Do you know what a “blood doll” is? Well, it’s a girl who craves to be the regular victim of or willing donor to a vampire, according to the Institutional Risk Analyst who use it as a metaphor for the fallen insurance giant AIG. I guess it has something to do with zombies…
“Some of the same banks that caused the collapse of AIG and the subsequent looting of the Fed are now acting as underwriters in an offering that nobody should touch.”
Institutional Risk Analyst
“Following our suggestion of over a year ago, Treasury Secretary Tim Geithner has finally taken the Federal Reserve Bank of New York out of its involuntary equity stake in AIG. Indeed, Treasury is disposing of stakes in zombie companies at a brisk clip, including Ally Financial and Citigroup. We applaud Secretary Geithner’s industry; selling these public stakes in private firms is precisely the right policy, but it would have been better had the investments not occurred at all.”
It’s always nice be updated on the issues that have brought us so much anger, fear and frustration, and yet even some amusements and raw laughter.
Well, the folks at Institutional Risk Analyst (IRA) pretty much sums up the situation with AIG right now; the insurance company that once was the largest in the world.
I am not sure, however, if it is a laughing matter this time, or one of the more irritating moments.
Read for yourself:
Geithner apparently now intends to offload the government’s position in AIG onto the public, declare success and ride off into the sunset — and hopefully back to the private sector. But the real question is whether or not there is anything left at AIG for public investors to buy. After selling most of the prime assets to repay the Fed and Treasury, AIG still looks insolvent to us. In fact, given that the most problematic liabilities of AIG were not reduced at all by the asset sales to date, the financial viability of AIG is arguably less certain than ever before.
A report published over the Christmas holiday by Bloomberg News, “AIG Didn’t Report $18.7 Billion of Guarantees, Pennsylvania Regulator Says,” illustrates the scale of the fraud and malfeasance seemingly still running rife at the government-owned AIG: “National Union Fire Insurance Co. (“NUFIC”) of Pittsburgh and American Home Assurance Co., which issued the guarantees to bolster other AIG units, had contingent liabilities tied to the promises of $157 billion on Dec. 31, 2008, compared with the $138.3 billion disclosed at the time, Robert Pratter, the state’s acting insurance commissioner, said today in a report. AIG was instructed by the regulator to limit or end its intra-group guarantees, according to the report,” Bloomberg News reports. You always read the holiday news clips.
The regulatory order to end intra-group guarantees by the insurance units of AIG is the key factoid for investors who want to understand the value proposition here. For years, AIG has used what seems to be a Ponzi scheme of credit-default swaps, side letters and overt reinsurance claims to generate revenue, but all the while concealing the true nature of the total liabilities facing the company. See our earlier comment: (“AIG: Before Credit Default Swaps, There Was Reinsurance,“ April 2, 2009)
While the AIG guarantees on mortgage securities issued by firms such as AMBAC Financial Group (See “An A.I.G. Lesson From Wisconsin,” Reuters, 3/25/10) might be sufficient by themselves to kill the company, the internal guarantees between American Home Assurance (“AHA”) and other units of AIG are far larger. AIG takes the position that these guarantees, which are visible in the statutory reporting for the regulated insurers, are unlikely to be paid out, but the scale of the portfolio and the lack of reserves supporting it beg the question. AHA has issued unconditional guarantees to other units covering “all present and future liabilities of any kind” And here’s the best part: the shell parent company of the AIG group is the guarantor for AHA. The snake eats its own tail in public, yet the banksters have no problem finding sufficient numbers of credulous investors to subscribe to an offering of shares.
Likewise NUFIC has issued unconditional guarantees of performance to affiliated companies within AIG. Again, the AIG parent company is the guarantor for these obligations by NUFIC. The guarantees include $21 billion in obligations issued by American International Assurance (Bermuda) and $6 billion in potential claims exposure written by American International Life Assurance (New York). The total capital surplus backing these potential claims is $2 billion. In all, NUFIC has issued $40 billion unconditional guarantees of performance backed by just $6 billion in capital surplus. Did we mention that NUFIC has over a $1 billion of its meager capital surplus tied up in real estate partnerships with other AIG companies?
Putting aside the financial condition of AIG for a moment, let’s now consider the spectacle of the Treasury draining AIG of assets to repay the bailout funds and then selling what remains to the investing public in a share offering. In his zealous advocacy of the financial interest of the American people, Geithner makes a lie of his previous sworn protestations that he is not an investment banker. Oh, our boy Timothy is a master of the universe all right, a regular Jedi warriror, but one who serves the Dark Side. And like his peers at GS and JPM, skirting a few securities laws along the way to cashing in at the great casino called Wall Street is not a problem.
Apparently Geithner is so excited about the AIG stock offering that he commanded his direct reports at the Treasury to put on a full-court press in the media, demanding positive press stories about AIG. Yet despite his intensity and supposed intellect, Geithner remains ignorant of many aspects of finance and law that bear directly on his responsibilities as chief fiscal officer of the US, especially when it comes to selling stock in zombie banks and other companies. Whether the beneficiary of the share sale is a private individual or the US Treasury matters not, according to the lawyers we consulted.
First and foremost, somebody needs to gently remind Secretary Geithner that he and the members of the Treasury staff are subject to the Securities Act of 1933 just like everyone else. Now that Treasury has announced its intention to sell shares in AIG and other companies, making any statements about AIG and/or its financial condition, or encouraging members of the media to write positive stories about the company, appears to be a violation of the law. And yet thus is precisely what has been going on for at least a month, according to several news organizations contacted by The IRA.
Jake Siewart, counselor to the Treasury Secretary since June 2009, apparently has been communicating with members of the media and the public regarding the offering of AIG shares. Since the decision to sell the shares was made well before the holidays, the communications of Siewart regarding the AIG offering, including both verbal and email communications to members of the media, are arguably a willful violation of the 1933 Act.
We contacted AIG yesterday and asked whether they were aware that employees of the Treasury are contacting members of the public and also the media regarding the upcoming sale of stock in AIG. We asked if such contacts were not a violation of the Securities Act of 1933 and FINRA regulations. We reminded them that sellers of securities are prohibited from making any statements regarding the offering except via a written prospectus. Also, none of the personnel at Treasury who have been making these solicitations regarding the AIG equity offering are registered with FINRA.
AIG officials did not reply directly to written questions from The IRA seeking comment on the activities of Treasury officials. About an hour after we sent our email to AIG, however, we heard from several senior lawyers from the Treasury. They assured us that all Treasury officials were aware of the law and the specific requirements regarding a public offering of securities.
When we asked, hypothetically you understand, whether Tim Geithner calling Arthur Sulzberger or other senior managers at the New York Times and demanding favorable coverage of AIG in front of an offering would be a violation of the law, they reiterated that all Treasury officials are doing their utmost to comply with the securities laws. We are delighted to hear it. But still, we understand from several members of the media that Siewart, the former and last press secretary for President Bill Clinton, has been offering to arrange interviews with AIG management and senior Treasury officials. Again, if these allegations are true, Mr. Siewart’s actions look an awful lot like conditioning the market in advance of a securities offering.
- Quick! Everybody Out of the Pool! (fool.com)
- AIG’s Benmosche to stay in CEO post despite cancer (sfgate.com)
- Treasury announces completion of AIG plan (seattletimes.nwsource.com)