Every time you think you’ve reached level red on the outrage meter, AIG manages to come up with a way to out-do itself. And I’m not even talking about the fact that it recently sued the government for a tax refund it feels its owed for laundering money through a series of offshore corporations:
The lawsuit, filed on Feb. 27 in Federal District Court in Manhattan, details, among other things, certain tax-related dealings of the financial products unit, the once high-flying division that has been singled out for its role in A.I.G.’s financial crisis last fall. Other deals involved A.I.G. offshore entities whose function centers on executive compensation and include C. V. Starr & Company, a closely held concern controlled by Maurice R. Greenberg, A.I.G.’s former chairman, and the Starr International Company, a privately held enterprise incorporated in Panama, and commonly known as SICO.
The lawsuit contends in part that the federal government owes A.I.G. nearly $62 million in foreign tax credits related to eight foreign entities, with names like Lumagrove, Laperouse and Foppingadreef, that were set up or controlled by financial products, often through a unit known as Pinestead Holdings.
No, this Enron type activity is only to be expected. But there’s more. We have been assured in the past that although AIG’s financial products division (the one getting those bonuses and suing for the tax refund) has helped drive the world and AIG into bankruptcy, its core insurance business is quite profitable. No hanky panky there.
Well, that was then. Turns out that they came up with a nifty little way to disguise risk in their insurance business as well. Most insurance companies get reinsurance to protect themselves against outsize losses. As with all insurance, it’s a way of minimizing risk. AIG apparently came up with a way not only to minimize risk (on its books, at least), but to book revenues.
How? Simple, set up a bunch of subsidiaries, and have then reinsure each other. Of course, functionally, it’s as if AIG was selling insurance to itself, so they have not, in fact, reduced any risk. But of course you know there’s more. The company AIG is using to write the reinsurance is set up as a Bermuda corporation, so that it can take advantage of loose accounting rules that allow it to keep very low reserves for that reinsurance:
…AIG admits that its got a company, AIRCO, that is reinsuring its own insurance, and AIRCO is using a Bermuda accounting trick to limit the reserves it holds for this reinsurance.
You can read the whole story at the link above. You may be surprised (if you have been living under a rock) to find out that the potential losses from this clever little stunt could be in the hundreds of billions.