Part 3: AIG and the Linkage to the Drug Trade
Three years after the Noriega trial, Lehder complained in a letter to U.S. District Judge William Hoeveler of Miami that he had been double-crossed by the US government. Weeks later, according to eyewitnesses, Lehder was whisked into the night from the witness protection center at Mesa, Arizona. He was not seen again for ten years, until 2005, when Lehder appeared in a Florida courtroom to appeal his life-in-prison-sentence-plus-135-years. The judge dismissed the appeal out of hand. No mystery there. But what about the $2.5 billion in assets that Lehder reportedly retained? I had hoped to interview Coral Talavera Baca who, no doubt, has the answers. Unfortunately, I was not successful in contacting her. In 2011, the questions raised a decade ago by Mike Ruppert about Baca’s connections with AIG, and AIG’s possible involvement in the drug trade, remain unresolved.
Yet, it is curious that Maurice Greenberg chose to expand into the financial services sector in 1987, the year of Lehder’s arrest in Columbia. Not only does the timing correspond with the sharp upsurge in the volume of revenues from the international drug trade, which by the late 1980s exceeded an estimated trillion dollars a year, that same year, AIG also entered into a bizarre relationship with a Barbados-based reinsurance company named Coral Re. The details, as I have noted, came to light in the mid-1990s when Delaware state regulators discovered that AIG secretly controlled Coral Re. In the insurance world, companies often reduce their exposure to underwriting losses by passing on a percentage of the risk to insurance wholesalers, also known as reinsurance companies. As payment, the reinsurance companies receive a percentage of the premiums. Wholesalers are generally based offshore in places like Bermuda, Barbados, the Caymans, and Luxembourg, where taxes are minimal or nonexistent and accounting records can legally be kept secret. Although US state laws require insurance companies to keep a certain amount of capital in reserve to cover losses, the amount is less if a company has reinsurance. AIG was a major user of reinsurance because it specialized in high-risk policies. For regulatory reasons, however, both parties to such a transaction, i.e., the insurer and reinsurer, must be independent of one another, for obvious reasons. If the two are affiliated, then there is no true risk reduction. This was the issue with Coral Re, and what attracted state regulators in the first place, because, despite persistent denials by AIG, Coral Re turned out to be a shell company created by AIG for reasons that have never been made clear. At the time Coral Re was established, the broker Goldman Sachs sent around a confidential memo which cautioned that the whole business must be kept secret. Indeed, the memo stipulated that all copies of the memo were to be returned to Goldman Sachs. When Delaware state regulators nevertheless managed to obtain a copy, they were incredulous. The dozen or so investors who lent their names put up no money of their own, yet were guaranteed a profit, a sweet deal if there ever was one. Within days of its creation, Coral Re recorded $475 million in losses, which soon topped $1 billion. Between 1987 and 1993, AIG ceded $1.6 billion of insurance premiums to the new reinsurer. Yet, Coral Re’s total equity capital never exceeded $52 million. In addition to being severely under-capitalized, the new company had no actual offices of its own. In fact, it was managed by a subsidiary of AIG. Coral Re’s board of directors made no decisions and conducted no business. At the time, the chief operating officer at Goldman Sachs was Robert Rubin, who later served as President Bill Clinton’s Treasury Secretary.
Rubin’s main “achievement” during his tenure at Treasury was persuading Clinton to support repeal of the 1933 Glass-Steagall Act, a key part of Franklin Delano Roosevelt’s New Deal program. Glass-Steagall had created a regulatory firewall between commercial and investment banking, for the soundest of reasons: to prevent conflicts of interest and other abuses within the banking system. But Robert Rubin, Alan Greenspan, and others on Wall Street viewed the New Deal as an aberration, and by 1999, they brought Clinton around. In 1998, Rubin also joined with Greenspan in blocking attempts by Brooksley Born, chairman of the Commodities Futures Trading Commission, to regulate derivatives, which Born and others correctly saw as a threat to the stability of financial markets. The result was the disaster we have witnessed in recent years. The defeat of every attempt to regulate derivatives, together with the repeal of Glass-Steagall, opened the floodgates to the wild speculation that characterized the G.W. Bush years, and is responsible for the derivative schemes, real estate bubble, collateral debt obligations, sub-primes, credit default swaps, legalized skimming rackets and, ultimately, the global financial meltdown in 2008. In short, we have suffered a replay of the roaring twenties when bankers showed they were incapable of regulating themselves.
After Rubin’s departure from Treasury he joined the board of Citigroup, the largest US bank, which had recently been rocked by several huge money laundering scandals, one involving Mexican President Salinas. In 2001, the pattern repeated itself when Citigroup paid $12 billion to acquire the second largest bank in Mexico, Banamex, whose owner Roberto Hernandez Ramirez was known to be deeply involved in the international drug trade. In December 1998, the daily Por Esto!, Mexico’s third largest newspaper, reported that Ramirez’s estate on the coast of Yucatan was a regular transshipment point for tons of South American cocaine. According to local fishermen, the coke arrived by boat during the night and, after being offloaded, was sent to the US via small planes operating out of a private airstrip on Ramirez’s sizable estate. The property is located on the tip of Punta Pajaros, which in English means Bird Point. So flagrant was the trafficking that local people dubbed it “la peninsula de la coca,” i.e., the cocaine peninsula. When Ramirez sued Por Esto! for libel, a Mexican court threw out the case after finding that the evidence for narco-trafficking was genuine. A succession of Mexican presidents, including Ernesto Zedillo and Vicente Fox, reportedly vacationed with the drug lord banker at his lavish estate, as did President Bill Clinton in February 1999.
No question, Citigroup acquired Banamex to gain easy access to drug money, which many US banks now depend on for liquidity. In 2009, Antonia Maria Costa, head of the UN Office on Drugs and Crime, told the press that billions of dollars of laundered drug money had saved the financial system during the 2008 meltdown on Wall Street. But not even laundered drug money could save Citigroup. The bank suffered enormous losses due to its sub-prime exposure, and at the height of the crisis received a $45 billion transfusion from the Federal Reserve, the second largest bailout after AIG’s. By December 2008 Citigroup’s stock had plummeted to $8/share from a high of $55 in 2006. Angry shareholders filed a lawsuit charging that Robert Rubin and other insiders not only lied to them about the bank’s losses, but had also cashed in their own inflated stock options before the collapse. Later, the SEC agreed with shareholders that Rubin and other bank officials knew about the losses. Which, of course, means that they are guilty of both defrauding investors and insider trading. At last report, however, none had been indicted, although one bank officer was fined $100,000. But the hand-slap is laughable given Rubin’s reported earnings of $120 million while at Citigroup.
Citigroup may be the largest, but it is not the only big US bank involved in narco-trafficking. Others include Bank of America, American Express Bank, Wells Fargo and Wachovia, none of which has ever been criminally prosecuted in a US court for their participation in the drug trade. Recently, Bloomberg reporter Michael Smith learned the answer to the question why when he interviewed Jack Blum, a long-time US Senate investigator and banking industry consultant. Said Blum: “There’s no capacity to regulate or punish them [the big banks] because they are too big to be threatened with failure.” This explains why “they seem….willing to do anything that improves their bottom line, until they’re caught.” Blum called their too-big-to-fail status “a get-out-of-jail-free-card for big banks.”
That is certainly how it played out when Wachovia was caught red-handed in “the biggest money-laundering scandal of our time.”  The plot began to thicken in 2006 when Mexican authorities discovered 5.7 tons of cocaine packed in 128 black suitcases (estimated street value: $100 million) in a DC-9 at the international airport of Ciudad del Carmen, located 500 miles east of Mexico City. Authorities later learned that narco-traffickers had purchased the plane with funds laundered through Wachovia Corp. and Bank of America. It was no isolated incident. A 22-month federal investigation disclosed that during a three-year period alone, from May 2003 to May 2007, Wachovia had processed $378 billion in questionable transfers from Mexican currency exchange houses, in the form of wire transfers, traveler’s checks and cash shipments. The whopping figure is the equivalent of roughly one-third of Mexico’s gross domestic product.
The noose began to tighten on May 16, 2007, when DEA agents raided Wachovia’s international offices in Miami, seizing bank records. A “back look” at the transactions confirmed that drug cartels had used Wachovia’s correspondent banking services to launder a minimum of $110 million in drug profits. Doubtless, this was only the tip of the iceberg, but was still the largest violation of US money-laundering laws in history. The cartels had used the laundered cash to purchase weapons, safe-houses, and aircraft for the narcotics trade. During the investigation, authorities also seized 22 tons of cocaine. According to Jeffrey Sloman, a federal prosecutor involved in the case, “Wachovia’s blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations.”
When Wachovia’s own anti money-laundering officer, Martin Woods, attempted to bring the problem to the attention of bank officials, the same officials told him to keep quiet. Woods persisted, to his credit, and became the target of internal harassment and bullying by bank officials. He lost his job and, even though later vindicated by the federal probe, ultimately, had to bring suit against the bank to get restitution. In the end, Wachovia refused to curb its lucrative dealings with the dubious Mexican currency houses, that is, until the financial media began to report the ongoing federal investigation. But then, Wachovia has a long history of caring more about the almighty dollar than the people it serves. Founded in Charlotte, North Carolina in 1879, Wachovia foreclosed on so many farms and businesses during the Great Depression that the bank became known in the Southeast as Walk-over-ya.