The F Word

Josh Marshall links to a fairly detailed description of how AIGFP managed what can only be called a fraudulent scheme to cook its own books and those of its counterparties.  

While some reinsurers are large, well-capitalized entities that generally avoid these pitfalls, AIG was already a troubled company when it began to write more and more of these risk-shifting transactions more than a decade ago. It is easy to promise the moon when people think that they can deliver, but because AIG and their clients saw how easy it was to fool regulators and investors, the practice grew and most regulators did absolutely nothing to curtail the practice.

It was easy for AIG to become addicted to the use of side letters. The firm, which had already encountered serious financial problems in 2000-2001, reportedly saw the side letters as a way to mint free money and thereby help the insurer to look stronger than it really was. AIG not only helped banks and other companies distort and obfuscate their financial condition, but AIG was supplementing its income by writing more and more of these reinsurance deals and mitigating their perceived exposure via side letters.

A key figure in AIG’s reinsurance schemes, according to several observers, was Joseph Cassano, head of AIG-FP. Whereas the traditional use of side letters was in reinsurance transactions between insurers, in the case of both CELL and PNC neither was an insurer! And in both cases, AIG used sham deals to make two non-insurers, including a regulated bank holding company, look better by manipulating their financial statements. Falsifying the financial statements of a bank or bank holding company is a felony.

Moreover, the folks at AIG knew the jig was up. The AIGFP division showed a large loss in the third quarter of 2007.  Hence, in December of 2007, they decided that they had only one more shot at milking the scam before everything fell apart.    All you have to do to see this is read the "retention bonus" "contract." (pdf)

  

(a) Covered Persons Who Are Not Members of the Senior Management Team.

Subject to Sections 3.01(c) and 3.01(d), for the 2008 Compensation Year and the 2009 Compensation Year, each Covered Person (other than members of the Senior Management Team) shall be awarded a Guaranteed Retention Award for each of those Compensation Years equal to one hundred percent (100%) of such Covered Person’s 2007 Total Economic Award.

(b) Covered Persons Who Are Members of the Senior Management Team.

Subject to Sections 3.01(c) and 3.01(d), for the 2008 Compensation Year and the 2009 Compensation Year, each Covered Person who is a member of the Senior Management Team shall be awarded a Guaranteed Retention Award for each of those Compensation Years equal to seventy-five percent (75%) of such Covered Person’s 2007 Total Economic Award.

In other words, the bonus pool under previous, "profitable" years was not going to be replicated in 2008 or 2009. So the firm agreed, with itself, to pay big bonuses anyway to the people who were responsible for these enormous losses, the destruction of the company and its counterparties.

In the first article, the side letters make it clear that neither party expected AIG to ever pay off these CDS instruments--that they were intended to fraudulently overstate the assets on the counterparty's balance sheet.

It is getting increasingly difficult to understand why the operative federal agency in these affairs is the Treasury and not the DOJ.