Spitzer's AIG probe: What it should have uncovered

By Andrew Barile

Andrew Barile Consulting Corporation


As an insurance industry veteran, I can cite a number of major issues with the probe into AIG by former New York Attorney General Eliot Spitzer. Fully quantified, the loss portfolio finite reinsurance transfer was only a $500 million transaction.

While the New York Attorney General's office was reviewing the eight-page finite risk reinsurance agreement, the Financial Products Division was writing $335 billion of AIG's super-senior credit default swap business, and characterized it as "written to facilitate regulatory capital for financial institutions primarily in Europe." Was Spitzer so focused on Hank Greenberg that he did not read the employment contract of Joe Cassano?

Charles Gasparino, the CNBC on-air editor who is working on a book about the Wall Street meltdown, says, "Eliot Spitzer's nasty little investigation into AIG's accounting fraud now seems trivial given that his investigators missed the financial dynamite the insurer (AIG) was playing with at the time."

Did Eliot Spitzer keep AIG's management team so busy that no director or senior executive was reviewing the potential exposure percolating in the Financial Products Division? We in the industry all recognized that Martin Sullivan, much like Ed Liddy, is in way over his head in attempting to understand the AIG platform. Joe Cassano must have recognized that Eliot Spitzer was keeping AIG senior executives very busy with the trivia of finite reinsurance and side agreements. It was the credit default swaps that forced AIG into potential insolvency, only to be bailed out by the U.S. government at a cost close to nearly $200 billion.

Did Spitzer look at the accounting practices of AIG's Financial Products Division? How about the pricing concepts behind the overflow of premium coming in from these risks? What about the reserving practices of this book of business?

Charlie Gasparino makes an astounding comment, especially to an insurance industry veteran like myself, "but the size of the accounting fraud that Spitzer allegedly uncovered was under $4 billion -- chump change next to AIG's losses now."

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