Spitzer’s AIG Probe Should Have Uncovered Losses In Credit Default Swaps, Barile Says

May 2009
By Andrew J. Barile

As an insurance industry veteran, I have 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. Industry practitioners know that it was industry custom and practice to use these types of reinsurance agreements to adjust earnings of insurance companies. In fact, I devote an entire chapter to a discussion of this subject in my textbooks.

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, which the company characterized 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 – the chief of the Financial Products Division?

Charles Gasparino, the CNBC on-air editor 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, was 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, bailed out by the U.S. government at a cost close to nearly $200 billion.

Did Spitzer look at the accounting practices of the 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, when he says, “the size of the accounting fraud that Spitzer allegedly uncovered was under $4 billion – chump change next to AIG’s losses now.”

Andrew Barile, MBA, CPCU, is the CEO of Andrew Barile Consulting Corp., and the author of finite risk reinsurance textbooks, A Practical Guide to Financial Reinsurance and A Practical Guide to Finite Risk Insurance and Reinsurance.