Batman.
EW: This is exactly what I have been sensing this week. I don’t follow all the details but my gut is always engaged. I watch for how many lies are being revealed and what facts are being revealed/ignored. And the other day Enron started popping into my head. I see no signs that this is not exactly what is happening. Thank you for your research and writing.
We keep saying: let’s have regulation ~ better and bigger ~ again. I know that’s all we’ve got and there will always be characters gaming the system and worse, but I no longer have any faith in regulation. I have no faith in any protection. I have NO trust left.
AND IF we don’t remove the current crop of bad players completely from the system like we NEVER have done in any of the past scandals … this cancer is just going to keep coming back again and again and again even bigger than the fiasco we are looking at right now. Each cycle just makes it bigger and bigger. And all these deals teh regulators cut just create more problems later on. It’s a big fat game of wink wink nudge nudge go back to your old ways, *this* time.
The ONLY real answer is for the people to get so disgusted we stop feeding this stealing monster. But I don’t see that happening either, human nature and striving being what it is.
There’s more to the insurance/reinsurance issue than meets the eye. Consider this historical look…
From September 22, 2000 L.A. Times article by Mark Fritz, referenced in my article on AIG
That is correct. Notably, Cornelius V. Starr would be Ken Starr’s uncle. Go figure.
Wonder if he had his (and Mrs. Starr’s) life insurance through AIG. They’re notorious for not paying off.
Thanks for posting this Valtin. I had mentioned a few times in earlier posts on AIG but no one responded.
Have you followed the Deep Capture website? Some of the intel info is interesting.
bmaz… very interesting! small world…
klynn… haven’t seen that website, but I’ll check it out. Thanks for the compliments!
Not that surprising, mining insurance information for intel.
I knew a lawyer who got the floor plans and construction drawings for a prison, merely by calling the functionary in the State’s archives and (truthfully) telling him the lawyer was involved in a suit between contractors who’d worked on building it and could he please get a copy of the plans for certain cell blocks and how much would a copy cost.
I’m told the functionary was quite courteous and the plans arrived in the mail later that week.
By the way, great article.
“So it sure sounds like AIG may be hiding its own special version of reinsurance shitpile in Bermuda.”
I hate to reveal a “secret” known to every insurance regulator in the county but:
Every nationwide life insurance company in the United States has been doing this for over a decade. (not always Bermuda, but always outside the U.S.)
The states allow it as long as they get a Letter of Credit from an approved bank that pledges to loan the insurance company the millions in reserves coming off the books if requested by said insurance company.
“Of course, what Liddy didn’t tell Cummings is that some of these reinsurance companies are shell games constructed within AIG.”
Liddy probably thought he truly didn’t need to since it is not a secret. Cummings can ask any of the 50 insurance commissioners about it.
oh great. now I have to go read Martin Chuzzlewit.
bmaz, I told you this was like being in school.
You can skip the part about the trip to America, unless you want to glimpse the genesis of Winguttius americanus.
http://www.propertyandcasualty…..GREPORT-dh
The craziness at AIG is beginning to sound a lot more like Bernie Madoff’s Ponzi scheme and the size of it is horrendous to consider.
I’d love to hear something happy, something you could call a ‘dot’ which connects to Ken Starr or the Bushies. That would take some of the sting out of these stories.
If all these insurance companies operate off-shore and perhaps use a Bermuda loophole to avoid holding reserves and are beyond state regulators and when there is no federal regulator (for insurance), then who’s to say there’s any ANY money in the accounts labeled ‘reserves’?
What drives me crazy is the officially promulgated notion that all this is too complex to act on quickly, so we need to do this and that to stretch it out a little longer. This smacks of fraud, and to my untutored eye, the complexity in a complex fraud is usually misdirection and obfuscation–it it is only there to hide simple truths.
The talk about keeping crooks on payroll while the fraud (if there is any) is unravelled is nuts. The way to deal with such a situation is to stop everything instantly. Lock it down. Freeze the assets and change the locks. Bring in the auditors. Let them take their time. But chances are that the process of dismantling a static object will go faster than grasping at a constantly shifting mirage will.
I also think this is right. There was an urgency at the outset to make sure things didn’t melt down completely, but we have had plenty of time to create Plan B and Plan C. Let’s get moving.
more fun, from LAT:
And from Bloomberg:
With the mob fury and death threats and calls to reveal who AIG had paid bailout monies to and now with this suit it appears somebody wants AIG to fail.
If they fail their CDSs fail and all the premiums they received are already gone. It would appear bankruptcy may be a way for somebody, not just top-level management, to walk away unscathed.
Maybe the attacks on Geithner are really because he’s doing too good a job with AIG, just as the employees there are being attacked for doing the job of winding down that business…without going bankrupt.
Somebody doesn’t want those FP products wound down neatly!
This is scary stuff. At the very least, it seems to me that we can assume they don’t have the reserves they should right now to cover their insurance liabilities. Whatever else is going on here just makes that situation worse.
This seems to be a key of the “new Wall St.”. They use fake ratings agency ratings on CDOs and they use CDSs with no reserves and they use money market funds like a bank (again with no reserves) and they go through Bermuda to avoid having to hold reserves.
Add this to maxi leveraging as just another fraud trick to avoid sound business practices.