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April 27, 2005

AIG is sounding more like Enron all the time

aiglogo150.gifAs noted earlier here and here, there are several characteristics of the structure of American International Group Inc. that are similar to the structure of Enron Corp. In particular, both companies' business is largely dependent on its customers' trust and, as Enron showed us in dramatic fashion, once that trust is lost, a company structured in such a manner can literally collapse in a very short period of time.

On face value, this report from yesterday regarding the Lord of Regulation's investigation into whether AIG wrongly pocketed tens of millions of dollars in insurance premiums that should have gone to the New York state workers' compensation fund is probably not any more damaging to the public's trust in AIG's finances than any of the dozens of other revelations that have occurred in regard to AIG and Berkshire Hathaway in connection with that investigation over the past couple of months.

However, in what can only be described as an astounding revelation in this morning's Wall Street Journal ($) article, AIG's general counsel in 1992, E. Michael Joye, informed AIG's senior management -- including former CEO Maurice "Hank" Greenberg -- that the company's accounting treatment with regard to the insurance premiums was illegal. Even more interestingly, Mr. Joye resigned from AIG (or was forced out) later that same year over problems relating to accounting issues.

To top it all off, according to the WSJ article, Mr. Joye provided to the Lord of Regulation a copy of his memo to AIG management about the insurance accounting issue, and then AIG waived its attorney-client privilege regarding Mr. Joye's memo and the accounting issue to allow Mr. Spitzer's office to proceed with its investigation into the issue. AIG's board is allowing this highly unusual level of cooperation with the Lord of Regulation because of its realization that the Lord has the board over a barrel: if the AIG board were to assert such basic rights as the attorney-client privilege, then the Lord of Regulation would almost surely issue an indictment that would have a potentially cataclysmic effect on AIG's various insurance licenses.

On the other hand, if AIG's senior management forced Mr. Joye out because of his calling out of questionable or illegal accounting practices, then that would reflect a serious defect in AIG's internal controls in that an advocate of adhering to legal requirements was canned rather than rewarded. Inasmuch as a similar defect in internal controls allowed Enron's Andrew Fastow to profit wildly from Enron's apecial purpose entities while serving as Enron's CFO, this latest revelation about AIG sure is starting to sound familiar, isn't it?

By the way, the WSJ's ($) article on AIG's ultra-exclusive New York area golf club -- Morefar -- makes it sound as if getting an invitation to play Augusta National is easy in comparison to getting one to play Morefar.

Posted by Tom at April 27, 2005 12:15 PM |

Comments

I know what you don't like is his heavy handedness, but doesn't all this information about IAG make you glad that Spitezer is finding it?

Posted by: Adam at April 28, 2005 8:45 AM

Adam, my main complaint with Spitzer -- apart from his political motives -- is his misuse of the threat of criminal prosecution to regulate business. The market -- or even civil regulatory agencies -- are proper and far less damaging mechanisms for regulating this type of behavior.

Posted by: Tom K at April 28, 2005 9:16 AM

Apart from his political motives -- He misuses the threat of criminal prosecution to regulate business. The market -- and/or civil regulatory agencies -- are proper and consist of somewhat less damaging mechanisms for regulating this particular type of behavior.

Posted by: Nikole Smith at May 5, 2005 8:14 PM

The apple doesn't fall far from the tree. AIG is also sticking it to the individual policyholders and their employees. No one seems to care. Trying to blow the whistle about this hasn't raised much interest so far. Maybe someone else knows how to do it.

Posted by: L. Smith at April 26, 2006 7:33 PM

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