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AIG: Before Credit Default Swaps, There Was Reinsurance

The Institutional Risk Analyst
April 2, 2009

"What do many corporate buyers of insurance have in common with American International Group? Perhaps more than they would like to admit. Like AIG, many companies in the past few years have bought finite insurance, which transfers a prescribed amount of risk for a particular liability. What regulators now want to know is, how many companies, like AIG, have used finite insurance to artificially inflate their financial results?"
Infinite Risk?
CFO Magazine
June 1, 2005

"In the regulatory world, a 'side letter' is perhaps the most insidious and destructive weapon in the white-collar criminal's arsenal. With the flick of a pen, underhanded executives can cook the books in enormous amounts and render a regulator helpless."
Fraud Magazine
July/August 2006

In fact, our investigation suggests that by the time AIG had entered the CDS fray in a serious way more than five years ago, the firm was already doomed. No longer able to prop up its earnings using reinsurance because of growing scrutiny from state insurance regulators and federal law enforcement agencies, AIG's foray into CDS was really the grand finale. AIG was a Ponzi scheme plain and simple, yet the Obama Administration still thinks of AIG as a real company that simply took excessive risks. No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community.

As with the phony reinsurance contracts that AIG and other insurers wrote for decades, when AIG wrote hundreds of billions of dollars in CDS contracts, neither AIG nor the counterparties believed that the CDS would ever be paid. Indeed, one source with personal knowledge of the matter suggests that there may be emails and actual side letters between AIG and its counterparties that could prove conclusively that AIG never intended to pay out on any of its CDS contracts.

The significance of this for the US bailout of AIG is profound. If our surmise is correct, the position of Feb Chairman Ben Bernanke and Treasury Secretary Tim Geithner that the AIG credit default contracts are "valid legal contracts" is ridiculous and reveals a level of ignorance by the Fed and Treasury about the true goings on inside AIG and the reinsurance industry that is truly staggering.

Does Reinsurance + Side Letters = CDS?

One of the most widespread means of risk shifting is reinsurance, the act of paying an insurer to offset the risk on the books of a second insurer. This may sound pretty routine and plain vanilla, but what most people don't know is that often times when insurers would write reinsurance contracts with one another, they would enter into "side letters" whereby the parties would agree that the reinsurance contract was essentially a canard, a form of window dressing to make a company, bank or another insurer look better on paper, but where the seller of protection had no intention of ever paying out on the contract. FULL STORY.

Government Bailouts...
Good for America?

Here are the results!

The Total Number of people who voted in this poll: 233972

1) Who is most to blame for America’s current economic crisis?
72% voted: Clinton Administration and the Democrats in Congress
10% voted: The Bush Administration
2% voted: Wall Street
12% voted: Banks and sub-prime lenders
2% voted: Real estate and mortgage professionals
0% voted: Investors
1% voted: Home buyers

2) Do you agree government bailouts are the answer to America’s financial crisis?
6% voted: Yes
89% voted: No
5% voted: Undecided

3) Do you believe the American taxpayers should have to foot the bill for our financial systems mistakes?
7% voted: Yes, we have to or we’ll end up in a prolonged recession or worse a depression.
22% voted: No, America is too far in debt already.
69% voted: Absolutely not, the American people should never be responsible for bailing out the private sector.
2% voted: Undecided

4) Do you believe the government bailouts will ultimately rescue our country's financial system?
7% voted: Yes
87% voted: No
6% voted: Undecided

5) Do you believe Barack Obama was the best choice to handle the country's future economic policy?
11% voted: Yes
86% voted: No
3% voted: Undecided

Thank you for your participation.