Almost on cue, this Wall Street Journal article($) is reporting that Warren Buffett, the famed investor who is chairman and CEO of Berkshire Hathaway Inc., will be questioned by regulators next month over his involvement in the transaction between Berkshire’s General Re insurance unit and American International Group Inc. that has led to the resignation of Maurice “Hank” Greenberg as AIG’s chairman and CEO.
Here are the previous posts on the probe into AIG and Berkshire, and a NY Post article from last week that reported on a leak from New York Attorney General Eliot Spitzer‘s office that Mr. Buffett was not a target of the investigation.
H’mm. I guess Mr. Spitzer has changed his mind.
Mr. Buffett’s interview is scheduled for April 11, a day before Mr. Greenberg’s interview unless he has decided to assert his Fifth Amendment privilege in light to his resignation from AIG. At this point, Mr. Spitzer’s office and the Securities and Exchange Commission are handling the probe, although Justice Department lawyers will also be present at both interviews.
Mr. Buffett will be questioned specifically about his involvement in a 2000 reinsurance transaction between AIG and General Re that regulators contend allowed AIG to boost its financial position improperly. The transaction shifted half a billion of expected claims to AIG from General Re along with a commensurate amount of premiums. AIG booked the premiums as revenue and then added $500 million to its reserves to account for its obligation to pay the claims at a time when market analysts were questioning whether AIG had adequate liability reserves. Regulators contend that the premium was designed to ensure that AIG was not at risk and, therefore, that the half billion was improperly booked as premium revenue. For its trouble, General Re received a $5 million commission on the deal and now even more investigative scrutiny into similar transactions with other companies.

The NY Times Gretchen Morgenson provides this lucid analysis of the deal that prompted American International Group’s board to call upon Maurice “Hank” Greenberg to step down as AIG’s CEO after a generation of phenomenal wealth building for AIG shareholders. Here are the prior posts on AIG and Mr. Greenberg’s mounting troubles.
Ms. Morgenson asserts that the purpose of the questionable transaction that led to Mr. Greenberg’s ouster was to mask AIG’s declining financial performance from the market. Unless AIG’s stock price was maintained, AIG risked overpaying for American General Insurance Co. in 2001, which was a key acquisition in Mr. Greenspan’s strategy of diversifying AIG’s insurance business.
Nevertheless, Ms. Morgenson’s analysis fails to address the nuance that the transaction in question was not performed in Mr. Greenberg’s basement where no one could see it. Rather, it was a material transaction that was fully disclosed after careful review and approval by AIG and General Re’s executives, auditors and attorneys. Presumably, Mr. Greenberg would not have approved the transaction without such disclosure and approvals. In fact, Ms. Morgenson’s article simply assumes that the transaction was at least wrong without even entertaining the notion that numerous experts in such transactions had approved the transaction and are prepared to defend AIG’s booking of it.
Despite all this, Mr. Greenberg faces a possible indictment on criminal charges that could result in a substantial prison sentence in the autumn of his long and successful business career. In a couple of weeks, Mr. Greenberg will be removed from the the board of directors of the company he built into a financial powerhouse unless he waives his privilege against self-incrimination in connection with the regulatory investigation into the transaction.
Maybe AIG took risks with certain transactions that should result in restatement of its earnings and reserves. Although the value of AIG’s shares are fallen 24% for over $46 billion in market value since the beginning of the above-described probe, perhaps the value of such shares should be hammered in the market as a result of such a restatement. But do we really want the government criminalizing talented people such as Mr. Greenberg simply because he approved a questionable transaction that multiple experts in such deals had previously blessed?
That a reporter of Ms. Morgenson’s stature does not even mention that troubling issue reflects just how socially acceptable it has become for the government to abuse its awesome police power to criminalize merely questionable business transactions.

In what is becoming a typical development in such sagas, this NY Times article reports that the board of financial services giant American International Group Inc. is considering a move to restate its financial statments as a result of suspected accounting mistakes on its financial statements that may total as much as $3 billion from as many as 30 different insurance transactions. Here are the earlier posts on the the government’s assault on AIG.
As the governmental probes into AIG’s accounting is now far broader than what was believed just a week ago, the AIG board is assessing whether to restate its financial statements in regard to an additional 60 transactions that internal AIG investigators have identified as being potential problems. The potential errors under scrutiny occurred over five year period and include the possible booking of revenue and income prematurely and improperly transferring liabilities off the company’s books. Many of the deals in question could have been designed either to boost AIG’s reserves or to “smooth the earnings” of the company to meet Wall Street expectations.
Gosh, isn’t this starting to sound downright Enronesque?.
Nevertheless, even a multibillion-dollar writedown of earnings should not damage AIG’s long-term financial stability much. The company had net income of over $11 billion last year on revenue of almost $100 billion.
Former AIG chairman Maurice “Hank” Greenberg, who remains as AIG’s nonexecutive chairman, is tentatively scheduled to give a sworn statement to investigators from New York AG Eliot Spitzer’s office and the SEC on April 12. At the rate this scandal is developing, Mr. Greenberg better think seriously about stepping down and taking the Fifth. It is becoming increasingly clear that the Lord of Regulation is going to want more from AIG than simply financial sacrifices.