AIG - CEO Stepping Down and Ongoing Accounting Problems

[HenryTo]

Just reported this morning... looks like we are near the end of the chapter for the "Greenberg Insurance Dynasty?"

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Report: Greenberg May Step Down As AIG CEO
Monday March 14, 7:46 am ET
Report: Maurice Greenberg Plans to Step Down As CEO of AIG Amid Regulatory Inquiries

NEW YORK (AP) -- Maurice R. Greenberg is planning to step down as chief executive of American International Group Inc. as early as this week amid concern over a rising number of regulatory inquiries at the financial services titan he built over nearly four decades, The Wall Street Journal reported Monday.

The Journal, citing unidentified people familiar with the matter, said the board is close to selecting Martin Sullivan, a co-chief operating officer and vice chairman, as chief executive.

The newspaper said the AIG board meet all day Sunday to hammer out the terms of Greenberg's retirement as chief executive. It said under once scenario, Greenberg would stay on as chairman.

An AIG spokesman, Chris Winans, declined to comment to the newspaper except to say that "the board has taken no action." He also told the newspaper Greenberg wasn't available for comment Sunday night.

If Greenberg steps down as CEO, it would be the third such high-profile departure in recent weeks. The boards of Hewlett-Packard Co. and Boeing Co. have recently forced out CEOs.

The Journal said Greenberg joined AIG in 1960 and became president in 1967 when it was a seller of property-casualty insurance in the U.S. and long-time life-insurance business in Asia. It has grown into one of the world's most powerful financial-services companies with a market capitalization of $168.5 billion. Greenberg is one of the company's largest individual shareholders, the newspaper said.

But the company has been the focus of an investigation into bid-rigging by insurance brokers and has been under a separate investigation by regulators for the sale and possible use of products that critics say could be used to manipulate earnings.

AIG reached a $126 million settlement with federal prosecutors and the Securities and Exchange Commission in November, ending a federal criminal inquiry into its role in helping a cellphone distributor disguise a trading loss with what authorities said was a loan portrayed as insurance. Under that settlement, an independent monitor is examing AIG's books to see if there are any other questionable deals.

AIG, without admitting or denying guilt, also settled civil-fraud charges with the SEC, paying a $10 million fine.

Currently, New York Attorney General Eliot Spitzer, federal prosecutors and the Securities and Exchange Commission are probing a transaction between AIG and Berkshire Hathaway Inc.'s General Reinsurance unit four years ago.

[HenryTo]

S&P Cuts AIG's AAA Rating

I guess this is now final, folks:

http://money.cnn.com/2005/03/30/news/fortune500/aig_sp.reut/index.htm

Only seven companies remain on the S&P AAA list now, down from 32 some twenty years ago:

http://www.usatoday.com/money/companies/management/2005-03-15-aaa-usat_x.htm

[Dubious]

[quote="Dubious"]The AIG board is going to purge themselves of this baggage. Muggsy will be gone within 30 days. With a golden parachute and a massive retirement package.

Bye bye Greenie...one down, one to go!!!

Use the force!!!!

AIG will rally for a little while now.

Dubious

[Dubious]

Greenburg is a treasure. What a farce - stepping down to a job that you receive the same pay is NOT stepping down.

The AIG board is going to purge themselves of this baggage. Muggsy will be gone within 30 days. With a golden parachute and a massive retirement package. Raines (another above the law treasure) can you hear me now? Destroyed Fannie Mae - hey ANOTHER "safe" high dividend large cap!!! You only lost 30 points on that pig - but the 15% dividend tax rate makes up for it . Testimony before Congress was not purgery? Hmm...interesting. "I do not want to live in the past" - Big Mac. Ah what the heck what is $3B between friends? . Another - widow and children baseball bat job - whack, whack, whack.

Dubious

[HenryTo]

News just came this Good Friday morning - always make me sick when news like this come out before a weekend. They really think that investors will ignore this?

It is also interesting how they mentioned that: "Though it's unclear how AIG might account for its mistakes, even a multibillion-dollar charge against earnings likely wouldn't damage its long-term financial stability. The company posted net income of $11.04 billion last year on revenue of $98.61 billion."

Hmmm... I wonder how much of that $11.04 billion number is realizable over the long-term - or perhaps it's just an actuarially-accounting-adjusted number sitting on their books?
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AIG's Concerns Over Accounting Grow Broader

Insurer Reviews Transactions
That Could Total $3 Billion;
A Change in Compensation?
By MONICA LANGLEY and IAN MCDONALD
Staff Reporters of THE WALL STREET JOURNAL
March 25, 2005; Page A1

Insurance giant American International Group Inc., under regulatory scrutiny, is considering a move to clean up suspected accounting mistakes that may total as much as $3 billion from as many as 30 insurance transactions, according to people familiar with the matter.

The potentially problematic accounting now being examined is far broader than was believed just a week ago, said people familiar with the situation.

The nation's largest insurer has yet to assess an additional 60 transactions that internal AIG investigators have identified as possibly problematic, said one person familiar with the matter. A number of senior AIG executives were aware of many of these transactions, this person said, which could subject them to regulatory scrutiny.

Last week, questions over AIG's accounting of an insurance transaction with a Berkshire Hathaway Inc. unit led to the ouster of Maurice R. "Hank" Greenberg as AIG's chief executive after nearly four decades at the helm. Investigators continue to examine whether AIG misled investors by manipulating its books. This week, AIG, which has pledged to cooperate with investigators, fired its chief financial officer and a senior reinsurance executive after they decided not to answer some questions on the grounds that their answers might be self-incriminating.

Chris Winans, an AIG spokesman, yesterday said the company had no comment.

Though it's unclear how AIG might account for its mistakes, even a multibillion-dollar charge against earnings likely wouldn't damage its long-term financial stability. The company posted net income of $11.04 billion last year on revenue of $98.61 billion.

The potential errors are spread over five years, and range from the possible booking of revenue and income earlier than they should have been recorded to the transferring of liabilities off the company's books, even as AIG remained responsible for those obligations, said one person familiar with the matter.

Meanwhile, directors are considering abolishing the historically important role of a private holding company, Starr International Co., as a payer of deferred compensation to AIG employees, this person said. Created several years after AIG's 1969 initial public offering, Starr International is run by key AIG executives, including Mr. Greenberg, who is its chairman. The closely held firm's board chooses which AIG executives benefit from the compensation plan. As of early last year, the latest date for which figures are available, Starr International also owned 11.9% of AIG shares.

If AIG takes over the compensation function, it would boost its annual compensation costs. If the expenses absorbed by Starr in 2003 had been reflected by AIG, the pretax total would have been $129.6 million, according to AIG's financial filings.

Beyond the cost, such a change in compensation would effectively end Mr. Greenberg's control of compensation at AIG. He is credited with turning the onetime midtier property-casualty insurance company into a world-wide powerhouse with big life-insurance, airplane-leasing and other financial-service operations.

The potential accounting errors in the 20 to 30 transactions so far assessed by AIG are believed to total $1.5 billion to $3 billion, said people familiar with the matter. It isn't clear if any errors could adjust income up rather than down, a person familiar with the matter said.

AIG hasn't yet concluded its analysis of the transactions and how they will affect its books, a person familiar with the matter said. AIG, whose board reviewed the matter at a meeting yesterday, and regulators still are sifting through many details, according to people familiar with the situation.

The company disclosed the initial findings of its internal investigation in a conference call Tuesday evening that its lawyers initiated with authorities from the New York Insurance Department, the New York Attorney General and the Securities and Exchange Commission. The internal investigation has focused on questionable deals over the past five years that effectively shifted billions in money-losing insurance claims or other unwanted reserves off AIG's books.

The findings put into question whether AIG will be able to file its annual regulatory report with the SEC by its revised deadline of next Thursday. The filing, originally due last week, was delayed by Mr. Greenberg's departure as well as the need to sort through the possibly questionable matters.

Many of the deals in question could have been designed either to boost AIG's reserves or to polish its balance sheet, people familiar with the matter said. Regulators are examining whether they also had the effect of improperly "smoothing" the earnings of the company to meet Wall Street expectations, the people said.

Among the transactions under scrutiny is the one that prompted the probe by New York Attorney General Eliot Spitzer, which involves Berkshire's General Re unit. Under that transaction, which took place four years ago, AIG booked a total of $500 million in premium revenue from General Re and took on responsibility for $500 million of claims that General Re was obligated to pay.

The issue: If the expected losses equaled the premium, there would be no risk for AIG. Thus AIG wouldn't really be insuring anything, and the $500 million shouldn't be treated as premium revenue. Authorities have been trying to determine if there was any risk transfer to justify the booking of the revenue.

Other transactions involve Barbados-based Richmond Insurance Co. and Union Excess Reinsurance Co., which provide insurance to insurance companies. Both have caught the attention of regulators because AIG appears to be their only U.S. customer. Transactions under review involve at least a dozen offshore entities, and some of the most potentially problematic issues appear to be in these entities, a person familiar with the matter said.

Heavy reliance on a single customer is a red flag for regulators because of the potential for that customer to exert enough influence to constitute control. Such control could give an insurance company an opportunity to jettison bad claims onto these entities' books, hide financial obligations or otherwise burnish its own results.

The central issue is whether some of these deals should have been treated as transactions with affiliated companies. If AIG controlled some of these entities, the proper accounting could have been consolidating both companies' books, which would add both assets and liabilities to AIG's balance sheet.

Mr. Greenberg, who remains as nonexecutive chairman, is tentatively scheduled to give a sworn statement to investigators from Mr. Spitzer's office and the SEC on April 12.

[HenryTo]

The bad news keep on coming in the AIG case as well:
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AIG falls again on accounting concern
Review may reveal $100M misstatement, report says
By Alistair Barr, MarketWatch
Last Update: 12:32 PM ET March 17, 2005


SAN FRANCISCO (MarketWatch) -- American International Group shares fell again Thursday after a Wall Street Journal report about a possible $100 million accounting error added to the giant insurer's damage-control problems.

An internal review may find that AIG misstated how it accounted for the sale of hundreds of so-called legacy policies by at least $100 million, the Journal reported, citing an unnamed person familiar with the review.

AIG (AIG: news, chart, profile) shares $1.50, or 2.4 percent, to $61.40 in midday trading.

AIG is also trying to work out whether it correctly calculated the value of long-term leases at its aircraft leasing business, the newspaper reported.

In addition, the world's largest insurer is expected to look into how it accounted for reinsurance recoverables, or money it expects to recoup from reinsurance companies that sold coverage to AIG, according to the report.

Regulators have begun asking about two companies with ties to AIG -- Richmond Insurance Co. and Union Excess Reinsurance Co.

These two Barbados-based firms are among the 10 largest reinsurance sellers to AIG.

The structure of these entities is similar to Coral Re, another Barbados-based firm set up by Goldman Sachs in the 1990's. Coral Re did business exclusively with AIG and came under intense regulatory scrutiny in the 1990's, according to the Journal report.

Regulators were concerned that Coral Re was actually controlled by AIG, so any reinsurance recoverables that Coral Re owed to AIG should have been accounted for as a liability on AIG's balance sheet, rather than an asset, the Journal reported.

Joseph Norton, an AIG spokesman, declined to comment.

AIG reportedly has denied it controlled Coral Re, and inquiries ended without charges.

The newspaper reported that AIG is also planning to reveal details of a so-called finite reinsurance contract it signed with General Re, which is part of Warren Buffett's Berkshire Hathaway Inc. (BRKA: news, chart, profile)

Reported intense scrutiny of this transaction by regulators such as New York's attorney general precipitated the departure earlier this week of Maurice "Hank" Greenberg, who was the company's chief executive for four decades.


Alistair Barr is a reporter for MarketWatch in San Francisco.

[HenryTo]

Things are getting more interesting by the day. Quote: "In addition, AIG said it would delay filing its 2004 10K statement with the SEC because of the management changes and an accounting review "of certain transactions.""

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How Investigations of AIG Led
To Retirement of Longtime CEO

Spitzer's and SEC's Close Look
At Big Trove of Documents
Put Pressure on the Chief
Greenberg: 'I'll Get Going Now'
By MONICA LANGLEY and THEO FRANCIS
Staff Reporters of THE WALL STREET JOURNAL
March 15, 2005; Page A1

At the helm of American International Group Inc., Maurice Greenberg was under mounting pressure. Regulators were applying increasing heat over a transaction AIG did with a unit of Warren Buffett's Berkshire Hathaway Inc., a deal they considered possibly misleading to AIG investors.

Mr. Greenberg, known as Hank, resisted the pressure with the same tenacity he displayed in nearly four decades running what has become the world's largest insurer. But then, in the past week, came the tipping point. The regulators -- relying on nearly 1,000 pages of e-mails and phone-call records -- gave AIG's independent directors an analysis providing new details of the deal and Mr. Greenberg's role in it. And some of that was in conflict with or missing from his statements on the matter.

One of the investigators, New York Attorney General Eliot Spitzer, insisted that his office and the Securities and Exchange Commission take a deposition from Mr. Greenberg this week.

At a call with independent directors over the weekend, Mr. Greenberg, 79 years old -- who had long resisted lining up a successor -- agreed to step down. "I'll get going now," Mr. Greenberg said in the call, according to someone who heard it. "I'll do anything to protect the company I've built." Mr. Greenberg didn't return messages requesting comment.

Last night the board named a new CEO: Martin Sullivan, 50, who had been vice chairman and co-chief operating officer. It said Mr. Greenberg will be nonexecutive chairman. The company also said its chief financial officer, Howard I. Smith, 60, "has taken leave," and was succeeded by Steven J. Bensinger, 50. Mr. Smith couldn't be reached for comment and AIG declined to elaborate.

In addition, AIG said it would delay filing its 2004 10K statement with the SEC because of the management changes and an accounting review "of certain transactions." It said it didn't expect the review to require significant changes to the company's financial position.

It's understood that several AIG executives have retained their own counsel as the investigation proceeds.

The transaction between AIG and a Berkshire Hathaway unit has emerged as the focus of a broad regulatory review of "nontraditional" insurance products. These are financial transactions that are called insurance -- and accounted for as insurance -- but that regulators say are in some cases really loans. Authorities believe that for years, some buyers of such nontraditional insurance have used it to hide losses and thus to manipulate their financial statements. The investigation has the potential to lead to broad changes in the insurance industry.

The pressure in the AIG case is the second time in six months Mr. Spitzer has been instrumental in the departure of a member of the Greenberg family from an insurance-company perch. In October, he demanded that insurance broker Marsh & McLennan Cos. remove Hank Greenberg's son Jeffrey as CEO to settle a probe of alleged bid-rigging. (Marsh recently did settle, for $845 million in penalties.) The bid-rigging probe also involves a second Greenberg son, Evan, who heads Bermuda insurer Ace Ltd.

The latest investigation could affect another financial titan: Mr. Buffett. Though the Berkshire unit, General Re, is cooperating in the probe, some Berkshire loyalists worry about the reputational risk to the investment legend at the head of Berkshire. Mr. Buffett declined to comment.

The dethroning of Mr. Greenberg is a blow to AIG, one of the world's leading sellers of property-casualty insurance to corporate customers. For years, the company has weathered the volatility of an industry hit hard by periodic price wars. AIG's share price has more than tripled in the past decade, far exceeding the broader market. Bulls say its diversification -- it does business in more than 100 countries, selling life and property-casualty insurance and even leasing airplanes -- protects it from many of the vagaries of the market.

All this provides a tough challenge for Mr. Greenberg's successor as CEO, Mr. Sullivan, to maintain AIG's reputation as one of the world's fastest-growing financial conglomerates. As chairman, Mr. Greenberg will no longer run day-to-day operations.


AIG had been involved in other skirmishes with regulators in recent years, which raised questions about Mr. Greenberg's leadership. But the transaction with General Re hit particularly hard because of Mr. Greenberg's personal role in it, say people familiar with the matter.

In late 2000, Mr. Greenberg contacted General Re's then-CEO, Ron Ferguson, to discuss a deal in which AIG would acquire from General Re a "loss portfolio." That's industry lingo for a collection of claims that an insurer has to pay.

The two men had a cordial relationship. According to people familiar with their ties, Mr. Greenberg frequently sent General Re business in "reinsurance" -- which is simply a way an insurer off-loads part of its risk to another insurer. Mr. Ferguson, who used e-mail as his preferred way of communicating internally, frequently called AIG its largest "trading partner," these people say.

Mr. Greenberg's request was unusual for several reasons. AIG is one of the biggest users of reinsurance. So in a more typical situation, it would be the one that was handing off a loss portfolio to General Re, not the other way around. General Re then would assume the portfolio and its risks, including a risk that the claims would grow bigger.

In this case, however, AIG was offering to acquire such a portfolio from General Re. AIG would be the one assuming the risk. Mr. Ferguson e-mailed his subordinates to execute the turnabout.

General Re explored what reinsurance contracts to sell to AIG as part of this loss portfolio. Through a number of e-mails and twists, General Re settled on a portfolio held by its Dublin subsidiary.

Interestingly, General Re had determined internally that this portfolio had little risk, the people familiar with the matter say. That is, the premiums would about cover the claims.

For its part, AIG booked as income $500 million in premium from General Re, and then added to its balance sheet $500 million in reserves against claims. The transaction thus didn't affect AIG's net income. (AIG then paid $5 million back to General Re as a type of commission for the business.)

The issue: If the expected losses equaled the premium, there would be no risk for AIG. Thus AIG wouldn't really be insuring anything, and the $500 million shouldn't be treated as premium revenue. Thus it could be argued that booking it that way was misleading to investors, even though net income wasn't affected. The same would hold true for the reserves AIG booked.

In AIG's defense, the contract on its surface exposed AIG to an additional $100 million in losses, should they develop. That would imply that risk was in fact transferred. But regulators are investigating whether any contract provisions between the two companies might have held the losses to $500 million.

All this came as Mr. Greenberg was under pressure from Wall Street analysts and investors to boost reserves (a balance-sheet figure reflecting an insurer's estimated obligation to pay claims). On Feb. 8, 2001, AIG said it had added $106 million to reserves for the just-ended fourth quarter.

Once regulators began scrutinizing this transaction, they found e-mails that suggested to them that AIG may have used the transaction to boost reserves, rather than for a valid economic purpose as AIG has recently maintained, say people familiar with the e-mails. The company could have boosted the reserves anyway, but if it did so without taking in premium income, its net income would have been dented.

In recent weeks, regulators moved to take a deposition from Mr. Greenberg. They want to determine his rationale for the General Re transaction and AIG's accounting treatment of it. And they want to know whether there was any impropriety in AIG's failure to disclose the transaction or to say that it was a factor in the fourth-quarter 2000 reserve increase.

In the course of reviewing nearly 1,000 pages of e-mails -- including General Re correspondence that the reinsurer turned over -- a treasure trove of evidence was discovered: phone recordings. In a fluke, Gen Re's unit in Dublin had recorded all phone calls during this period. "If you think e-mails are frank, informal and explicit, you can imagine how candid and blunt phone calls are," said a person familiar with the matter.

There was one problem, however. No one could transcribe the phone recordings because they were trapped in an obsolete Irish system. In an unexpected turn of events, just two possible machines could play the tapes, requiring investigators to scurry on eBay to find the device, according to a person familiar with the matter.

The pressure on Mr. Greenberg began to rise last autumn. In an unrelated investigation, Mr. Spitzer filed civil charges alleging that Marsh cheated corporate clients by rigging bids and collecting fees from insurers for throwing business their way. As part of the probe, Mr. Spitzer secured criminal guilty pleas from two midlevel managers at AIG for their roles in the alleged scheme. That investigation continues.

In that case, AIG had rushed to deliver to Mr. Spitzer evidence against Marsh, even though it implicated the company run by his son Jeffrey. Hank Greenberg told a colleague at the time: "I'm on Spitzer's good side," says someone familiar with the matter. Indeed, during the bid-rigging probe, Mr. Spitzer hailed AIG for its cooperation.

Around the same time, AIG agreed to settle a separate SEC case. The allegation was that AIG helped a cellphone distributor called Brightpoint Inc. and PNC Financial Services Group Inc. in burnishing their balance sheets, by providing misleading financial products that amounted to little more than loans. AIG agreed to pay an $80 million fine and disgorge $46 million in fees, but didn't admit or deny wrongdoing.

AIG's goodwill with Mr. Spitzer's office evaporated quickly. Later in the fall, Mr. Spitzer and the SEC began investigating AIG's deal with General Re. AIG's independent directors, aware of the increasingly harsh corporate environment often resulting in director liability, retained their own lawyer, Richard Beattie.

A colleague recalls Mr. Greenberg complaining last month about a "new world order," where a lifetime of leading a profitable company can be jeopardized by minuscule mistakes picked through by pesky regulators. (The colleague says he told Mr. Greenberg that "the world is changing" and "you have to change your attitude.")

At the same time, AIG's board grappled with succession. For the past year, independent director Frank Zarb, as the head of the executive committee and a longtime friend, pushed Mr. Greenberg to deal with the issue, the subject of much speculation by investors.

Over monthly lunches of scrod and vegetables in the AIG chairman's dining room, the men had crafted a succession plan in case Mr. Greenberg met an untimely demise. Mr. Greenberg, fit and health-conscious, wouldn't go much farther than identifying his two favorite contenders -- Mr. Sullivan and Donald Kanak, who runs AIG's Asian operations. He put his wishes for a successor in a secret letter, which he revised periodically like a will.

As regulators turned up the heat against AIG, Mr. Zarb made more entreaties to Mr. Greenberg to move on a successor. With two strong internal candidates, Mr. Zarb encouraged Mr. Greenberg to retire sooner, not later.

The independent directors were getting queasy because regulators seemed to have more information than they did, says one person familiar with the matter. Mr. Greenberg evidently was concerned as well. He hired Robert Morvillo, a criminal-defense lawyer who had represented Martha Stewart.

AIG representatives lurched into crisis mode last Thursday. Mr. Spitzer and the SEC had scheduled a deposition from Mr. Greenberg this Thursday. Representatives for AIG, the independent directors and particularly for Mr. Greenberg pleaded for a delay, in a private meeting with Mr. Spitzer last Thursday. "No delay," Mr. Spitzer countered, according to a person familiar with the matter, reinforcing his aggressive style of pushing for immediate results.

By Friday, the independent directors were in meetings and phone calls over Mr. Greenberg's fate. By Sunday, independent directors concluded Mr. Greenberg should step aside as CEO. Several times in a meeting they held, Mr. Greenberg was on the speaker phone in harsh exchanges.

Even as he appeared to agree to retire as CEO, he refused to leave as AIG chairman, according to a person familiar with the meeting. He argued to the independent directors that his departure would be a devastating blow to the company and its stock price.

"The board is being led around by a bunch of lawyers, none of whom know how to spell insurance," Mr. Greenberg said by phone, according to a person who heard it. As the tense negotiations continued, Mr. Greenberg retained trial lawyer David Boies on Sunday, though Mr. Morvillo is expected to stay on to handle any criminal matters.

The independent directors discussed various scenarios. They mulled whether to keep Mr. Greenberg as a nonexecutive chairman or to have a director, probably Mr. Zarb, take that role. Mr. Zarb has decades of experience in the heavily regulated securities business and served in the federal government as well. The directors told Mr. Greenberg that he deserved "respect" for his accomplishments at AIG, and his tone changed.

At last night's meeting, Mr. Greenberg was in better spirits and prepared to give up his CEO post, noting that he would be 80 in May. He told directors this will be a "sensible transition for us," according to a knowledgeable person, who added: "He's devoted his life to AIG, and it felt like he was letting his child grow up."

Mr. Greenberg is still scheduled to give a deposition, but it may be postponed, knowledgeable people said.