In 2002, The Economist wrote: Scrutiny for AIG, the world's biggest insurer. I doubt I read it at the time.
"The routine public filings that AIG posts with American regulators are widely considered to be unfathomable. When challenged, AIG notes that it provides abundant disclosure, including 40 pages of densely written footnotes in its most recent annual report, as well as extraordinarily detailed statements with the Securities and Exchange Commission. But while the company provides great gobs of information, it is all but impossible to put them together. While AIG boasts of its dominance in various business lines and countries, it discloses only the broadest loss ratios. A source of its resilience is a willingness to reinsure about one-quarter of its underwriting, so spreading risk, but no outsider knows what business it keeps and what it cedes. Plenty of opportunity exists, if not for creative accounting, then certainly for inscrutability.
Part of the recent fall in AIG's share price can presumably be explained by suspicions about sophisticated but opaque forms of financial engineering. The insurer was hit with a $69m loss linked to Enron, and it is now at the centre of a dispute over off-balance-sheet partnerships held by PNC Financial, a regional American bank. AIG is a large and growing participant in complex derivatives markets. It says that derivatives play an important part in reducing the company's overall risk. From the outside, all that is clear is that AIG's credit exposure to derivatives is rising, from $17 billion in 1999 to $33 billion in 2000, according to the most recent annual report. Gross exposure has grown from $435 billion to $544 billion.
Any cracks in the confidence that AIG knows what it is doing in derivatives would be highly damaging. The company has a triple-A rating from Standard & Poor's, in part because a conventional analysis of its balance sheet shows AIG to be well-capitalised. A top-notch credit rating counts for much, particularly in skittish markets like Japan, where local insurers are chronically weak. A good rating gives AIG a low cost of funding. So it is a concern that recent volatility in AIG's share price probably lowers other, quantitative ratings that rely more on market data."
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Even if one did read the article, would it have registered in any meaningful way? It seems to me, in retrospect, that all of these types of reports are only 80% complete. They all speak to the who, what, where, and when, but never seem to address the why! Why make unfathomable "routine public filings"? What was the motive...well, we found out several years later.
Ultimately AIG was found guilty of accounting fraud, partly as a result of an investigation by then NYS AG Elliott Spitzer.
Here's a brief history of AIG's legal woes over the last 8 years. This is courtesy of The Huffington Post. It speaks for itself.
http://www.huffingtonpost.com/2009/03/24/aig-fraud-history_n_178545.html
TT
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