Similar totally irresponsible actions are behind the troubles at many Wall Street firms and banks. Executives and traders engaging in business deals that resulted in short term profits for the firm, and very high bonuses for themselves, but ended up costing the firms stockholders truly massive amounts of money and the taxpayers even more money in the form of bailouts to cover the criminal behavior. I use the word "criminal" here because that is what was happening and not just in a broad layman's use of the word. Fraud is generally defined in law as an intentional misrepresentation of a material existing fact, made by one person to another, with knowledge of its falsity and for the purpose of inducing the other person to act, and upon which the other person relies with resulting injury or damage (which can include loss of money). Fraud may also be made by an purposeful failure to state material facts or by an omission, which nondisclosure makes other statements misleading.
In the case of AIG the fraud was two-fold: (1) The stockholders were relying on the corporate officers and employees to write insurance policies that were both profitable and reasonable in the sense of a reasonable risk to the corporation; (2) The parties paying for the insurance coverage were relying on the corporation to insure their risk and to be able to pay the insured amount in the event of a legitimate claim. In both cases, the corporate officers and those selling/writing the policies knew or should have known that setting aside NO RESERVES or very small reserves placed the corporate stockholders and the policy holders at grave risk. The corporate officers and those selling/writing the policies were profiting from the high profit sales of these insurance policies, without reserve amounts being maintained, by the receiving of large bonuses and other remuneration based on the short-term profits from the sales of the policies without regard to the mid and long-term consequences to the corporate stockholders or to the policy holders. This constitutes fraud. It does not matter if the exotic policies were in a insurance law loophole or not. What matters is that the corporate officers and employees engaged in fraud by selling policies without regard to the stockholders or to the policy holders, and knew or should have known from normal insurance practices that selling insurance policies without significant reserve amounts set aside to cover claims was certain to cause substantial loss to both stockholders and policy holders. The resulting crisis caused by the AIG policies is 'Prima Facie' evidence of same.
The corporate officers and those employees involved engaged in fraud against the corporate stockholders; they also engaged in fraud against the policy holders. They should be tried for criminal fraud at the Federal level and/or at the state level. This can be undertaken by the US Department of Justice or by State Attorney Generals or local county prosecutors in jurisdictions where either stockholders and/or policy holders reside or do business in.
Similar cases of fraud exists throughout the many investment banks and institutions currently receiving billions in federal bailout money. We have not yet seen criminal prosecutions of these matters but the public is totally outraged and the crimes are massive in scope. It is high time that federal and state/local prosecutors begin a parade of corporate officers and senior employees before grand juries for criminal indictments and the resulting criminal trials.
Not only billions but trillions of dollars have been lost to these multiple frauds and it is time that the criminals responsible face the law. Our very system of government demands that the guilty parties be brought to justice.