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Fascinating piece from Chris Whalen that reminds me of what Martin Mayer said about finance "innovation": just another word for the last generation's (forgotten) frauds.
Try this on for size:
"The major OTC dealers, starting with Merrill Lynch, Citigroup (C), GS and Deutsche Bank (DB) were sucking AIG's blood for years, one reason why the latest "reform" proposal by Washington has nothing to do with either OTC derivatives, complex structured assets or OBS financial vehicles. And this is why, IOHO, the continuing inquiry into the AIG mess presents a terrible risk to Merrill, now owned by Bank of America (BCA), GS, C, DB and the other dealers -- especially when you recall that the AIG insurance underwriting units were lending collateral to support some of the derivatives trades and were also writing naked credit default swaps with these same dealers. Deliberately causing a loss to a regulated insurance underwriter is a felony in New York and most other states in the US. Thus the necessity of the bailout -- but that was only the obvious reason. Indeed, the dirty little secret that nobody dares to explore in the AIG mess is that the federal bailout represents the complete failure of state-law regulation of the US insurance industry. One of the great things about the Reis and Flynn book excerpted above* is the description of the assorted types of complex structured assets that Wall Street was creating in the 1920s. Many of these fraudulent securities were created and sold by insurance and mortgage title companies. That is why after the Great Depression, insurers were strictly limited to operations in a given state and were prohibited from operating on a national basis and from any involvement in securities underwriting.
The arrival of AIG into the high-beta world of Wall Street finance in the 1990s represented a completion of the historical circle and also the evolution of AIG and other US insurers far beyond the reach of state law regulation. Let us say that again. The bailout of AIG was not merely about the counterparty financial exposure of the large dealer banks, but was also about the political exposure of the insurance industry and the state insurance regulators, who literally missed the biggest act of financial fraud in US history. But you won't hear Chairman Volcker or President Obama talking about federal regulation of the insurance industry."
* The quote was from False Security: The Betrayal of the American Investor
Bernard J. Reis and John T. Flynn, Equinox Cooperative Press, NY (1937)
There is no bottom to this rabbit hole it would seem. (And I suspect the only one who could really figure it out is a forensic accountant.)
Link: http://us1.institutionalriskanalytic...ub/IRAMain.asp
Try this on for size:
"The major OTC dealers, starting with Merrill Lynch, Citigroup (C), GS and Deutsche Bank (DB) were sucking AIG's blood for years, one reason why the latest "reform" proposal by Washington has nothing to do with either OTC derivatives, complex structured assets or OBS financial vehicles. And this is why, IOHO, the continuing inquiry into the AIG mess presents a terrible risk to Merrill, now owned by Bank of America (BCA), GS, C, DB and the other dealers -- especially when you recall that the AIG insurance underwriting units were lending collateral to support some of the derivatives trades and were also writing naked credit default swaps with these same dealers. Deliberately causing a loss to a regulated insurance underwriter is a felony in New York and most other states in the US. Thus the necessity of the bailout -- but that was only the obvious reason. Indeed, the dirty little secret that nobody dares to explore in the AIG mess is that the federal bailout represents the complete failure of state-law regulation of the US insurance industry. One of the great things about the Reis and Flynn book excerpted above* is the description of the assorted types of complex structured assets that Wall Street was creating in the 1920s. Many of these fraudulent securities were created and sold by insurance and mortgage title companies. That is why after the Great Depression, insurers were strictly limited to operations in a given state and were prohibited from operating on a national basis and from any involvement in securities underwriting.
The arrival of AIG into the high-beta world of Wall Street finance in the 1990s represented a completion of the historical circle and also the evolution of AIG and other US insurers far beyond the reach of state law regulation. Let us say that again. The bailout of AIG was not merely about the counterparty financial exposure of the large dealer banks, but was also about the political exposure of the insurance industry and the state insurance regulators, who literally missed the biggest act of financial fraud in US history. But you won't hear Chairman Volcker or President Obama talking about federal regulation of the insurance industry."
* The quote was from False Security: The Betrayal of the American Investor
Bernard J. Reis and John T. Flynn, Equinox Cooperative Press, NY (1937)
There is no bottom to this rabbit hole it would seem. (And I suspect the only one who could really figure it out is a forensic accountant.)
Link: http://us1.institutionalriskanalytic...ub/IRAMain.asp