Imagine how much money might have been passed through AIG to banks who never would have even had the expectation of being paid for their loss?

Like everywhere else in life, the majority of people are well meaning and ethical. And then there are the people who aren’t. It’s the way of the world unfortunately. I have worked in the reinsurance industry for over 30 years, and I am very proud of what I and my colleagues do for a living. Reinsurance performs an important function in the financing of risk – in it’s many variations, including finite risk. I also happen to know personnally the author of the FAI fax to Ajit Jain – he’s a bad actor, and would probably act in an unethical manner no matter what industry he worked in.

I think the point of your article might have had a little more validity if you actually used facts instead of inuendos and smears. Nice try. You didn’t do it.

AIG facilitated accounting manipulation with the ’side letters’ given as examples, many banks facilitated Enrons transactions, but this facilitation was not fraudulent, and didn’t bankrupt the banks.

In the fraud/incompetance debate, the risk was taken, if those in charge knew how big a bet it was, then they were fraudulent(although perhaps not in the legal sense unless they can be proven to have been deliberately misleading), if they didn’t, then they were incompetent.

Damning in either case.

This article however is poor, arguing for a pre determined conclusion, and showing a clear lack of understanding of the CDS market.

Well, that was just an oblivious statement from Greenberg, wasn’t it? Both on the insurance side and the FP side. But, assuming he really believes that, perhaps it illustrates THE core problem: that no one in positions of power — companies, Congress, government agencies, auditors — took TBTF/systemic risk seriously over the past decade.

It is interesting to note that Hank Greenberg testified before Congress yesterday that the failure of AIG would not have been a huge, systemic event. — Chris

As a matter of fact finite or financial reinsurance should not be considered illegal or fraudulent in the first place as long as these contracts are fully disclosed to regulators/auditors and are accounted for properly. I have personally tailored legitimate solutions for large international companies which were fully approved by regulators and vetted and accounted for per auditors instructions.

As in many other areas of business there are always black sheep who cheat and commit fraud such as in the HIH Insurance case referred to in the article. Fortunately the investigation was thorough and some the culprits were imprisoned for their deceit.

I hope to see similar actions by US courts.

FromLori Says:
March 24th, 2009 at 1:48 pm
Unless someone forces them to tell us what our losses would be as citizens you might want to rethink the nationialization. I believe from what I have been able to uncover they are too big to save. Since they no longer pose a risk of systemic failure we should bail out now and let them fail!

How much does anyone really know? here..

http://www.siliconvalleywatcher.com/mt/archives/2008/10/the_size_of_der.php

No longer a systemic risk here…

http://features.csmonitor.com/economyrebuild/2009/03/22/can-us-let-aig-fail/

It was a giant fraudulant ponzi scheme to begin with let them take their licks they will bankrupt us otherwise!

Fraud here..

http://www.financialsense.com/editorials/engdahl/2009/0318.html

Public Risk here..

http://www.marketwatch.com/news/story/Public-has-more-risk-public/story.aspx?guid={3C374173-407C-4A88-9D76-436ECEE6116E}

Lori

http://bluelori.blogspot.com/2009/04/oooh-just-wait-until-china-finds-out.html

1. “Much of our known world is built on pillars of sand” — What troubles me about this is the implication that our *economy* is built upon pillars of sand. I think that is a poor conclusion from the post above. Economics is the study of the allocation of scarce resources. There is a real economy here and in the rest of the world. What has happened in the financial world the last few decades, especially as so well described and analyzed by Mr. Whalen, is that a huge transfer of wealth has occurred through sham transactions. There is, in some general sense, a finite amount of wealth in the world, as judged by the amount of goods and services we can amass in total. What these sham transactions did was to shift the wealth from participants in other sectors of the economy to participants in the financial sector. This transfer of wealth has been exposed as especially egregious now that we see how many financiers (and their families) became extremely wealthy and then basically left the “taxpayers” with the bill. This was an enormous transfer of wealth, and I am completely on board with Whalen’s description of it as often being obtained through fraudulent means. In one sense, the finance sector found a way to bury the risk, take huge profits from savers (and those who “saved” through pensions) by hiding that risk and convincing the general public that the risk did not exist, and then kept the gains once the risk blossomed into losses for the savers. I understand that the economy is not exactly a zero sum game, but it is close enough that we should really be focused on who are the winners and who are the losers in any particular scheme rather than whether this was all built upon pillars of sand.

2. “Incompetence explains a lot more than conspiracy theories.” I have expounded upon this elsewhere, but there is a third explanation that I think explains a lot more than both incompetence and conspiracies. No doubt there is enormous incompetence in all sectors (I see it every day), and no doubt many people collude in conspiratorial ways to defraud others, but what happens in a huge system like the financial sector (which includes hundreds of thousands of participants) is more subtle. I’ll pull a little Upton Sinclair on you, “It is difficult to get a man to understand something when his job depends on not understanding it.” The explanation is, of course, not incompetence or conspiracy, but willful ignorance. Each individual participant in the financial sector had little reason to ever question any assumptions as long as the system continued to make him rich. There is no need to have an overt conspiracy or to be incompetent. Millions upon millions of transactions slowly move the system to where those in control of the transaction extract maximum benefit; no conspiracy necessary. You can see this everywhere in the system, down to subprime mortgage originators. The money was great. Why question the system that is making you rich? The market rewarded those who pushed the envelope as far as possible, so the envelope kept getting pushed. That’s the market. Unfortunately, those ultimately bearing the risk (savers, taxpayers, however you want to label them) did not have as strong a personal incentive on an individual basis to keep watch over the system, and thus, those in charge of the financial sector ran roughshod over the entire enterprise, extracting profits far in excess of any value generated by their actions. I guess that’s why economics text discuss the concept of market failure (sarcasm…). So in addition to looking at who wins and who loses (as I noted in #1), we should always be looking at the incentives in any system. When there are enormous incentives for each individual participant to cheat, the efficiency of any market breaks down. That’s one reason we enforce contracts through public courts. It’s also the reason we should regulate a system like Mr. Whalen has described above.