Where Insurance finally meets the Big Bailout. AIG a Massive Ponzi Scheme?

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.

10 thoughts on “Where Insurance finally meets the Big Bailout. AIG a Massive Ponzi Scheme?”

  1. First, great job on this post.

    Second, is what the impact of the transaction. If you are going out of your way to create a transaction which cost 6 percent to do, what is the impact of the transaction—

    It appears what they were doing is engaging in a supposed or as Judge Sentor would say sham risk shifting transaction, that MISREPRESENTED a financial statement. SOP would be better versed in this type of analysis than me but I think the heart of the matter is that the impact was to mispresent the financial statement.

    The exact vehicle of achieving such misrepresentations can change over time and circumstances but in the end the impact is always the same—misrpresentation of financial statements. It also reminds me of the reinsurance sham State Farm used in their most recent rate increase requests in Florida. Same impact, albeit a different manner, of getting a misstatement of financial statements IE higher rate request than would have otherwise been achived without the sham reinsurance transaction.

    To me this is all fraud. Plain and simple.

  2. This makes what happened at WCOM and Enron seem like childs play Steve. Chris Dodd’s good friend Joseph Cassano better have a good criminal defense lawyer on retainer.

    In fact this will be a bonanza for the criminal defense bar IMHO, especially those with expertise in defending white collar crime.

    Perhaps now we’re all gaining a better understanding how and why wind pool consumers have taken it without vaseline for years so these crooks could stuff their pockets full of cash. Great job Mr Chaney!

    As we follow the money the stench gets worse.


  3. So, any insurer purchasing reinsurance from AIG or one of their counter-parties could have nothing but a policy on paper but no coverage – just a letter and deposits in an off-shore account.

    wow! That certainly would be reason enough to “hedge” on obligations to policyholders after Katrina – and explain the recent “off years” in the reinsurance business as well as the number of obviously covered claims that end up in litigation.

    Wonder how many claims have settled since the bailout began last fall?

  4. When they regulators were catching the insurance industry prior to 2005 – when the activity finally seems to have stopped- they would go in and seize computers, materials, etc. before they could be destroyed.

    In this case the culprits have been in place for some time, and nobody on the other side of the deal is going to say anything. On the plus side, it is extremely difficult to actually remove all electronic files from a file server system.

    It is likely that most of AIGs CDS deals were simply foolish. But there is nothing to keep you from using these deals to wash money in the same way the reinsurance policies were used.

    It is interesting that Berkshire through General Re was also very much a guilty party. I recall Buffet raving about the brilliance of the guy who eventually went to jail.

    Probably a coincidence, but was not Allstate going bare in 2005 on reinsurance in LA or MS? I wonder if all the sudden it got more expensive.

  5. Mississippi, Louisana and Alabama were all nudist colonies for Allstate if I remember correctly. Didn’t they know the bible belt does approve ofsuch behavior?

    Of course you are pretty much naked if you have sub-prime reinsurance.

  6. Sorry should read bible belt does NOT approve…

    IE being nude on a beach in Mississippi is illegal. I guess Allstate gets away with anything these days.

  7. Russell the timeframe when the regulators began to get wise correlates to the rise of the Cat Bond market which is reinsurance securitized. The problem is the how do you give State Farm reinsurance credit for broadly defined risks which may trigger bond payments that are unrelated to the actual loss.


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