TNI Mar 30 AIG Series of Unfortunate Events

News Analysis: AIG’s Series of
Unfortunate Events
by Joann M. Weiner
Reprinted from Tax Notes Int’l, March 30, 2009, p. 1155
Volume 53, Number 13 March 30, 2009
(C)TaxAnalysts2009.Allrightsreserved.TaxAnalystsdoesnotclaimcopyrightinanypublicdomainorthirdpartycontent.

News Analysis: AIG’s Series of
Unfortunate Events
by Joann M. Weiner
This story does not have a happy ending. Just as
Lemony Snicket warned in his Series of Unfortunate
Events about the orphaned Baudelaire children, if you
are interested in stories with happy endings, you would
be better off reading some other story.
For those who won’t take my advice, here is the
unhappy ending: The American International Group
has failed.
No matter how loudly AIG claims that it is still a
leading international insurance organization with more
than $850 billion in assets and 160,000 employees
working in more than 4,300 operations in 130 jurisdic-
tions, it lost more than $100 billion last year.
AIG has failed. Yet AIG Chief Executive Edward J.
Liddy has made it clear why the U.S. government can-
not allow AIG to fail.
Liddy said in a March 2 earnings call:
We are the world’s largest property casualty in-
surer. . . . We are the largest provider of retire-
ment savings for primary and secondary school
teachers and healthcare workers. . . . We insure
the property of 94 percent of the Fortune 500
companies.
Extolling the global reach of the insurance giant
was not why Liddy, a retired Allstate insurance com-
pany chief executive and director of a private equity
firm who former Treasury Secretary Henry Paulson
had picked to lead AIG, was calling. No, Liddy was on
the phone because AIG was again on its deathbed, de-
spite the $85 billion lifeline the federal government had
thrown AIG in September and two additional injec-
tions that had brought the bailout to $150 billion by
the end of 2008. Liddy was on the phone pleading for
a fourth taxpayer-funded bailout to prevent his nomi-
nally solvent company from joining Lehman Brothers
in bankruptcy. As Liddy warned, AIG’s global reach
extends so deep into so many nooks and crannies of
the world’s financial system that a formal AIG bank-
ruptcy risked igniting a global financial meltdown.
Taxpayer-Financed Bailout
The Federal Reserve complied and gave AIG an-
other $30 billion from the Troubled Asset Relief Pro-
gram that allowed AIG to survive. AIG needed an-
other multibillion-dollar lifeline to forestall an
anticipated and deserved ratings credit downgrade to
near junk status that would have triggered collateral
calls from its swap counterparties that it could not
meet. Although it had not yet admitted it, AIG had
already spent almost every penny of the funds it had
received from the U.S. government.
And because the government believed AIG and its
counterparties had to survive, the Treasury Department
and the Federal Reserve conceded yet again that AIG
could not go bankrupt, arguing in a joint statement
issued March 2 that an AIG failure posed a ‘‘systemic
risk’’ to the ‘‘entire financial system.’’ Treasury and the
Fed adopted the populist tone necessary to justify fur-
ther financial support to AIG:
AIG provides insurance protection to more than
100,000 entities, including small businesses, mu-
nicipalities, 401(k) plans, and Fortune 500 compa-
nies who together employ over 100 million
Americans. AIG has over 30 million policyhold-
ers in the U.S., and is a major source of retire-
ment insurance for, among others, teachers and
nonprofit organizations.
Protecting innocent small businesses, municipalities,
and nonprofit organizations became of paramount im-
portance to the U.S. government. Unfortunately, saving
those entities required saving the counterparties that
enabled AIG to fall or, as Lemony Snicket might say,
be pushed into its financial black hole. Predictably, tax-
payers were outraged that U.S. taxpayer bailout funds
supported AIG’s swap counterparties.
AIG’s Enablers
As is now well known, by 2008 AIG had become
much more than an insurance company. Beginning in
the late 1980s, it had expanded into the financial ser-
vices business, and its most profitable line of business
was selling an insurance-like product known as a credit
default swap. The idea of a credit default swap is
simple. Lending institutions pay intermediaries, such as
AIG, a premium to provide insurance against default
by the creditor. AIG’s triple-A credit rating, which it
held until March 2005, allowed its financial products
Reprinted from Tax Notes Int’l, March 30, 2009, p. 1155
TAX NOTES INTERNATIONAL MARCH 30, 2009 • 1

unit to obtain the most favorable terms from its coun-
terparties. These counterparties were typically financial
institutions that held packaged securities known as col-
lateralized debt obligations, many of which were
backed by residential and commercial mortgages.
Although the historical default rate on these pack-
aged securities was low, in 2007 the securities underly-
ing the swaps began to default and AIG was forced to
make payments on an increasing number of deals. As
AIG’s financial position deteriorated, the ratings agen-
cies downgraded AIG, and triggers in the swap con-
tracts that required it to post additional collateral in
case of a downgrade led its counterparties to demand
more collateral.
AIG had already raised $20 billion of new capital in
the spring of 2008, which it hoped would cover the
mounting losses at its financial products unit. That
amount was insufficient, and over the weekend of Sep-
tember 13, 2008, the credit ratings agencies indicated
that AIG’s continuing financial problems would lead to
a further downgrade. On September 15, Lehman
Brothers filed for bankruptcy. The next day, it was clear
that AIG could not meet the anticipated $15 billion in
collateral calls that the credit downgrade would trigger.
To avoid what it perceived as financial calamity, the
federal government stepped in and gave AIG the funds
to meet its collateral calls.
The Unfortunate Truth
As Liddy ominously noted on March 2, nearly six
months after nearly falling into bankruptcy, AIG still
had a $2 trillion financial products operation. More
than $1 trillion of that amount was concentrated with
12 major global financial institutions. The fate of
AIG’s counterparties appeared indistinguishable from
AIG’s fate.
Without counterparties, AIG could not have entered
into a single swap transaction it would be like having a
supply without a demand. Counterparties are vital en-
ablers to AIG’s series of unfortunate events. AIG’s
counterparties covered the financial spectrum, from
banks and investment banks to pension funds, corpora-
tions, foundations and endowments, insurance compa-
nies, hedge funds, money managers, high-net-worth
individuals, municipalities, sovereigns, and suprana-
tional entities.
On March 15 AIG released a list of its major coun-
terparties. Goldman Sachs, which had denied having a
large exposure, received $12.9 billion in collateral post-
ings, payments in the securities lending program, and
swap cancellation payments. Other counterparties in-
cluded Deutsche Bank ($11.8 billion), Société Générale
($11.9 billion), Merrill Lynch ($6.8 billion), Barclays
($8.5 billion), J.P. Morgan ($0.4 billion), UBS ($5 bil-
lion), HSBC ($3.5 billion), Bank of Montreal ($1.1 bil-
lion), and the hedge fund Citadel ($0.2 billion). In to-
tal, from September 16 to the end of December 2008,
AIG posted more than $22 billion collateral to those
counterparties and others and an additional $80 billion
for other AIGFP transactions. (For details on the trans-
actions involving UBS, see Doc 2009-5732 or 2009 WTD
49-3.)
AIG has spent more than $100 billion of its federal
bailout funds to meet demands from its counterparties.
What is unfortunate in this deal is that those counter-
parties are being made whole in this transaction at a
time when the swaps are valued at most at 60 cents on
the dollar.
Winding Down Exposure
There is some slightly good news to this story. AIG
is winding down its credit default swap business. At
the end of 2008, it had $302 billion in notional value
of credit default swaps, down from the $527 billion it
held a year earlier. As in 2007, most of AIG’s expo-
sure remains in Europe, with nearly 70 percent related
to swaps European institutions used to facilitate regula-
tory capital relief in Europe. AIG structured these
swaps with its French subsidiary, Banque AIG.
But with $300 billion of possibly toxic credit default
swaps outstanding and a $1.6 trillion derivatives portfo-
lio that includes complicated bespoke transactions that
it still has to unwind this sad story is far from over.
Offshore Troubles
AIG is a tangled web of global operations. As
shown in the chart, each of its four main operating
segments, including AIGFP, the main source of its
woes, is a miniature multinational enterprise in itself.
Recently AIG earned nearly $15 billion from its glo-
bal operations. But that was then, and this is now. In
2008 AIG wiped out those gains and more with its
$61.7 billon loss in the fourth quarter of 2008, the larg-
est in U.S. corporate history. For all of 2008, each of
AIG’s operations lost money, and the company as a
whole lost more than $100 billion before taxes and mi-
nority interests. AIG’s Financial Services sector re-
ported more than $40 billion in operating losses last
year.
AIG’s Tax Problems
Taxes, or more accurately, structuring transactions to
minimize taxes often using offshore entities, are re-
sponsible for a large part of AIG’s historical and con-
tinuing financial troubles. Recall that AIG began as an
insurance company in 1919 in Shanghai and entered
the U.S. market only three decades later. Several of
these tax troubles are described below, starting from the
beginning.
Benefiting From the Celtic Advantage
Good business managers always seek ways to maxi-
mize their revenue while minimizing their taxes. Unfor-
tunately, at times these executives may enter into trans-
actions that appear sound but in fact are standing on
HIGHLIGHTS Reprinted from Tax Notes Int’l, March 30, 2009, p. 1155
2 • MARCH 30, 2009 TAX NOTES INTERNATIONAL

shaky ground. That may describe the transaction that
AIG entered into in late 2000 that may have seemed
solid but turned out to be anything but.
The origins of AIG’s demise may lie in a common-
place transaction between two companies that were
then led by two titans in the insurance industry, Mau-
rice R. ‘‘Hank’’ Greenberg of AIG and Warren Buffett
of Berkshire Hathaway. In October 2000, Greenberg
called Ronald Ferguson, who was then the CEO of
General Reinsurance Corp. (Gen Re), a Connecticut-
based subsidiary of Warren Buffett’s holding company,
Berkshire Hathaway, to discuss a possible insurance
transaction.
The complicated details of the transaction are set
forth in various legal proceedings. In late 2000 and
early 2001, AIG entered into two reinsurance transac-
tions involving an Irish subsidiary of Gen Re that were
designed to boost AIG’s loss reserves. The main trans-
action concerned a transaction between Gen Re’s Co-
logne Re Dublin (CRD) subsidiary and AIG’s
Bermuda-based National Union insurance subsidiary.
HIGHLIGHTSReprinted from Tax Notes Int’l, March 30, 2009, p. 1155

The transactions involved a then-common practice
of using finite risk insurance, a form of insurance de-
signed to transfer risk and smooth earnings over time.
These transactions made it appear as if Gen Re was
paying $500 million in premiums for AIG to reinsure
Gen Re for up to $600 million in liability. The $100
million difference between the liability limit and the
expected premium made it appear as if AIG had taken
on a risk of $100 million in losses. AIG applied rein-
surance accounting to the transaction and booked a
total of $100 million in additional reserves over two
quarters. Gen Re applied a different accounting inter-
pretation. In a separate side transaction, AIG arranged
to pay Gen Re $5.2 million for its services.
Why Ireland?
Of all the low-tax countries in the world, AIG chose
Ireland. Why?
In Ireland CRD benefited from the tax breaks of-
fered in Dublin’s International Financial Services Cen-
ter and from Ireland’s extensive income tax treaty net-
work that allows companies to reduce or eliminate
withholding taxes on cross-border payments. Ireland
also is a member of both the European Union and the
OECD, which distinguishes it from other low-tax juris-
dictions. Participants in the reinsurance scheme were
aware of Ireland’s generous benefits.
Four Gen Re executives (Ronald E. Ferguson, Chris-
topher P. Garand, Robert D. Graham, and Elizabeth
A. Monrad) and an AIG executive (Christian M. Mil-
ton) used Gen Re’s Dublin operation to avoid what
was referred to as the ‘‘North American problem,’’ a
rule requiring domestic reinsurance companies to file a
Schedule F with state regulators to provide details
about each reinsurance transaction. Since Gen Re and
AIG were reporting the transaction differently, U.S.
state regulators might have noticed and started looking
more closely at it. Ireland does not impose such strin-
gent reporting obligations.1
Concealment With Little Gain
In late November 2000, Graham proposed structur-
ing the transaction using offshore entities so that ‘‘any
reviewer of the AIG U.S. entity’s statements wouldn’t
be able to connect the dots to CRD and beyond.’’ The
parties also designed elaborate transactions to hide the
source of the side payments. AIG used a different sub-
sidiary, Hartford Steam Boiler Inspection and Insur-
ance Co. in Connecticut, to transfer payment to Gen
Re rather than use National Union, the party to the
fraudulent reinsurance contracts, to pay CRD, the party
to the sham contract.
Graham also knew how to fool U.S. state regulators.
In tape-recorded conversations, Graham explained that
‘‘if it’s split up enough among AIG’s U.S. entities, the
transaction would probably not reach the [state insur-
ance] regulatory prior approval threshold for any of
them.’’
These tape recordings, which were introduced into
the court proceedings, provide powerful evidence of
the executives’ interest in structuring a transaction that
would both minimize taxes and avoid regulatory scru-
tiny.
This clever tax planning adds many unhappy ele-
ments to the story. The five executives were found
guilty on February 25, 2008, of conspiracy, securities
fraud, and making false statements to the Securities
and Exchange Commission and faced long prison sen-
tences for their acts. Following a determination that
AIG shareholders had lost more than $500 million in
this fake insurance transaction, the federal sentencing
guidelines could have resulted in a sentence of life in
prison. The harshest penalty to date has been Milton’s
four years in prison. Ferguson was sentenced to two
years and Garand to one year and a day in prison.
Thus, with the sentencing nearly finished, the four-
year-old case regarding a transaction that took place
eight years ago is nearly over.
What was the direct economic gain in this affair?
Very little. AIG paid Gen Re $5.2 million for putting
the deal together.
What was the business gain? By reporting higher
reserves than otherwise, AIG avoided a potentially
negative analyst report that might have caused its share
price to fall, preventing it from purchasing the life in-
surance company American General.
What were the costs? Greenberg, who was an unin-
dicted alleged coconspirator, still faces a civil trial over
his role in the fraudulent reinsurance transaction. As
part of a settlement with the SEC and the New York
attorney general’s office, AIG paid $1.64 billion in
2006 to settle investigations related to these transac-
tions. Also as part of the settlement, AIG restated its
2000 to 2004 earnings by $3.9 billion.
The actual cost of the transaction is immeasurable.
It led to the ouster of Greenberg and quite possibly the
eventual demise of AIG and the current financial cri-
sis.
Generating Foreign Tax Credits in Three Easy Steps
The series of unfortunate events continues. In its
second-quarter SEC filing in 2008, AIG reported that it
had received a statutory notice of deficiency from the
IRS asserting that it owed additional taxes, primarily
because of disallowed foreign tax credits. AIG made
the payments, but then filed a refund for $306 million
and claimed a $26 million refund related to the tax
1
For more information, see http://www.usdoj.gov/usao/ct/
Documents/FERGUSON_SS_Indictment.pdf.

effects from income restatements related to the fraudu-
lent reinsurance transactions in late 2000.2
The foreign tax credit issue concerns a tax strategy
that essentially involves a company structuring a trans-
action primarily to generate creditable foreign-source
income. AIG is challenging the IRS over cross-border
financing transactions that AIGFP entered into in the
1990s. Joseph Cassano, who is now notorious for his
role in the credit default swaps debacle, led AIGFP’s
Transaction Development Group, which structured
transactions to arbitrage cross-country tax differences.
With operations in 130 countries and low-tax ha-
vens, AIG could readily find cross-country tax differ-
ences to arbitrage, and its foreign-tax-credit-structured
transactions span the globe. In its lawsuit, AIG identi-
fies seven specific cross-border financing transactions
involving the Cayman Islands, the Netherlands Anti-
lles, Ireland, France, New Zealand, the Netherlands,
and Italy.
These transactions largely took advantage of incon-
sistencies between U.S. and foreign tax law. For ex-
ample, one of AIG’s financial transactions involved a
controlled foreign corporation, Lumagrove, incorpo-
rated in the Cayman Islands but managed and con-
trolled in Ireland.
Lumagrove
The facts of the Lumagrove transaction are straight-
forward. In 1997 AIGFP created Pinestead Holdings as
a wholly owned subsidiary for its offshore financial
operations and established Lumagrove Finance Co. as
an exempt company in the Cayman Islands. Pinestead
was considered a U.S. shareholder and owned at least
10 percent of the voting stock of Lumagrove, which
made Lumagrove a CFC for U.S. tax purposes and
subjected its portfolio income to current taxation under
subpart F. Pinestead managed and controlled the com-
pany from Ireland, which made it a resident of Ireland
for tax purposes.
Initially, this structure appears unusual, since com-
panies don’t often wish to create transactions that will
increase their tax liability. But AIGFP knew how to
structure a transaction to obtain the maximum tax ben-
efits.
Although AIGFP is now known for its credit default
swaps business (it conducted its first credit default
swap in 1998), in 1997 AIGFP’s specialty was tax arbi-
trage.
AIGFP’s Pinestead Holdings purchased shares in
Lumagrove for $479 million. Lumagrove invested these
funds in securities that generated a $6.8 million profit,
on which Lumagrove paid $3.8 million in Irish corpo-
rate income taxes.
AIGFP’s Pinestead holding company sold shares in
Lumagrove to a subsidiary of the Bank of Ireland and
simultaneously agreed to buy those shares back. Pine-
grove obtained $295 million from the bank.
The story does not end here because it is not yet
clear why AIG needed Irish income and the subse-
quent tax liability. Because Lumagrove’s portfolio in-
come was treated as subpart F income and Pinestead
was a qualifying shareholder for CFC purposes, Pinest-
ead was required to include its pro rata share of
Lumagrove’s income in its gross income for U.S. tax
purposes. Pinestead then claimed a $3.8 million foreign
tax credit in the financial services category for the Irish
taxes. Because AIG had sufficient excess liability in the
financial services foreign tax credit basket, it was able
to use the Lumagrove tax credit in full.
AIGFP does not reveal how much excess liability it
had in the financial services basket, but it’s a safe bet
that it was at least $3.8 million. In total, AIG claimed
nearly $62 million in foreign tax credits on the transac-
tions described in its lawsuit against the United States.
As taxpayers, we may not be happy that AIG is su-
ing the IRS for a refund (although the case helped re-
veal the inner workings of the tax avoidance scheme),
but AIG has the right to claim that it is entitled to a
refund if the tax law allowed the transactions at that
time.
The Offshore Charity
AIG’s offshore tax troubles are not limited to rein-
surance scams or foreign tax credits. AIG and its
former chairman are in a long-running dispute over
control of a block of shares held by Starr International
Co. (SICO), a private holding company that Greenberg
heads. The case began with a relatively simple matter
concerning the ownership of some artwork. Shortly
after Greenberg resigned from AIG on March 14,
2005, SICO sued AIG, claiming that AIG was refusing
to return Greenberg’s works of art and other items
worth $15 million that it held in its Bermuda office.
With the bad blood between AIG and Greenberg, it
was inevitable that AIG would countersue, which it did
in September 2005, asserting breach of contract, unjust
enrichment, and other matters relating to SICO’s fail-
ure to use AIG’s shares solely for the benefit of AIG
and its employees. SICO had established a deferred
compensation profit participation plan in 1975 that
provided compensation to top AIG managers. When
Greenberg left AIG, he removed all AIG directors from
SICO’s board of directors, ended SICO’s participation
in AIG’s deferred compensation plan, and began di-
recting the funds from SICO to a new international
charity.
Like so many of AIG’s transactions, this one has
extensive offshore links. SICO is a Panamanian corpo-
ration domiciled in Bermuda, managed in Ireland, and
with a principal office in Zug, Switzerland. Ever seek-
ing the most tax-efficient location for its business, in
2
AIG v. U.S., 09-cv-1871, U.S. District Court, Southern Dis-
trict of New York (Manhattan).

2004 SICO relocated its tax residence from Bermuda to
Ireland partly to take advantage of the Ireland-U.S. tax
treaty that reduced the dividend withholding tax on
AIG dividends.
In 2005 SICO held 311 million AIG shares, which
at one time were worth more than $31 billion. The
shares SICO now hold are worth less than $300 mil-
lion. AIG claimed that SICO held the shares as de-
ferred compensation for AIG’s employees. Greenberg
insists that such a deal was never in place and that
SICO has control over the shares. Should Greenberg
prevail, the shares would be ceded to the Starr Interna-
tional Charitable Trust, an Ireland-based charity that
Greenberg controls and that would benefit from Ire-
land’s tax exemption scheme for charities.
Based on what we know about Ireland’s practices in
other areas, we might anticipate that this offshore char-
ity may one day be involved in an international tax
controversy.
An 80/20 Issue
Although the foreign tax credit claim has generated
public interest, some of AIG’s tax issues lie just below
the surface. One such issue reported February 20 by
ProPublica, an organization that describes itself as a
producer of investigative journalism in the public inter-
est, involves a tax position with one of AIG’s opera-
tions that is up for sale.
AIG plans to sell its American Life Insurance Co.
(ALICO) to help pay for the U.S. government loan.
However, in 2004 the IRS ruled that life insurance and
annuity products sold to foreign clients are subject to a
30 percent U.S. withholding tax. ALICO, one of AIG’s
life insurance subsidiaries, has not been withholding
this tax on these products on the basis that it is an
80/20 company and so is not subject to the 2004 rul-
ing, which did not cover 80/20 companies, which are
U.S. incorporated entities that conduct at least 80 per-
cent of their activity outside the United States.
H. David Rosenbloom, an attorney with Caplin &
Drysdale in Washington, advises ALICO and clarified
his client’s position with Tax Analysts. Rosenbloom
said the issue concerning ALICO’s potential tax liabil-
ity is not the size of the withholding tax but the proce-
dures and forms involved in instituting a withholding
tax. ‘‘The amount of tax at stake is minuscule, and
most of the income would be exempt from withholding
tax by the applicable bilateral tax treaty,’’ Rosenbloom
said, ‘‘but asking all of ALICO’s policy holders, most
of whom are foreigners, to sign a W8-BEN form is
highly impractical for the firm.’’
Rosenbloom explained that the problem largely
arises because some countries, such as the United
Kingdom, where ALICO writes many of its policies,
treat the product as life insurance rather than as a
money market fund. As Rosenbloom noted, once the
foreign country classifies the product as insurance, the
income on the contract falls into its own special cat-
egory of tax treatment because of Internal Revenue
Code section 7702 (Life Insurance Contract Defined).
Rosenbloom stressed that ALICO should be treated
as an 80/20 company and be exempt from the with-
holding tax. Even though the company is domiciled in
Delaware, it earns more than 90 percent of its income
outside the United States. The company has asked the
IRS for a private ruling to clarify the position.
AIG recognizes the complexity of the tax situation
associated with ALICO and the other insurance entity,
American International Assurance Co. Ltd., which the
federal government is putting into special purpose ve-
hicles. For example, in the March 2 earnings call,
Paula Reynolds, AIG’s chief restructuring officer, said,
‘‘There is a lot of complexity with respect to the tax
issues associated with those two entities. . . . You know,
we laughed last night. I said to Ed [Liddy] that it
might be better to go to jail than it would be to have to
deal with the intricacies of securities laws.’’
Interest Deductions and the Bailout
Another tax issue involving AIG has a purely do-
mestic aspect. In September 2008 the U.S. government
took a 79.9 percent ownership in AIG. Although the
government has now effectively taken full ownership,
there was a clear tax benefit to the ownership decision.
Under IRC section 163, interest is tax deductible, but
only if the interest is paid on a loan from an entity
that controls less than 80 percent of the corporation’s
voting power and value. If the government had pur-
chased 80 percent of AIG, the company would have
lost a tax deduction for the interest paid on its original
$85 billion loan at the London interbank offered rate
(LIBOR) plus 8.5 percent.
The Financial Products Group
In true Lemony Snicket fashion, we have saved the
worst for last. Another of AIG’s offshore troubles con-
cerns a lawsuit that Greenberg filed against AIG on
February 27, alleging that AIG committed securities
fraud by materially misrepresenting and omitting facts
concerning its true financial position.
Greenberg alleges that AIG misrepresented its finan-
cial position in its December 5, 2007, earnings call
when then-CEO Martin J. Sullivan said that the possi-
bility that AIGFP, the AIG unit that issued the credit
default swaps, would sustain a loss was ‘‘close to
zero.’’ In August 2007 Cassano, who earned $280 mil-
lion over eight years as head of AIGFP, famously said
he could not envision a scenario in which his AIGFP
unit would lose more than $1 on its transactions.
AIG’s annual report for 2007 noted that a down-
grade could lead to $1.4 billion in collateral calls. It
optimistically but erroneously said that events that
might lead it to post collateral would have no material
effect on its financial condition.

Greenberg says that on the basis of representations
by AIG’s senior executives, he purchased on or about
January 30, 2008, more than 3.6 million AIG shares at
$54.37 per share. Greenberg paid more than $70 mil-
lion in ordinary income tax on that transaction.
AIG countered that Greenberg is the source of his
own problems. He created AIG’s financial products
unit in 1987 following the advice of J.P. Morgan invest-
ment bankers.
Much as Greenberg may be to blame for establish-
ing the AIGFP operations, he appears to have a valid
point about AIG’s misleading statements. In its 2007
annual report, AIG stated that it had identified a ‘‘ma-
terial weakness in internal control over financial report-
ing relating to the fair value valuation of the AIGFP
super senior credit default swap portfolio.’’
The filing also admitted that AIG did not have ef-
fective controls over how AIGFP valued its credit de-
fault swaps, and that as a result, its oversight was ‘‘not
adequate to prevent or detect misstatements in the ac-
curacy of management’s fair value estimates and dis-
closures on a timely basis.’’ The financial statement
said the deficiency could result in a misstatement of
the company’s fair value estimates that could be mate-
rial to AIG’s financial statements.
On February 28, 2008, AIG reported that AIGFP
had $11.5 billion in unrealized market valuation losses.
Less than three months earlier it reported that it would
lose at most $1.5 billion on the same portfolio.
Continuing to ignore reality, AIG asserted that the
$11.5 billion in unrealized market valuation losses that
it had experienced in the last three months of 2007
‘‘were not indicative of the losses AIGFP may realize
over time on this portfolio’’ and stated that any of
AIGFP’s losses would not be material to AIG’s con-
solidated financial condition.
Unfortunately, Cassano turned out to be very wrong
in predicting that the swaps couldn’t lose. By mid-2008
a significant share of AIG’s swaps were underwater.
AIG and the entire financial community grossly under-
estimated how those losses would drag down the glo-
bal economy.
In what might be an unexpected event, perhaps the
U.S. taxpayer should join Greenberg in his lawsuit
against AIG for its flagrant and willful misrepresenta-
tions about its precarious financial situation. There’s
not much to lose in taking this bet against the casino
in London that may have fraudulently misrepresented
its practice for years.
The Penultimate Peril
Four years ago Greenberg was forced out of AIG
for a transaction that was later determined to have cost
shareholders about $550 million in losses. Those losses
now seem trivial, as AIG’s shares quickly rebounded
and rose to $70.11 a share in October 2007, thus more
than recouping what turned out to be a temporary
shareholder loss.
AIG’s current investors will not be so fortunate.
AIG’s share price has hovered close to $1.00 a share
for the past six months and will never recover even a
fraction of its value, the company is no longer included
in the Dow Jones Industrial Average, AIG’s credit rat-
ing is abysmal, and shareholder equity stands at just
under $4 billion, down from more than $71 billion six
months ago. One shareholder Hank Greenberg lost
more than $3 billion during a single week in September
when the government took over AIG. In total, the
holders of AIG’s nearly 3 billion shares have perma-
nently lost more than $175 billion since the start of
2008. Coincidentally, that figure is just about equal to
the amount that the federal government has provided
AIG to keep the company in business. The global dam-
age from the financial crisis that surrounds AIG’s de-
mise is shocking. The Asian Development Bank esti-
mated that financial markets lost $50 trillion in wealth
last year.
Have shareholders been defrauded? Should share-
holders file for relief for a possible theft due to AIG’s
misdeeds, like victims of the Bernard Madoff scheme
may receive? That chapter remains to be written.
The Unhappy Ending
Snicket ended the adventures of the Baudelaire or-
phans in the 13th installment of his series of unfortu-
nate events, simply titled The End. Snicket ended as he
began, reminding readers that ‘‘the end of this un-
happy chronicle is like its bad beginning, as each mis-
fortune only reveals another, and another, and an-
other.’’
In recounting AIG’s series of unfortunate events, it
is unclear whether the story has reached its end. Al-
though Greenberg is far from innocent in AIG’s down-
fall, many believe that if he had not been forced out in
2005, AIGFP would never have been allowed to take
on such a risky position. At the very least, it seems
clear that a shareholder with more than 300 million
shares who had led the company for more than three
decades would have taken a very strong interest in the
health of the company. Greenberg himself objected to
the federal bailout from the start.
With the latest scandal involving AIG’s
multimillion-dollar bonus payments to the so-called
best and brightest executives whose actions triggered
the worst of the series of unfortunate events, it seems
as if Snicket could just as easily have been describing
the unhappy chronicles of AIG, rather than of the
Baudelaire orphans, where each misfortune only re-
veals another, and another, and another. ◆
♦ Joann M. Weiner is a contributing editor to Tax Analysts.
E-mail: jweiner@tax.org

TNI Mar 30 AIG Series of Unfortunate Events

Empfohlen

Empfohlen

Weitere ähnliche Inhalte

Was ist angesagt?

Was ist angesagt? (17)

Andere mochten auch

Andere mochten auch (17)

Ähnlich wie TNI Mar 30 AIG Series of Unfortunate Events

Ähnlich wie TNI Mar 30 AIG Series of Unfortunate Events (20)

TNI Mar 30 AIG Series of Unfortunate Events