AIG's Comeuppance
For 15 years my firm and the lawyers who work here have represented executives, business owners, and individuals seeking money damages for the wrongful conduct of others. Many times the claims we make are covered by insurance bought by insureds specifically to cover the event that underlies our lawsuit.
Often the work we do involves suing insured entities or in other instances, suing the insurance company directly.
Why have we built a specialty suing insurance companies directly on behalf of executives and business owners? Aren't those folks usually complaining that trial lawyers are driving up their insurance costs?
The answer is nuanced and was stated perfectly by Gretchen Morgenson, columnist for the New York Times in today's column "Your Money at Work, Fixing Others' Mistakes". She described the rescue of American International Group (AIG), once the world's largest insurance company. In her words, “It was pretty breathtaking. Since when do insurance companies, whose business models seem to consist of taking in premiums and stonewalling claims, deserve rescues from beleaguered taxpayers?"
Indeed our law firm's experience fits Morgenson's description to a T. AIG, and most other large insurers, take policyholder premiums and then when the policyholder makes a claim under the policy, the insurance company stonewalls and often refuses to pay the claim at all. That's when it pays to know lawyers such as the ones in my firm. We will litigate to get your insurance claim paid.
Don't buy the tort reformers argument that lawyers are driving up insurance premiums. When AIG writes $441 billion in credit default swaps, most of which were going sideways until us taxpayers bailed out AIG, only a fool would believe that insurance premiums are being driven by legitimate claims that AIG mostly stonewalls anyway.
Don't keep falling for the tort reformers’ creed. All they’re after is your premium money and to hell with your claim. What did Greenberg make his last year at the helm of AIG-a couple hundred million dollars in compensation? He keeps the money and us taxpayers are now bailing out AIG. Now let me hear the tort reformers continue to cry for the insurance industry; there is no end to their greed and hypocrisy.
See the full article below:
Your Money at Work, Fixing Others’ Mistakes
By GRETCHEN MORGENSON
The New York Times
Published: September 20, 2008
It looks as if we may get through this weekend without another scramble to save a troubled financial firm with a trillion-dollar balance sheet.
But that doesn’t mean taxpayers are out of danger. No, sir. No, ma’am. Because lawmakers are at work on a bailout fund that would buy the kind of distressed assets (defaulted mortgages, for example) that have ignited this firestorm.
Treasury Secretary Henry M. Paulson Jr. has called the fund the “troubled asset relief program.” I’ll just call it TARP for short (you know, the kind of thing they spread over muddy fields so you don’t soil your Guccis).
And depending on how TARP is operated, and how the assets are valued before taxpayers are forced to buy them, it could bloat our final bill for this mess while benefiting the very institutions that got us into it.
Yes, we need a smart plan and a concerted effort to get the frozen credit markets up and running. But we also have to be certain that the types of conflicts of interest that riddle Wall Street aren’t visited upon TARP.
Consider: A bank wants to sell the TARPistas (also known as TAXPAYERS) a pile of stinky mortgage securities that it currently values at 60 cents on the dollar. Let’s assume that the most recent actual trade between market participants for similar assets was struck at 30 cents on the dollar.
So what’s a fair price that we TARPistas should pay for the assets?
If we bought at 60 cents, a price that the bank would argue is appropriate, we would most likely face a loss. The bank, however, would be much better off than if it had to dump at 30 cents.
Conversely, if the assets were sold at 30 cents, taxpayers could wind up making a profit on the purchase if the assets performed better than expected over time. But the bank would have to write down the value of the assets as a result of the sale, possibly threatening its financial standing yet again.
Do you think, perchance, that financial services lobbyists might be working their Hill contacts right this very minute to ensure that the TARP valuations are rigged in their favor?
You know the answer to that.
And you also know that we should steel ourselves for heavy losses as the TARP gets pulled over our eyes. Never mind that it was the banks, with their reckless lending and monumental leverage, that drove us into this ditch.
Such is our lot today: They break it. We own it.
Taxpayers deserve better than this, of course. But we have no lobbyists, so we get skinned.
IF federal regulators and political leaders want to earn back some trust, they could do two things. First, they could provide us with some transparency about whom precisely we are backing in the recent bailouts.
Take, for example, the rescue on Tuesday of the American International Group, once the world’s largest insurance company. It was pretty breathtaking. Since when do insurance companies, whose business models seem to consist of taking in premiums and stonewalling claims, deserve rescues from beleaguered taxpayers?
Answer: Ever since the world became so intertwined that the failure of one company can topple a host of others. And ever since credit default swaps, those unregulated derivative contracts that allow investors to bet on a debt issuer’s financial prospects, loomed so big on balance sheets that they now drive every bailout decision.
The deal to save A.I.G. involves a two-year, $85 billion loan from taxpayers. In exchange, the new owners — us — get 80 percent of the company. If enough of A.I.G.’s assets are sold for good prices, we may get our money back.
Credit default swaps, which operate like insurance policies against the possibility that an issuer of debt will not pay on its obligations, were the single biggest motivator behind the A.I.G. deal.
A.I.G. had written $441 billion in credit insurance on mortgage-related securities whose values have declined; if A.I.G. were to fail, all the institutions that bought the insurance would have been subject to enormous losses. The ripple effect could have turned into a tsunami.
So, the $85 billion loan to A.I.G. was really a bailout of the company’s counterparties or trading partners.
Now, inquiring minds want to know, whom did we rescue? Which large, wealthy financial institutions — counterparties to A.I.G.’s derivatives contracts — benefited from the taxpayers’ $85 billion loan? Were their representatives involved in the talks that resulted in the last-minute loan?
And did Lehman Brothers not get bailed out because those favored institutions were not on the hook if it failed?
We’ll probably never know the answers to these troubling questions. But by keeping taxpayers in the dark, regulators continue to earn our mistrust. As long as we are not told whom we have bailed out, we will be justified in suspecting that a favored few are making gains on our dimes.
A.I.G.’s financial statements provided a clue to the identities of some of its credit default swap counterparties. The company said that almost three-quarters of the $441 billion it had written on soured mortgage securities was bought by European banks. The banks bought the insurance to reduce the amounts of capital they were required by regulators to set aside to cover future losses.
Enjoy the absurdity: Billions in unregulated derivatives that were about to take down the insurance company that sold them were bought by banks to get around their regulatory capital requirements intended to rein in risk.
Got that?
Which brings us to Item 2 for policy makers. Stop pretending that the $62 trillion market for credit default swaps does not need regulatory oversight. Warren E. Buffett was not engaging in hyperbole when he called these things financial weapons of mass destruction.
“The last eight years have been about permitting derivatives to explode, knowing they were unregulated,” said Eric R. Dinallo, New York’s superintendent of insurance. “It’s about what the government chose not to regulate, measured in dollars. And that is what shook the world.”
And it will continue.
©2008 Angel Reyes
www.ReyesLaw.com
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