This is indeed very interesting, though I know that the business of reinsurance is complex so simply taking as absolutely true the suggestion that the AIG side letters were in all instances fraudulent is a not something I would do without looking into things with some care.
The first reason for not taking the article as established fact is that the purpose of reinsurance is indeed to free up an insurance company's capital so that it can use it in other ways. If it can show regulators that a substantial amount of its risk has been passed on to someone else, someone solvent, then the regulators will not require quite as much in reserves as they might otherwise.
Of course, if regulators are told something which is not true with respect to reinsurance agreements, and they rely on the statements to lower reserve requirements, then obviously the possibility of fraud is clear.
I believe that this is exactly what was taking place with respect to the AIG/General Re case.
I can see how the idea of these side letters somehow infected the CDS and CDO world. If these un-reserved insurance policies could somehow allow investment committees worldwide to buy toxic junk with a AAA rating, why not juice up things by entering into side letters which made it less likely that anyone would claim under them or at least mitigate the risk of a counterparty's claim in the event of a default. Naturally, what was being sold was not protection for AIG clearly knew that even a minor blow up would put it on the ropes. Instead it was AIG's AAA rating which it pimped. In essence, AIG was aiding and abetting fraud.
It has been my contention all along that CDS, because they insure against risks, are in essence insurance products which may well have been illegal from inception because they did not conform with state insurance regulatory laws. In my view, an aggressive effort should have been undertaken to test this hypothesis before the federal government started to fund AIG's liabilities on a 100 cents on the dollar basis.
The question of what was more criminal, the Treasury for its absolutely incredible negligence in not fighting AIG's exposure, which negligence borders on an almost intentional screw up, or AIG's fraud, is a close one.
I cannot wait for a serious history of this sordid age to be written.
If you are really of a suspicious turn of mind, the $165 million in bonus money to the AIG Financial Products folks so that they could stick around and 'help' unwind the mess can surely be seen in a different light in view of this article. Yes, they were the only ones who knew what was going on. I bet they did in fact engage in very substantial 'cleaning up' though you and I might call it getting rid of the evidence.
Having dealt with AIG in the past, I can assure you that it is the Enron of the insurance and financial world. The culture was for years pure cowboy from the top down. Its demise is a blessing. |
