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Article on AIG that backtracks to look st AIG's past frauds and questionable practices, that took place long before the credit default swaps issued in the mid-2000's.
"...The official version is that Joseph Cassano, who occupies the stucco-fronted house near Harrods, brought down a safe and stable company — and by extension, the world — with incompetent gambles ...But the official version overlooks many things, including episodes of fraud at AIG that go back at least 15 years...
In 2001, with AIG trading at $85 on the New York Stock Exchange, The Economist decided to commission some research on the company’s true value, and chose the little-known firm Seabury Analytic to do it. This was deliberate. The magazine’s New York bureau chief, Tom Easton, had been around long enough to know that nobody on Wall Street ever says “sell”, except perhaps when a market is about to go up, and that the big security firms could not be trusted to give a candid view of AIG.
... He judged that AIG was highly overvalued, and he would later realise that its shares were supported by an ability to stifle criticism. In his report for The Economist, however, he was tactful. To justify the share price, he said, “it would have to grow about 63% faster than [its] peers for the next 25 years. If investors believe that AIG can sustain this type of performance for that period of time, then AIG is properly valued”. Any investor who believed that would need to be certified.
... [and then the fallout] “I assumed AIG was attempting to railroad us out of business,” says Freestone, who did not sign...
“AIG’s foray into CDS was really the grand finale,” says Christopher Whalen, managing director of Institutional Risk Analytics, an expert on banking who has testified before Congress. Towards the end, it looked much like a Ponzi scheme, “yet the Obama administration still thinks of AIG as a real company that simply took excessive risks”. In other words, there was never a chance AIG would honour its contracts: its income was nowhere near enough to cover the payouts.
Whalen has a reputation to protect: he is global risk editor of The International Economy magazine, co-founder of the Herbert Gold Society, a group of current and former employees of the US Treasury and the Federal Reserve, and regional director of the Professional Risk Managers’ International Association. His assertion is not an impulse. It comes from months of talking to forensic specialists such as Freestone, insurance regulators “and members of the law-enforcement community focused on financial fraud”. As
evidence of dishonesty, Whalen points to AIG’s occasional habit of using secret agreements to falsify financial statements — either its own or those of other companies. In 2005, a former senior executive at the insurer General Re pleaded guilty to a conspiracy to misstate AIG’s finances, after General Re paid $500m in premiums for AIG to reinsure a nonexistent $500m risk. The transaction was a sham; the only economic benefit to either party was the $5.2m fee paid by AIG for Gen Re’s help.
When the $500m in loss reserves were added to AIG’s balance sheet in 2000 and 2001, Greenberg was able to claim an increase in reserves, when in fact they had declined. “They’ll find ways to cook the books, won’t they?” John Houldsworth, the former executive, said in a recorded phone conversation with Elizabeth Monrad, his chief financial officer. She observed that “these deals are a little bit like morphine; it’s very hard to come off of them”.
Similarly, in 2003 AIG was fined $10m for helping a telecoms company, Brightpoint, hide $11.9m in losses with a “non-traditional” insurance product that AIG offered for “income statement smoothing”. Brightpoint paid $15m in premiums, and AIG refunded $11.9m in fake insurance claims. The ruse allowed Brightpoint to spread its loss over three years, overstating its 1998 net income by 61%. And in 2005, AIG restated five years of financial statements, admitting that they had exaggerated its income by $3.9 billion.
Whalen believes that at some point between 2002 and 2004, AIG concluded that the game was up for secret agreements, and that other methods of enhancing revenue were needed. “The thing I haven’t satisfactorily answered,” Whalen adds, “is whether AIG was so unstable coming out of 2000, 2001, that Cassano was trying to cover up a wounded, dying beast. Was he doubling up, to try and hit a home run and save the house? It looks like it, because otherwise it was just greed on his part, and he was writing as much of this crap as he could to inflate his bonus.” If he is right, the implications are profound. Any bank that thought it was protected by credit-default swaps with AIG would have been exposed from the start, putting taxpayers at risk. The banks’ credit traders would — or should — have realised that AIG was never likely to pay out. “The key point that neither the public, the Fed nor the Treasury seems to understand,” says Whalen, “is that the CDS contracts written by AIG were shams, with no correlation between fees paid and the risk assumed. These were not valid contracts but acts to manipulate the capital positions and earnings of financial companies around the world.”
The investigation into the General Re affair prompted AIG to oust Greenberg in 2005..."
From The Sunday Times May 17, 2009
http://business.timesonline.co.uk/to...cle6281953.ece
"...The official version is that Joseph Cassano, who occupies the stucco-fronted house near Harrods, brought down a safe and stable company — and by extension, the world — with incompetent gambles ...But the official version overlooks many things, including episodes of fraud at AIG that go back at least 15 years...
In 2001, with AIG trading at $85 on the New York Stock Exchange, The Economist decided to commission some research on the company’s true value, and chose the little-known firm Seabury Analytic to do it. This was deliberate. The magazine’s New York bureau chief, Tom Easton, had been around long enough to know that nobody on Wall Street ever says “sell”, except perhaps when a market is about to go up, and that the big security firms could not be trusted to give a candid view of AIG.
... He judged that AIG was highly overvalued, and he would later realise that its shares were supported by an ability to stifle criticism. In his report for The Economist, however, he was tactful. To justify the share price, he said, “it would have to grow about 63% faster than [its] peers for the next 25 years. If investors believe that AIG can sustain this type of performance for that period of time, then AIG is properly valued”. Any investor who believed that would need to be certified.
... [and then the fallout] “I assumed AIG was attempting to railroad us out of business,” says Freestone, who did not sign...
“AIG’s foray into CDS was really the grand finale,” says Christopher Whalen, managing director of Institutional Risk Analytics, an expert on banking who has testified before Congress. Towards the end, it looked much like a Ponzi scheme, “yet the Obama administration still thinks of AIG as a real company that simply took excessive risks”. In other words, there was never a chance AIG would honour its contracts: its income was nowhere near enough to cover the payouts.
Whalen has a reputation to protect: he is global risk editor of The International Economy magazine, co-founder of the Herbert Gold Society, a group of current and former employees of the US Treasury and the Federal Reserve, and regional director of the Professional Risk Managers’ International Association. His assertion is not an impulse. It comes from months of talking to forensic specialists such as Freestone, insurance regulators “and members of the law-enforcement community focused on financial fraud”. As
evidence of dishonesty, Whalen points to AIG’s occasional habit of using secret agreements to falsify financial statements — either its own or those of other companies. In 2005, a former senior executive at the insurer General Re pleaded guilty to a conspiracy to misstate AIG’s finances, after General Re paid $500m in premiums for AIG to reinsure a nonexistent $500m risk. The transaction was a sham; the only economic benefit to either party was the $5.2m fee paid by AIG for Gen Re’s help.
When the $500m in loss reserves were added to AIG’s balance sheet in 2000 and 2001, Greenberg was able to claim an increase in reserves, when in fact they had declined. “They’ll find ways to cook the books, won’t they?” John Houldsworth, the former executive, said in a recorded phone conversation with Elizabeth Monrad, his chief financial officer. She observed that “these deals are a little bit like morphine; it’s very hard to come off of them”.
Similarly, in 2003 AIG was fined $10m for helping a telecoms company, Brightpoint, hide $11.9m in losses with a “non-traditional” insurance product that AIG offered for “income statement smoothing”. Brightpoint paid $15m in premiums, and AIG refunded $11.9m in fake insurance claims. The ruse allowed Brightpoint to spread its loss over three years, overstating its 1998 net income by 61%. And in 2005, AIG restated five years of financial statements, admitting that they had exaggerated its income by $3.9 billion.
Whalen believes that at some point between 2002 and 2004, AIG concluded that the game was up for secret agreements, and that other methods of enhancing revenue were needed. “The thing I haven’t satisfactorily answered,” Whalen adds, “is whether AIG was so unstable coming out of 2000, 2001, that Cassano was trying to cover up a wounded, dying beast. Was he doubling up, to try and hit a home run and save the house? It looks like it, because otherwise it was just greed on his part, and he was writing as much of this crap as he could to inflate his bonus.” If he is right, the implications are profound. Any bank that thought it was protected by credit-default swaps with AIG would have been exposed from the start, putting taxpayers at risk. The banks’ credit traders would — or should — have realised that AIG was never likely to pay out. “The key point that neither the public, the Fed nor the Treasury seems to understand,” says Whalen, “is that the CDS contracts written by AIG were shams, with no correlation between fees paid and the risk assumed. These were not valid contracts but acts to manipulate the capital positions and earnings of financial companies around the world.”
The investigation into the General Re affair prompted AIG to oust Greenberg in 2005..."
From The Sunday Times May 17, 2009
http://business.timesonline.co.uk/to...cle6281953.ece
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