Chris Whalen at Institutional Risk Analytics has penned an explosive piece on AIG (AIG), arguing against the idea that the company’s problem was that they merely took on too much risk.
Rather, he says, the move into credit default swaps was merely the evolution of its reinsurance — a business line that was characterised by so-called “side letters.” These side letters were agreements between the insurer and the insured that basically confirmed the contract was never supposed to be paid out, but was made purely for regulatory reasons. (Sound familiar?).
The side letters are fraudulent, and historically resulted in jail terms.
But here’s the explosive part:
As with the phony reinsurance contracts that AIG and other insurers wrote for decades, when AIG wrote hundreds of billions of dollars in CDS contracts, neither AIG nor the counterparties believed that the CDS would ever be paid. Indeed, one source with personal knowledge of the matter suggests that there may be emails and actual side letters between AIG and its counterparties that could prove conclusively that AIG never intended to pay out on any of its CDS contracts.
The significance of this for the US bailout of AIG is profound. If our surmise is correct, the position of Feb Chairman Ben Bernanke and Treasury Secretary Tim Geithner that the AIG credit default contracts are “valid legal contracts” is ridiculous and reveals a level of ignorance by the Fed and Treasury about the true goings on inside AIG and the reinsurance industry that is truly staggering.
It’s scary to think of the wormhole that would erupt if these emails came to light. In any just system, all that money that AIG paid out to its counterparties should be clawed back — again, if there was a wink-nod-email agreement that it was never to be paid out. But actually going about this would shatter confidence in these banks, if not their balance sheets outright.
Is there anyone in government that would even want to find the truth? Maybe Cuomo. He’s the only one with something to gain here.
(via The Big Picture)