AIG Is Teetering, Even After Bailout

The American International Group (AIG) received the biggest financial bailout in history last fall. But The New York Times reports that the dozens of insurance companies that make up AIG show considerable weakness, and that could lead to an ugly showdown between policyholders and the Federal Reserve.

A key source for the Times article, forensic accountant Thomas Gober, has strong ties to Alabama and our Legal Schnauzer tale.

Reporter Mary Williams Walsh lays out the AIG story:

In the months since A.I.G. received its $182 billion rescue from the Treasury and the Federal Reserve, state insurance regulators have said repeatedly that its core insurance operations were sound—that the financial disaster was caused primarily by a small unit that dealt in exotic derivatives.

But state regulatory filings offer a different picture. They show that A.I.G.’s individual insurance companies have been doing an unusual volume of business with each other for many years—investing in each other’s stocks; borrowing from each other’s investment portfolios; and guaranteeing each other’s insurance policies, even when they have lacked the means to make good. Insurance examiners working for the states have occasionally flagged these activities, to little effect.

More ominously, many of A.I.G.’s insurance companies have reduced their own exposure by sending their risks to other companies, often under the same A.I.G. umbrella.

Spreading risks to other companies is known as reinsurance. And Gober is a national expert on that subject. Gober currently is based in Mississippi, but he used to work as research compliance director at the University of Alabama at Birmingham (UAB), my former employer. Gober was one of two whistleblowers in a massive research-fraud case at UAB that totaled an estimated $600 million.

Gober sounded an alarm about AIG in a Newsweek article published in March. Now he is a consultant for a lawsuit on behalf of AIG policyholders, filed in California Superior Court in Los Angeles.

Reports the Times:

The lawsuit seeks a court order requiring all A.I.G. subsidiaries doing business in California to put enough money to cover their obligations into a secure account controlled by the state treasurer. The goal is to keep money from being moved out of California or used to finance A.I.G.’s other activities, said Maria C. Severson, a lawyer for the plaintiffs. The lawsuit also seeks to bar A.I.G. companies from soliciting new business without full disclosure of their financial condition.

Gober doesn't like what he sees on the horizon:

“Eventually, there’s going to be a battle between the policyholders and the feds,” said Thomas D. Gober, a former insurance examiner who now has his own forensic accounting firm that specializes in insurance fraud. “The Fed is going to say, ‘We want our money back,’ but the law says, ‘Policyholders come first.’ It’s going to be ugly.”

Another insurance expert paints an equally grim picture, noting that AIG companies have reinsured each other to such a large extent that now billions of dollars worth of risks may have ended up at related companies that lack the means to cover them:

“An organization like this one relies on constant, ever-growing premium volume, so it can cover and pay for the deficits,” said W. O. Myrick, a retired chief insurance examiner for Louisiana.

If A.I.G.’s incoming premiums shrink, he warned, “the whole thing’s going to collapse in on itself.”