AIG Fraud & the Blind Spot

[Indiana Oracle]

An increasing number of expose' articles are starting to appear in financial circles now that AIG has the light on them again. Here is some of the information I have gleaned from these and other sources (if you have the patience or interest, the primary links are at the bottom).

There is a big problem looming.

1 --
When Treasury and Fed refer to saving the "banks" it is referring to Citi, Bank of America, J.P. Morgan Chase, and Wells Fargo. That is the frame of reference for the rest of this post. Geithner does not provide this specificity of course. We are led by implication to think we are taking care of your local S&L as well. The 4 banks involved is each larger than the whole economies of many countries. These 4 are The Issue.

2 --
As Geithner finally admitted last week, PPIP is intended to restore the lending ability of these wholesale institutions to, one would assume, encourage the economy to indebt itself even further. We can just remove the toxic assets from the books and motor right along. If that does not work, Treasury can throw another couple hundred billion in, liquidate the bank(s) and sell them back to the public. Hold onto that concept. Let's now move on to the derivatives on their books.

3 --
On 31 December 2008 the net derivative loss exposure of the banks was $1.58 trillion. AIG's exposure was $440 billion. Treasury has spent $170 billion on AIG so far.

4 --
It appears that AIG was engaged in fraud. The SEC brought a complaint against them along these lines in 2004. The essence of the fraud is that companies (not just insurers) would sell their Credit Default Swaps (CDS) to AIG, and correspondingly remove the liability from their books to made their profitability look better, but, AIG would have side letters with them that the amounts would not be paid. Fed and Treasury are presenting the CDS as up and up valid financial transactions. It is likely that many are not.

5 --
In this light (fraud) Fed/Treasury bail out funds passed whole onto Goldman Sachs through AIG amount to what is know as illegal taking and should be returned by Goldman. The GAO echoed this in March. This will likely pose a large problem for Goldman. Note they and their graduates are seeded all through the financial side of government.

6 --
In addition, to the degree the CDS contracts are not enforcable due to the side letters, the exposure related to CDS could reach $16 trillion - way above what is now envisioned. This will cause major problems around trying to avoid bankruptcies with these institutions.


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How Much Risk Is the Treasury Really Assuming from Financial Institutions? (Part 2) -- Seeking Alpha

AIG: Before CDS, There Was Reinsurance | The Big Picture

 

[RodISHI]

"Blue sky", with side letters and verbal agreements while stuffing their own pockets sounds about right.

 

[InrXeyelArkvst]

An increasing number of expose' articles are starting to appear in financial circles now that AIG has the light on them again. Here is some of the information I have gleaned from these and other sources (if you have the patience or interest, the primary links are at the bottom).

There is a big problem looming....


...5 --
In this light (fraud) Fed/Treasury bail out funds passed whole onto Goldman Sachs through AIG amount to what is know as illegal taking and should be returned by Goldman. The GAO echoed this in March. This will likely pose a large problem for Goldman. Note they and their graduates are seeded all through the financial side of government.....

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Something's definitely rotten in Jersey City...

http://content.lawyerlinks.com/library/sec/briefs/2008/goldman_auction_rate_order_101008_008.pdf


And back during the Two Hanks' heyday, in NYC, just as smelly....

U.S. SECURITIES AND EXCHANGE COMMISSION

LITIGATION RELEASE NO. 19560 / February 9, 2006

ACCOUNTING AND AUDITING ENFORCEMENT RELEASE NO. 2371 / February 9, 2006

SECURITIES AND EXCHANGE COMMISSION V. AMERICAN INTERNATIONAL GROUP, INC., Case No. 06 CV 1000 (S.D.N.Y.)

SEC CHARGES AIG WITH SECURITIES FRAUD

The Securities and Exchange Commission announced today the filing and settlement of charges that American International Group, Inc. (AIG) committed securities fraud. The settlement is part of a global resolution of federal and state actions under which AIG will pay in excess of $1.6 billion to resolve claims related to improper accounting, bid rigging and practices involving workers’ compensation funds....

http://www.sec.gov/litigation/complaints/comp19560.pdf
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
-against-
GOLDMAN, SACHS & CO.,
Defendant.
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:Civil Action No.

FINAL JUDGMENT AS TO DEFENDANT
GOLDMAN, SACHS & CO.

Plaintiff Securities and Exchange Commission ("Commission") having filed a Complaint in this action ("Complaint") and Defendant Goldman, Sachs & Co. ("Defendant") having (a) entered a general appearance, (b) consented to the Court's jurisdiction over Defendant and the subject matter of this action, (c) consented to entry of this Final Judgment without admitting or denying the allegations of the Complaint (except as to jurisdiction), (d) waived findings of fact and conclusions of law, and (e) waived any right to appeal from this Final Judgment; and the Commission having agreed that, on the basis of this Final Judgment, it will not institute a proceeding against Defendant pursuant to Sections 15(b), 15B, 15C, or 19(h) of the Securities Exchange Act of 1934 (the "Exchange Act"):
I.
Injunctive Relief

IT IS HEREBY ORDERED, ADJUDGED AND DECREED that:
A. Defendant, Defendant's officers, agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice of this Final Judgment by personal service or otherwise are permanently restrained and enjoined from violating Rule 2110 of the Conduct Rules of NASD Inc. ("NASD") and Rules 401 and 476 of the New York Stock Exchange, Inc. ("NYSE"), by: (1) engaging in acts or practices that create or maintain inappropriate influence by investment banking over research analysts and therefore impose conflicts of interest on research analysts, and by failing to manage these conflicts in an adequate or appropriate manner; (2)_publishing research reports that do not provide a sound basis for evaluating facts, are not properly balanced, and/or contain exaggerated or unwarranted claims and/or opinions for which there is no reasonable basis; or (3) promising, implicitly or explicitly, favorable research coverage to investment banking clients or potential clients.

B. Defendant, Defendant's officers, agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice of this Final Judgment by personal service or otherwise are permanently restrained and enjoined from violating NASD Rule 2210 and NYSE Rule 472 by issuing communications to the public that do not provide a sound basis for evaluating facts, are not properly balanced, and/or contain exaggerated or unwarranted claims and/or opinions for which there is no reasonable basis.

C. Defendant, Defendant's officers, agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice of this Final Judgment by personal service or otherwise are permanently restrained and enjoined from violating NASD Rule 3010 and NYSE Rule 342 by failing to maintain appropriate supervisory procedures regarding or controls over the following that are reasonably designed to ensure compliance with securities laws and regulations: (1) influence by investment banking over research analysts; (2) compensation and evaluation of research analysts; (3) use of research or research analysts in connection with the solicitation or marketing of investment banking business; and (4) publication of research regarding a securities issuer with which Defendant has, has solicited, or is soliciting an investment banking relationship......

Final Judgment: Goldman, Sachs & Co.

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[InrXeyelArkvst]

From IO's second link.....

...As best as we can tell, the questionable practice of using side letters to mask the economic and business reality of reinsurance transactions started in the mid-1980s and continued until the middle of the current decade. This timeline just happens to track the creation and evolution of the OTC derivatives markets. In particular, the move by AIG into the CDS market coincides with the increased awareness of and attention to the use of side letters by insurance regulators and members of the state and federal law enforcement community.

Keep in mind that what we are talking about here are not questionable risk management policies but acts of deliberate and criminal fraud, acts that often result in jail time for those involved. As one senior forensic accountant who has practiced in the insurance sector for three decades told The IRA:

“In every major criminal fraud case in which I have worked, at the center of the investigation were these side letters. It was always very strange to me that on-site investigators and law enforcement officials consistently found that these side letters were being used to mask the true financial condition of an insurer, and yet none of the state regulators, the National Association of Insurance Commissioners (NAIC), nor federal law enforcement authorities ever publicly mentioned the practice. They certainly did not act like the use of side letters was a commonplace thing, but it was widespread in the industry.”

It is important to understand that a side letter is a secret agreement, a document that is often hidden from internal and external auditors, regulators and even senior management of insurers and reinsurers. We doubt, for example, that Warren Buffet or Hank Greenberg knew the details of side letters, but they should have....

...Only when we understand how AIG came to be involved in CDS and the fact that this seemingly illegal activity was simply an extension of the reinsurance/side letter shell game scam that AIG, Gen Re and others conducted for many years before will we understand what needs to be done with AIG, namely liquidation. Seen in this context, the payments made to AIG by the Fed and Treasury, which were then passed-through to dealers such as Goldman Sachs (NYSE:GS), can only be viewed as an illegal taking that must be reversed once the US Trustee for the Federal Bankruptcy Court for the Southern District of New York is in control of AIG’s operations....

Ahh. There's that Madoffesque outperforming the market hyposerendipitousness again, despite the plausible deniability. Especially with the fox guarding the national ne$tegg to cover his mutually vested buddies' and his corporate alma mater's butt$. Eh?

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