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  • stakeholder_9999 stakeholder_9999 Apr 18, 2005 4:12 PM Flag

    AIG side deals like Enron BusinessWeek

    AIG side deals like Enron BusinessWeek

    "Watchdogs With Eyes Wide Shut"

    APRIL 25, 2005 Business Week

    As investigators pore over the books of AIG, it's becoming clear that for years regulators failed to detect lapses

    Where were the watchdogs? State and federal investigators are examining the accounts of insurance giant American International Group Inc. (AIG ), drawing out super-investor Warren E. Buffett, and sparring over Fifth Amendment rights with ousted AIG Chairman and CEO Maurice R. "Hank" Greenberg. But the feverish enforcement activity obscures the fact that AIG's admitted misstatements -- so far worth, by the company's estimate, $1.7 billion to shareholders -- and other industry transgressions went undetected by many of the same agencies, in some instances for 14 years or longer.



    But even absent a strong new federal agency, current watchdogs can do more. The SEC must use its broad authority to review filings of public companies to focus on insurers' financial reporting until it's confident the industry has cleaned up its act.

    Auditors, too, must become more vigilant. The suspect reinsurance deals at AIG bear an eerie resemblance to Chewco Investments LP, the LJM partnerships, and other "special purpose entities" that brought down Enron. Like the SPEs, the reinsurers AIG used were supposed to be independent -- but were in fact closely linked to the parent company. Why didn't such deals arouse more suspicion? In both cases, auditors focused narrowly on whether the deals met technical benchmarks to qualify for favorable treatment, without looking at whether they made sense. Just as important, auditors need to force into the open any side deals that soften or negate the terms of contracts. Such deals already violate insurance and accounting regs, but that hasn't stopped their use.

    Accounting-rule writers must also move faster to clarify standards for "structured finance" -- a category that includes off-balance-sheet SPEs and the finite reinsurance that AIG allegedly used to beef up its numbers. FASB is on its third round of post-Enron clarifications for rules governing off-balance-sheet financing. Rulemakers must also set reinsurance standards that genuinely measure risks insurers transfer.

    Insurance is a devilishly complicated business, and the industry often plays by no-holds-barred rules. "Insurance is like the Wild West -- it makes Wall Street seem quite orderly and gentlemanly," says an analyst. It's also an increasingly sophisticated industry in which players take advantage of every international loophole available to move operations offshore in order to decrease scrutiny and cut tax liabilities. In this high-stakes business, regulators can't afford to be caught napping. When they snooze, investors lose.

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    • How can we have effective national regulation of the Insurance industry with Republicans in control of the government who believe that deregulation is a panacea of all the nations ills?

      It must be remembered that it was Sen. Phil Gramm R-Texas, whose wife Dr. Wendy Lee Gramm sat on Enron's BOD auditors committee, who pushed through the Gramm-Leach-Bliley Act of 1999 that "reformed" the Banking Act of 1933 and repealed the Glass-Stegall Act.

      We now have the worst of all possible worlds.

      Commercial banks who are FDIC (taxpayer) insured owning insurance companies who have taken operations off-shore to tax havens where it is difficult if not possible for state regulators to monitor or regulate their insurance company operations.

      Is it now time to revisit the wisdom of repealing the Glass-Stegall Act of 1933.


      Watchdogs With Eyes Wide Shut

      APRIL 25, 2005 Business Week

      As investigators pore over the books of AIG, it's becoming clear that for years regulators failed to detect lapses

      ht tp://


      The obvious solution: national regulation.

      State oversight of insurers is a relic of 19th century finance, until recently defended by insurers. Now, however, the industry is splitting. Many big underwriters crave the uniformity and cost savings of replacing 50 regulators with one. A dual system -- modeled on banking -- has been under discussion for decades: Small insurers would be chartered by states; big insurers would answer to a federal regulator, most likely in the Treasury Dept. Meanwhile, the Federal Reserve Board would continue to oversee financial companies that mix insurance with other businesses.

      Problem is, even if today's Republican White House and Congress created a new regulator -- a big if -- they would be unlikely to give it tough powers like those the SEC enjoys with brokers and banks. The furthest GOP leaders may go now is the so-called SMART bill drafted by House Financial Services Committee Chairman Michael G. Oxley (R-Ohio), which would create a super-NAIC with federal help to press for uniform, streamlined state regs.

      Further revelations might force action. Five other big reinsurers, including Swiss Re, MBIA (MBI ), and St. Paul Travelers (STA ), have disclosed that the SEC and Spitzer have subpoenaed records from them. "There's a lot more to come" on insurance companies collaborating to buff up each others' financials, warns a source close to the probes.

      • 1 Reply to stakeholder_9999
      • The FDIC is capitalized by the banking industry not the federal government. Banks are assessed a fee based on the condition of the bank. Poorly run banks pay more than well run banks. The fund must stay at 1.25% of the total deposits of all banks. The government stepped in on the FSLIC (Savings and Loans)and that cost the taxpayers some money but a good portion was also paid by the banks. Many of the S & L problems were caused by congressmen on both sides of the aisle, Cranston and McCain had a very costly association with Keating. The banks were mandated to pay the shortfall when the funds were merged.
        Stake, if you want to look at the next problem look at credit unions. They claim to be "non-profit" but yet in most cases their net worth increases each year enen. Their directors live the lifestyle of the rich and famous with training seminars on cruise ships in Australia or Europe in the fancy rooms at the top of the ship. Ususall they don't even pick up the seminar packet. All of this done without them paying one penny in taxes. They go to Washington DC and they even refuse to pay the local hotel taxes. Management that has been trained in car loans, home loans and consoldation loans is now entering corporate lending. It is a matter of time until the failures start and CUNA will be merged into the FDIC with the bankers once again having to pay for sins of a competitor. At least the Savings and loans paid taxes.

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