Monday, January 11, 2010

Was (Is?)There a Secret AIG Multi-Billion Dollar Slush Fund?

Yves Smith has finished Ira Ross Sorkin's Too Big To Fail before I have, and raises the intriguing possibility that AIG had(has?)a secret multi-billion dollar slush fund.

This wouldn't surprise me since the back story on AIG is all about secret accounts and offshore money.

AIG history dates back to 1919 when Cornelius Vander Starr established an insurance agency in Shanghai, China that operated there until the takeover by Mao. Even back then, top executives received bonuses out of an offshore corporation that controlled quantities of AIG stock. Hiding money was part of the corporate culture at the very top levels of AIG. I'm sure it continued after Starr passed and Hank Greenberg gained full control.

Here's Smith on AIG is it is about to get its first bailout money:

So the story thus far is that AIG is a great big mess that will bring everyone down if it goes. Got that. Geithner accepts that picture, persuades Bernanke. AIG is on the verge of bankruptcy, according to Sorkin, mere “minutes away” (p. 399). The Fed agrees to extend a $14 billion loan to get it through the trading day but it wants collateral. Collateral? From a broke company? How is that going to happen?

Then we get this bit:

Wilmustad understandably wondered how they were supposed to come up with $14 billion in the next several minutes. Then it dawned on them: the unofficial vaults. The bankers ran downstairs and found a room with a lock and a cluster of cabinets containing bonds – tens of billions of dollars’ worth, dating mostly from the Greenberg era. They began rifling through the cabinets, picking through fistfuls of securities that they guessed had gone untouched for years. In an electronic age, the idea of keeping bonds on hand was a disconcerting but welcome throwback. (p. 400)

WTF? This is a company about to go out of business, then it suddenly remembers it has a secret stash….worth at least 1/6 of the initial government rescue commitment? $14 billion was only what they coughed up to satisfy the Fed. How much more was left in those cabinets?

And more important, WHO SUPPOSEDLY OWNED THIS PAPER? This wasn’t held by the subsidiaries; otherwise, AIG would not have been able to pledge it to the Fed. And if it was a parent company holding, why wasn’t it repoed or sold earlier? What entity took the semi-annual interest payments? Take the $14 billion we know about, and assume a 5% interest rate. That’s $700 million. Where did it go? Was it reinvested? Disbursed?

The language further suggests that bonds in this secret trove, while mainly accumulated under Greenberg, had more recent additions, presumably under Martin Sullivan, perhaps Wilmustad. This “unofficial vaults” designation strongly implies this was a secret, off balance sheet cache that threw off a hefty amount of annual income by virtue of its staggering size. That would mean it could be used by the CEO at his sole discretion, for anything from bribes to unreported executive payments that might then be used to open foreign bank accounts or pay for personal or business expenses.

1 comment:

  1. Could the CIA be involved? Hank Greenberg has always been considered a patriot - someone who looked out for the interests of his country and, as a result, had easy access to the White House, etc. As head of AIG, a truly international business, he had the ability to place employees all over the globe, in some very sensitive countries, who might have had a side job working for the CIA.