Based on all that has happened over the past six months, one could write a book on American International Group and the many problems this “insurance company” has caused to our nation and its people. AIG, which has been run by a group of greedy and perhaps incompetent individuals, has constantly been in the news and on the minds of the American people over the past several weeks. Due to time and space constraints, I am going to just hit the main areas of concern in this issue.
AIG MELTDOWN HAD ITS ROOTS IN THE GREENBERG ERA
As we all know, American International Group was in the news because of the company’s role in the economic downturn of our nation’s economy. We are learning a great deal about how this giant insurance company operated and how it took advantage of the federal government’s regulatory schemes. Maurice “Hank” Greenberg built AIG into the world’s largest insurance company, but during his tenure the giant insurer became a financial monster that was totally out of control. Greenberg left AIG in 2005 amid allegations he used off-balance sheet transactions to improperly boost profits. AIG posted a $61.7 billion quarterly loss last month, the biggest in corporate history. A third bailout by the U.S. government was necessary to save the company. It certainly appears that Greenberg planted the seeds of the financial disaster that will cost taxpayers over $180 billion. Greenberg’s creation more than two decades ago of a financial products unit appears to have caused the bulk of AIG’s massive losses. Obviously, he had to have help to make things work for his then-company.
It’s been reported that credit default swaps (CDS) held by AIG Financial Products have been the biggest driver of AIG’s losses, which have exceeded $100 billion over the past five quarters. Christopher Whalen, co-founder of Institutional Risk Analytics, which provides analysis and ratings to banks, made this observation:
The bottom line is that Hank Greenberg wandered out of the very safe, well-capitalized world of insurance into the surreal world of credit default swaps where you can create endless amount of risk.
In a most interesting development, Greenberg has filed suit against his former company for misrepresenting the risk of losses from credit default swaps held by AIG Financial Products. The lawsuit also named several individuals as Defendants, including Greenberg’s successor Martin Sullivan and Joseph Cassano, the former chief of AIG’s financial products unit, which originated many of the credit default swaps. In the suit, it is alleged that Greenberg was misled into buying stock at inflated prices. Greenberg claims he paid more taxes than he should have because of the inflated prices resulting in his overstating his income. Greenberg oversaw AIG’s growth into a company spanning 130 countries and serving more than 70 million customers. But in 2005, an investigation by then-New York Attorney General Eliot Spitzer forced Greenberg out.
Source: Reuters and Insurance Journal
THE FEDERAL GOVERNMENT MUST CONTROL AIG’S OPERATORS
There was more wrong with American International Group, however, than just Hank Greenberg’s involvement. President Obama is absolutely correct in saying that AIG is in financial straits because of “recklessness and greed.” Reports surfaced in Mid-March that financially strapped AIG was paying about $165 million in bonuses to executives. He is also on the right track in his efforts to stop AIG from paying out $165 million in executive bonuses. The President, in letting the public know his intent, said:
It’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay. How do they justify this outrage to the taxpayers who are keeping the company afloat.
AIG should never have paid any bonuses to a group of executives who ran the company into the ground and certainly not $165 million. Anybody who had anything to do with causing the largest corporate loss in history should be fired – not rewarded for their incompetence. The bulk of the payments at issue cover AIG Financial Products, the unit of the company that sold credit default swaps, the risky contracts mentioned above that caused massive losses for the insurer. Rewarding incompetence and perhaps even wrongdoing makes no sense and can’t be tolerated.
It also was revealed that American International Group Inc. used more than $90 billion in federal aid to pay out foreign and domestic banks, some of whom had received their own multibillion-dollar federal government bailouts. Some of the biggest recipients of the AIG money were Goldman Sachs at $12.9 billion, and three European banks — France’s Societe Generale at $11.9 billion, Germany’s Deutsche Bank at $11.8 billion, and Britain’s Barclays PLC at $8.5 billion. Merrill Lynch, which also is undergoing federal scrutiny of its bonus plans, received $6.8 billion as of December 31st. The money went to banks to cover their losses on complex mortgage investments, as well as for collateral needed for other transactions.
Source: Associated Press
NEW YORK ATTORNEY GENERAL GETS INVOLVED
Perhaps the best news that I have heard relating to AIG is that New York Attorney General Andrew Cuomo is now after them. The Attorney General has subpoenaed information relating to the payment of bonuses. He will investigate whether the employees were involved in the insurance giant’s near-collapse and whether the $165 million in bonus payments are fraudulent under state law. The Attorney General’s office issued subpoenas for the names and information about their work and contracts. In addition to the list of people set to receive bonuses, Cuomo wants details about who developed the bonus plans and a status report on whether payments have been made.
Source: Associated Press
U.S. HOUSE PASSES MEASURE TO RECOUP AIG BONUSES
The U.S. House of Representatives passed a bill on March 19th to recoup the bonuses paid to AIG employees. The House voted 328-93 to approve a 90% tax on bonuses for certain executives at companies that are getting taxpayer-financed help. Republican Senator Jon Kyl of Arizona, blocked an initial bid to approve a Senate version of the legislation that would put a 70% excise tax on bonuses for employees at companies that have received at least $100 million in bailout aid. Senator Kyl said more study was needed.
President Obama urged lawmakers to press on with measures that he can sign into law, calling AIG bonuses a symptom of “a bubble and bust economy that valued reckless speculation over responsibility and hard work.” I have concerns that the House bill is unconstitutional, but it does send a message to Corporate America. The American people are fed up with the greed and arrogance that have been displayed by all too many corporate executives.
Source: Insurance Journal
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