EVEN Bill Clinton’s crew in Arkansas was worried when American International Group decided to set up a legally questionable company called Coral Reinsurance in Barbados.
And that, folks, is saying a lot because Arkansas in the late 1980s into the ’90s had the loosest ethics of any modern state. (Sorry, New Jersey.)
To recap: AIG is being investigated by a multitude of authorities over transactions that seemed to have made the company’s profits look better than they were.
The chairman Hank Greenberg – he’s gone. The company’s stock – it’s down, along with AIG’s reputation.
Among the many things being investigated is whether AIG planted straw companies in the Caribbean which it used like subsidiaries but didn’t treat like subs for accounting purposes. That would be fraud.
One of those companies was Coral Re.
Goldman Sachs weaved together the financing for Coral Re, putting the arm on some big-time Chicago investors and something called the Arkansas Development Finance Authority, or AFDA, for short. That was in 1987.
By 1992, a guy named Bob Nash, who by then was the head of ADFA, jotted a note to his predecessor, a good ol’ boy named Wooten Epes, questioning the Coral Re transaction.
In the hand-scrawled, barely legible note with Coral Re on the subject line Nash wrote: “Wooten: 1. Why are they asking about this??!! 2. Were other states involved? If so, which? No other states, any private people? 3. Who was mover and shaker on this? 4: What about issue of state agency not having authority to buy stock?? Legal opinion? 5. Call Me (in darker lettering).”
Nash doesn’t identify who was asking questions.
But in August 1992 a supervising insurance examiner in Delaware sent a note to Nash asking about Coral Re.
The examiner said “we consider this company [Coral Re] unique and are interested in confirming that the information which we have received to date is consistent with the information which your organization was provided with.”
“In this respect, we would appreciate your discretion regarding discussion of such request. This is a fairly urgent matter,” the Delaware examiner added.
It’s unclear whether Arkansas helped Delaware figure out the Coral Re mystery. But that’s the least of the open questions that’ll haunt investigators now looking into AIG.
For one thing, what was the nature of all the Coral Re transactions and was the same sweet deal replicated by AIG to put together other questionable reinsurance companies?
One interesting point in the ADFA deal is that the Arkansas agency never really had to risk any of its own money. It seems to have gotten a $5 million loan from the Chicago branch of Japan’s Sanwa Bank, which was repaid when Coral Re started to pay dividends.
Yesterday, AIG admitted that accounting errors may have caused its net worth to have been inflated for 14 years. But even if the errors began only when Coral Re came into existence, that would be 18 years.
If AIG is going to make a confession, it may as well do it right. I’ll have more on this in the future.