By early 2005, AIG’s directors were pursuing their own internal investigation which eventually led offshore to several Greenberg-controlled corporations that were a part of the AIG empire. One was the Starr Investment Corporation (SICO), a mysterious holding company which dated to AIG’s original founding by Cornelius Starr. The other firm, C.V. Starr (also named after the founder), was no less mysterious. Both were based in Bermuda, which is famous for having no corporate income tax. The island also attracts insurance companies because of the welcome absence of regulation. Both SICO and C.V. Starr held substantial amounts of AIG stock, and were used by Greenberg to reward top AIG executives. But C.V. Starr was also reserved for an inner circle who received lavish compensation. The inner group included Howard Smith, AIG’s chief financial officer, and Mike Murphy, SICO’s treasurer. It is curious that Smith had previously worked for PricewaterhouseCoopers, the company that, for many years, conducted AIG’s annual audits. How convenient.
The final showdown began on March 23, 2005 when a team of AIG lawyers arrived in Bermuda to examine SICO records and conduct interviews. The same facility housed both SICO and AIG employees. Martin Sullivan had already replaced Greenberg as AIG’s CEO. Greenberg still remained as chairman. However, by this point, a rift was developing between Greenberg’s supporters and the rest of the board, all of whom wanted the public relations disaster simply to end. The plot thickened when the directors issued a company-wide order to cooperate with regulators. The next day, AIG employees in the company’s Dublin office seized a SICO computer and placed it under lock and key. (Both firms also shared the Dublin office.) Things quickly escalated. Mike Murphy, a Greenberg loyalist, led a group of SICO employees into the Bermuda office, under cover of night, using a passkey, and hustled 82 boxes of SICO documents out of the building to a separate location. SICO was incorporated in Panama, a major center of money laundering, and there was concern that Murphy might attempt to move evidence beyond the reach of US law enforcement. The next day, an SEC official in New York received a message: “Looks like they’re destroying documents in Bermuda.” It was the last straw.
When word reached Spitzer he issued a stern warning to Sullivan, and also subpoenaed the SICO and AIG records. Sullivan personally flew to Bermuda, summarily fired Mike Murphy, and took possession of the documents. The AIG board, now under threat of criminal prosecution, had no choice but to demand Greenberg’s immediate resignation.
In subsequent months, the court proceedings played out in the press. The details gradually emerged about Greenberg’s largest deception: a $500 million deal “in which various AIG insiders staged an elaborate artificial transaction with the Gen Re Corporation,” a major reinsurer owned by Warren Buffet. AIG ostensibly bought $600 million in reinsurance from Gen Re for a $500 premium, indicating a risk of $100 million. However, because Greenberg wanted zero risk exposure, the deal’s “purported terms were all undone” by his staff “in undisclosed side agreements” that rendered the transaction “a sham,” according to the SEC. Papers were altered to distort the nature of the transaction. Buffet’s subsidiary provided records to Spitzer documenting everything. The records showed that AIG’s purpose had been to generate a large tax write-off, in order to make the company look more prosperous than it was. The documents also proved Greenberg’s personal involvement. One of the investigators told the New York Times that the intent may have been “to mask the the activities of murky offshore entities that AIG used extensively during Mr. Greenberg’s tenure at the company.”
In 2006, AIG reached a $1.6 billion settlement with state and federal authorities: the largest ever paid by any financial services company, in US history. In February 2008, four former executives of Gen Re and one from AIG were convicted of conspiracy, securities fraud, mail fraud, and making false statements to the SEC.
It is important to remember that Maurice Greenberg is not some run-of-the-mill hoodlum. As noted, he served as chairman of the Federal Reserve Bank of New York, is a director of the New York Stock Exchange, is the vice-chairman of the Council on Foreign Relations, and is a member of the Trilateral Commission. He also served as vice-chairman of the Center for Strategic and International Studies, and is the Director of the Institute for International Economics, is the Director of the US-China Business Council, the vice-chairman of the US-ASEAN Business Council, the Director of Project Hope, founding chairman of the US-Philippine Business Committee, and, until his forced retirement, was a Trustee of the Asia Society. While this is not a comprehensive list of Greenberg’s credits, it should suffice to lend new meaning to the old adage that scum rises to the top.
After Hank’s departure from AIG, the new CEO Martin Sullivan told the press that the insurance giant would now prosper “with the right controls and checks and balances in place, and the right level of compliance.” However, as we know, things turned out rather differently. By 2008, AIG was in dire financial straits, largely because of the company’s exposure to the sub-prime mortgage market (the outcome of zero regulation of derivatives). By September 16, 2008, AIG stock had fallen by more than 95% to just $1.25/share, from a one-year high of $70.13. For the year, AIG reported a $99 billion loss, and received a controversial $85 billion bailout. Greenberg pointed an accusatory finger at the current directors, and told the press that AIG’s sales of credit default swaps had exploded after he left. Sullivan denied this, insisting that AIG actually stopped writing credit default stops in 2005. By March 2009, AIG’s federal bailout had expanded to $150 billion, making it the largest single bailout by far in US history. AIG also set another dubious record when it posted a $61.7 billion loss for the final three months of 2008, the largest quarterly loss in corporate history. That same month, AIG announced that it would disperse $1.2 billion in bonus packages to its employees, 73 of whom would receive checks of at least $1 million.
The bonus announcement stirred understandable outrage. But the press failed to ask the really important questions. The investigations of the Greenberg empire showed that AIG was no different than the rest of the industry: AIG also lost money, at times, in the insurance business. Given that AIG managed its risks by ceding as much as 70% of its premiums to various reinsurers, this means that most of AIG’s insurance revenue was unavailable for investment. Nor can the remaining 30% account for AIG’s impressive earnings, over many years. The question, therefore, is: how did Maurice Greenberg manage for so long to produce a silk purse from a sow’s ear? Did Greenberg succumb to the temptations of the powerful, and step over the line? What is clear is that AIG’s offshore dealings were key to the company’s profitability, even during the downturns that affected the rest of the industry but to which AIG seemed largely immune. David Schiff, a Greenberg admirer, put it this way: “AIG’s unique global franchise obscured the reality of the company’s financial condition.”
Former LAPD narcotics detective Michael Ruppert arrived at a different conclusion. In August 2001, just weeks before 9/11, Ruppert posted an article exploring possible AIG involvement in the drug trade. Ruppert was astounded to learn that Coral Talavera Baca, the wife (or girlfriend, it is not clear which) of Medellin drug lord Carlos Lehder was, at the time, employed at AIG’s San Francisco office, ostensibly as AIG’s office manager, a position for which Talavera had neither the requisite training nor the credentials. What was she doing there?
Amazingly, as it turns out, Coral Talavera Baca was the very same woman who in 1995 supplied investigative reporter Gary Webb with the initial lead that resulted in his groundbreaking series of articles in the San Jose Mercury News about CIA links to Latin American drug traffickers. Talavera’s husband, Carlos Lehder, was one of the central figures in the notorious Medellin drug cartel, led by Pablo Escobar, which in the mid-1980s grew into the world’s largest cocaine smuggling ring. At the time of Lehder’s 1987 arrest in a Columbian jungle, he reportedly cut a deal with US officials and was allowed to keep much of his estimated $2.5 billion fortune amassed from the drug trade. Lehder was extradited to the US, where he entered a witness protection program. But why would the US government negotiate with a man who had been public enemy number one? Lehder and his cohorts in Medellin are believed to have ordered the assassination of numerous Columbian officials, newspaper editors, journalists, informants, as well as 600 policemen; but are probably best known for their involvement in the grisly attack on the country’s Palace of Justice in November 1985 that left nearly 100 people dead, including eleven of Columbia’s supreme court justices. Lehder was a bad apple.
According to the Pittsburgh Post-Gazette, it was none other than Vice President George H.W. Bush who negotiated the deal with Lehder. I was shocked to read this, until I recalled that Ronald Reagan named Bush in 1982 to head up his so called war on drugs. As we will discover, this explains many things.
Although Lehder testified for US prosecutors at the 1992 trial of Manuel Noriega, his testimony proved of little value to the prosecution. According to knowledgeable observers, Noriega’s conviction was a foregone conclusion, with or without Lehder’s testimony. Some wondered why the US was so interested in Noriega, in the first place, since Lehder was a much bigger fish in the drug world. Narcotics expert Alfred McCoy may have provided the answer when he speculated that the US prosecution of Noriega probably had nothing to do with curbing the drug trade and everything to do with projecting US power in Central America. Noriega’s crime was that he turned nationalist, developed his own power base, and sought to chart an independent path, much like his predecessor, General Omar Torrijos, who died in a mysterious plane crash, probably orchestrated by the CIA.