Yesterday we noticed the focus of the Case Against AIG And The Reckless Executives Inhaling Our Money had begun to shift from the exotic, futuristic sounding world of synthetic credit derivatives to the Old Economy business of dodging taxes. In fact, the two are inextricably intertwined — AIG FP was by far the biggest underwriter of the inscrutable options that could generate the kind of phony capital gains losses that rich people and companies use to get out of paying taxes. To really understand what Cassano and his gang were up to, it helps to have a working knowledge of the company’s history of run-ins with the IRS. Again and again AIG has been involved in schemes the IRS has deemed illegal, forcing the insurer and its clients to cough up some billions of dollars in back taxes over the past decade. The only real factor obscuring the magnitude of the malfeasance at AIG was arguably the many hundreds of banks, corporations and individuals who played along.
UPS: The platonic “ideal” tax structure
AIG has been a go-to source for IRS shortchanging expertise at least since 1983, when it helped UPS form a Bermuda “reinsurance” subsidiary in 1983 to divert certain “excess value” charges into an ingenious tax haven from which the IRS, following a five year legal battle eventually recovered $1.44 billion of $2.3 billion in uncollected taxes. After the jaw-dropping penalty was announced, the insurance trade journal National Underwriter quoted KPMG partner Mark Anderson saying he still looked to AIG’s UPS tax haven as an “ideal” when structuring his own clients’ tax havens.
KPMG: The accounting industry folds
But the taxman came for KPMG next, after discovering the firm had peddled tax shelter schemes — a few of which came bundled with liability “insurance” to protect the tax benefits from AIG FP — to hundreds of companies, including the baseball card manufacturer Upper Deck, which ended up suing AIG after coughing up almost a hundred million dollars in taxes after KPMG coughed up its client list as part of a half billion dollar plea agreement. Seventeen ex-KPMG executives were indicted in the “S2” tax shelter case, which was prosecuted in the aftermath of accounting scandals that nearly decimated all the industry’s entrenched players. They didn’t decimate AIG, however, which refused to make good on Upper Deck’s insurance.
What Happens To A Prosecution Deferred…
Shortly thereafter AIG FP’s inimitable chief Joseph Cassano was charged in assisting PNC Financial in a similar fraud, though the three firms avoided formal criminal indictments by coughing up fees in deferred-prosecution agreements that in AIG’s case anyway, meant the company was required to pay a government-appointed attorney to report on the company’s operations.
It sure seemed like that lawyer, James Cole, missed big-time with AIG — but the IRS effectively banned foreign tax credit generators like the ones in which AIG specialized in 2007, and Cole’s primary mission was to go back and scour the company’s practices between 2000 and 2005, years during which AIG FP’s haven-structure subsidiary the Transactions Development Group had been involved with countless other such deals, including the Hewlett-Packard vehicle the Wall Street Journal reported yesterday had generated the firm $132 million in bogus tax credits.
Son of Bosses And Fake Tax Losses
Meanwhile the IRS is still waging a decade-long battle with the so-called Son Of Boss tax shelters that have employed unregulated derivatives of the sort sold by AIG to generate more than six billion dollars in phony capital losses. The IRS has recovered more than three billion dollars in losses since offering amnesty to taxpayers who voluntarily cough up funds, but other investors have tied up courts with dubious claims that their shelters serve actual economic or business purposes. Last month a Los Angeles judge ruled another $145 million Son of Boss shelter illegitimate.
Which is to say, perhaps Cole and other federal watchdogs had their work cut out for them simply rooting out all the different loopholes AIG used to hide from the IRS — and the “systemic risk” flew over their heads.