We welcome back Russell and let him break the news that AIG is a massive fraud – a ponzi scheme built on sham reinsurance transactions. – sop
Are AIGs credit default swaps worth anything? Or were they sham transactions that neither party ever had any intention of paying out on? The Institutional Risk Analyst in its latest bulletin claims that it is the later.
Institutional Risk Analytics provides customized risk management solutions and advisory services to global enterprises. They write an occasional piece that they post on the web to generate interest and attention to their work. Being in the risk business they tend toward the bearish side, and tend to be a little bit skeptical of others professed best intentions.
The details are almost numbing, in a scary way, but what they point out is that AIG had a long track record of sham transactions involving various insurance instruments and reinsurance instruments in particular. They would sign a reinsurance contract with an insurance company, take a certain amount of money, and at the same time form a side agreement that essentially said: “We will not pay you on this policy.” Why would the insurance company do this: to lower their capital requirements. And since AIG did not perform much in the way of the services, they could kick some of the money back to the insurance company via an offshore entity which would allow the insurance company to write off all the money paid off to AIG, and then accept back part of the money back as tax free profits.
Really, this is not being made up! But somewhere around 2002-2004 the authorities had wised up to the point where it just wasn’t working very well. So what exactly did AIG start writing in this time frame?
That’s right, credit default swaps. No regulators there to worry about there. Of course there are regulators interested now, but they are not part of the insurance industry and wouldn’t know to ask little less where to look to see if there is anything in the way of side agreements on any of these big CDSs.
Which lead the article to the question: Does Reinsurance + Side Letter=CDS.
For a discussion that adds some interesting links see also the Big Picture which brought me to the original bulliten.