Saturday, May 10, 2008

 

The Depression Chronicles – 4: Insurance

On Tuesday I marveled at the pundits' predilection for declaring that all was well in the world of finance upon the slightest excuse. We didn't have to wait long to see Wall Streeters running for their Alka-Seltzer and Pepto-Bismol.

On Friday the world's largest insurance company American International Group (AIG) surprised its shareholders by announcing it had lost $7.81 billion in the first quarter of this year. According to the Financial Times, this was on top of a loss of almost $15 billion in the previous quarter.

AIG hopes to raise $12.5 billion to tide it over. About half of that will come from the sale of common stock, promising another blow to its shareholders.

The FT reporters wrote that "AIG’s poor first quarter results and capital raising plans will ... dispel investor hopes that turbulence in the credit markets has subsided. Business Week ran a story with the subhead "The insurance giant's ... first-quarter loss ... renews fears the credit crisis may still have a way to go." And Business Week reporter David Bogoslav wrote that "American International Group's (AIG) financial results ... sent a shock wave through the equity markets, renewing concerns that there's likely to be more fallout from the credit crisis."

As usual, the mortgage mess underlies much of AIG's loss. But last year the company was assuring the Nervous Nellies of Wall Street that "the company's exposure to subprime investments is limited." So in November, AIG was sued by a shareholder. According to Janet Whitman,

Doris Staehr charged that AIG concealed the extent of its exposure to the subprime crisis, with executives at one point claiming that the mortgage market would have to reach "Depression proportions" before hurting the company.

Hmm. Maybe they were telling the truth. Maybe the mortgage market has reached "depression proportions." But in any case, the company will be embroiled in lawsuits for the foreseeable future.

Of course with corporate executives it's hard to tell when they're lying. Unbridled capitalism, with Republican assistance, has produced a bumper crop of accomplished liars, cheats and fraudsters. In March four executives from another company and one executive from AIG were convicted of "conspiracy, securities fraud, mail fraud and making false statements to the Securities and Exchange Commission," for a bit of financial flimflam to prop up AIG's books—and that wasn't even related to the subprime debacle.

The officers come up for sentencing next week—

The defendants were former General Re CEO Ronald Ferguson; former General Re Senior Vice President Christopher P. Garand; former General Re Chief Financial Officer Elizabeth Monrad; and Robert Graham, a General Re senior vice president and assistant general counsel from about 1986 through October 2005.

Also charged was Christian Milton, AIG's vice president of reinsurance from about April 1982 until March 2005.

Ferguson, Monrad, Milton and Graham each face up to 230 years in prison and a fine of up to $46 million. Garand faces up to 160 years in prison and a fine of up to $29.5 million.

Let's see if they pull a sentence equal to Wesley Snipes'.

Related posts
Many in finance found to be SIV-positive (10/30/07)
The Depression Chronicles – 3: Money market funds (5/6/08)

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