AIG Fraud & the Blind Spot

Discussion in 'Economy' started by Indiana Oracle, Apr 10, 2009.

  1. Indiana Oracle
    Offline

    Indiana Oracle The Truth is Hard to Find

    Joined:
    Mar 17, 2009
    Messages:
    639
    Thanks Received:
    65
    Trophy Points:
    28
    Location:
    NW Indiana
    Ratings:
    +65
    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.


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

    AIG: Before CDS, There Was Reinsurance | The Big Picture
     
    • Thank You! Thank You! x 1
  2. RodISHI
    Offline

    RodISHI Gold Member

    Joined:
    Nov 29, 2008
    Messages:
    10,392
    Thanks Received:
    1,858
    Trophy Points:
    280
    Ratings:
    +5,047
    "Blue sky", with side letters and verbal agreements while stuffing their own pockets sounds about right.
     
  3. InrXeyelArkvst
    Offline

    InrXeyelArkvst Abre los ojos

    Joined:
    Apr 4, 2009
    Messages:
    70
    Thanks Received:
    5
    Trophy Points:
    6
    Location:
    "The" city
    Ratings:
    +5
     
  4. InrXeyelArkvst
    Offline

    InrXeyelArkvst Abre los ojos

    Joined:
    Apr 4, 2009
    Messages:
    70
    Thanks Received:
    5
    Trophy Points:
    6
    Location:
    "The" city
    Ratings:
    +5
    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?

    :smoke:
     

Share This Page