AIG

Lawsuit: AIG Not Just Screwing Over Taxpayers Anymore

Moe Tkacik | April 2, 2009, 2:02PM

AIG has allegedly stopped paying many of its bills in spite of its $180 billion in bailout cash, and a lawsuit filed against the firm by a Pennsylvania real estate developer managing 16,800 apartments owned by the global real estate arm paints a disturbing portrait of goings-on at the failed insurer that give emphatic new meaning to the term "zombie bank."

In his complaint, King of Prussia, Pa. property developer Mitchell Morgan alleges numerous counts of fraud and breach of contract, and depicts AIG as an absentee landlord to its multibillion dollar real estate portfolio, halting maintenance and renovation fees to hundreds of properties and potentially deepening the real estate crash further, sabotaging its own investments at the expense of taxpayers. Striking a populist tone notable for an outspoken Republican who once hosted a Rick Santorum fundraiser featuring George W. Bush in his own (generously-sized) home, Morgan's suit paints a portrait of a company that manages largely by never returning phone calls and blaming the Fed for everything:

There are real-world consequences for AIG's financial irresponsibility and its failure to honor its commitments. Employees whose jobs depend on the project renovations will be faced with loss of jobs in an economy whose unemployment rate continues to rise dramatically... Unlike many of the large real estate transactions that were occurring at the time, the goal of this Limited Partnership was not to purchase and "condo convert" or "flip" the properties, but to renovate them and continue to rent them to low income and middle class families...Because of the failure to timely approve and fund the required capital contributions, the Partnership's vendors, if not paid on time, which will constitute an immediate event of default under the Partnership's loan agreements. To be clear, these are real loans, not federal bailout loans that can simply be restructured.

Morgan is far from the only partner AIG has stiffed, but thus far he appears to be the only one to have sued, perhaps because he remembers how the insurer ran things in the boom years.

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Topics: AIG

Larry Summers

Harvard Derivatives Whiz Fired For Emailing Larry Summers About "Frightening" Trades?

Moe Tkacik | April 1, 2009, 1:31PM

Late update: Harvard spokesman John Longbrake called to emphasize that the university had conducted thorough investigations of all allegations about Harvard Management Company and point out the 13.8% annualized returns HMC delivered in the ten years that ended June 2008. In a separate development, we learned that Mack was scheduled to be the subject of a February 23 Newsweek story by Michael Hirsh that had been subsequently shelved. Hirsh declined to comment.

A former quantitative analyst at Harvard Management Company, the university's once-vaunted endowment manager, tells the Harvard Crimson she was fired for voicing concern to then-university president Larry Summers' chief of staff about the money manager's risky use of derivatives the traders didn't understand.

The episode dates back to 2002, when analyst Iris Mack, whose website identifies her as the second African American woman to earn a Harvard PhD. in applied math (and someone who likes primary colors) joined the much-venerated Harvard Management Company, which invests the university's then $18 billion endowment, to find what she termed a "frightening" state of affairs.

"The group I was working for had no background whatsoever to be working on [derivatives]," Mack says, adding that, to her knowledge, several of her colleagues were not licensed securities traders. "Sometimes the ways they handled even basic Black-Scholes models [widely used to price stock options] were puzzling."

So Mack took inventory of the abuses -- high employee turnover, lax risk management practices and a "low level of productivity in the workplace" were among others, and detailed them in an email to Marne Levine, Summers' chief of staff and a Treasury staffer on the Obama Transition Team. (Summers was the only person to whom Meyers reported, and according to a recent Forbes story he personally ordered the university's biggest derivatives trade, a purchase of interest rate swaps that cost the university billions this year.)

A month after sending her email, Mack was fired after a meeting in which the endowment fund's then-chief furnished her the emails and castigated her for making "baseless accusations." She later sued for wrongful termination and settled out-of-court with the university. But she claims the practices "shocked" her, and -- the punchline is -- she had joined the company from Enron.

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Topics: Harvard Management Company, Larry Summers

Congress Demands Records Of Court-Appointed AIG "Fly On The Wall"

Moe Tkacik | March 31, 2009, 7:11PM

Last week the Wall Street Journal broke the news that the Justice Department had appointed a lawyer to monitor an accounting fraud-fraught AIG in 2005. And today the paper reports that the House Oversight Committee has demanded the full dossier of records kept by the longtime Washington-based Bryan Cave attorney named James Cole, on what he saw while he was there. Yesterday the committee fired off letters jointly to Bryan Cave and Attorney General Eric Holder demanding all available records -- "to be construed on the broadest sense" -- from Cole's tenure in the post:

Mr. Cole evidently had routine access to the highest levels of the company and participated as an observer in AIG Board meetings. In effect, Mr. Cole had a seat at the table as the company decided to oust two CEO's, developed its strategy in the midst of the housing bubble and subsequent collapse, and made critical decisions concerning restructuring AIG-FP, allocating retention payments, generating options to produce liquidity, and ultimately requesting taxpayer capital injections from the Federal Reserve and Treasury now amounting to nearly $180 billion.

Cole was appointed to monitor the insurer's meetings as part of a "deferred prosecution" agreement with the SEC after investigators unearthed a complex tangle of fraudulent partnerships the company had set up to hide debt on behalf of its client PNC Bank. At the time Cole was retained -- which has so far cost AIG (us) $20 million -- the "independent monitors" installed to sit in on the senior meetings of the 103 companies with whom the government had struck such bargains were the source of much hand-wringing in corporate circles.

So much hand-wringing, in fact, that the Criminal Law Review in 2007 worried:

With respect to the corporation, DPA's "cooperation" provisions typically obligate the corporation to act at the direction and on the behalf of the government in the investigation and prosecution of individuals. This has the potential to turn corporations into agents of the state, with resulting corporate governance and constitutional implications.

Ha, AS IF.

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Topics:

James Thomas

How $2 Million In AIG FP Options Saved An IRS Attorney $145 Million In Taxes

Moe Tkacik | March 31, 2009, 4:54PM

As we are quickly coming to understand, AIG Financial Products was siphoning billions from tax coffers the old-fashioned way ages before the collateral calls began flooding in. Essentially, the same unregulated swaps and options contracts in which AIG FP "specialized" a.k.a. "did not understand" lay at the heart of many of the sham "partnerships" corporations and wealthy people use to obscure their capital gains. These partnerships are often referred to as "Son of Boss," we still do not know why, and the IRS has been shutting down them down for years, because it is usually abundantly clear that the rich people who bought said derivatives had no idea what the hell they were for beyond "generating artificial basis" or somesuch euphemism for "pretending they lost money to hide the fact that they actually raked it in." That said, most of the people with enough money to know about tax shelters are/have pretty decent lawyers, so sometimes they think up a pretty good excuse for having invested in a baffling combination of esoteric "swaps" and such. Last month, for instance, a Los Angeles judge struck down a Son of Boss partnership that had spared a pair of local real estate developers an accumulated tax bill of $145 million by investing $2 million in some obscure AIG credit default swaps. But one of the developers, former Sacramento Kings owner and former IRS attorney James Thomas, had a pretty genius alibi.

In 2001 they sought out an abusive tax shelter that has become known as "Son of BOSS." In the Son of BOSS scheme used by Thomas and Fox, they purchased an exotic form of a financial option that they claim would have protected them against a catastrophic decline in real estate values, which they feared in the immediate aftermath of the terrorist attacks of September 11.

A catastrophic decline in real estate values you say? How very "black swan"!*
The judge wasn't hearing it though.

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Topics: AIG, James Thomas

AIG Transaction Development Group

A Brief History Of AIG's Three-Decade Duty Free Bermudan Adventure

Moe Tkacik | March 31, 2009, 3:27PM

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.

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Topics: AIG Transaction Development Group, IRS, Son of BOSS, UPS

Joseph Cassano

All Joe Cassano Ever Wanted Was To Not Pay Taxes

Moe Tkacik | March 30, 2009, 6:54PM

The Feds are closing in on a criminal fraud case against Joseph Cassano, reports ABC News, which tracked down the former AIG Financial Products czar wearing blue spandex and a sheepish expression outside his home in London. And before you wonder why a Brooklyn College educated swaps dealer with a name like Joe Cassano lives in London again, the answer is probably "taxes" -- and decimating taxes, it may not shock you to know, is fast emerging as the cornerstone of the AIG business model.

An ABC News investigation found that Cassano set up some dozens of separate companies, some off-shore, to handle the transactions, effectively keeping them off the books of AIG and out of sight of regulators in the U.S. and the United Kingdom.

"This is the other very important issue underneath the AIG scandal," said [tax law expert Jack] Blum. "All of these contracts were moved offshore for the express purpose of getting out from under regulation and tax evasion."

And as breathtaking as the sum of taxpayer dollars AIG has managed to put down in its post-crisis nationalized afterlife, the zombie insurer might possibly have indirectly scammed the government out of more money back in its Triple-A days. Today the Wall Street Journal explores AIG's euphemistically-named "tax structuring" business in a story about an IRS battle with Hewlett-Packard over an offshore entity -- or what the IRS terms a "sham that lacked economic substance and a business purpose" -- that AIG set up for the company to collect $132 million in tax credits. AIG's tax business, is "even bigger than the credit-default swaps business that led to the company's meltdown," a person "familiar with the business" tells the Journal. But that might be compartmentalizing things: we are beginning to suspect the credit default swap business and the tax "structuring" business were the same thing -- not just because they served the same end.

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Topics: Joseph Cassano

AIG

Traders "Unwinding" AIG: "We Have Never Done As Big Or As Profitable Trades -- Ever"

Moe Tkacik | March 30, 2009, 5:28PM

What's it like, the laborious job of "unwinding" hundreds of thousands of mind-numbingly complex derivatives contracts amassed over the years by the inimitable AIG Financial Products? Ask the Wall Street investment banks to whom they've been farming out the work -- it's so painful and time-consuming it feels like the old days, especially the "massively profitable" part. An anonymous derivatives trader tells the blog Zero Hedge:

During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent - these were whole portfolio unwinds.The size of these unwinds were enormous, the quotes I have heard were "we have never done as big or as profitable trades - ever".

Sort of undermines the notion that AIGFP employees needed retention bonuses so that the Great Unwinding might be an "orderly" and modest process conducted by cool heads and not, god forbid, subject to raids from ex-AIGers who'd left to trade against the company's book. Nah, they pretty much "threw in the towel," as Zero Hedge points out, and gave the "winners" on all those bad trades a chance to really earn their bonuses again.

But is the big payout the real shadowy force behind the recent runup in stock prices? Today's stock traders seem worried. Because even if reports that AIG FP has only unwound a quarter of its total trades are true, most investors agree the Treasury is too cash-strapped to do this forever.

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Topics: AIG, Goldman Sachs