Interestingly, this possibly huge story has connections to Alabama and my former employer, the University of Alabama at Birmingham (UAB). We will examine those connections in a bit, but first let's look at the meat and potatoes.
In a report by Newsweek's Michael Hirsh, Gober says he believes AIG's supposedly solvent insurance business might be at least as troubled as its reckless financial-products unit. Reports Hirsh:
Far from being "healthy," as state insurance regulators, ratings agencies and other experts have repeatedly described the insurance side, Gober calls it "a house of cards." Citing numerous documents he has obtained from state insurance regulators and obscure data buried in AIG's own 300-page annual reports, Gober argues that AIG's 71 interlocking domestic U.S. insurance subsidiaries are in hock to each other to an astonishing degree.
What is at the heart of this financial volcano that might erupt at any moment? Gober sums it up in one word: reinsurance.
Most major insurance companies use outside firms to reinsure, but the vast majority of AIG's reinsurance contracts are negotiated internally among its affiliates, Gober says, and these internal balance sheets don't add up. The annual report of one major AIG subsidiary, American Home Assurance, shows that it owes $25 billion to another AIG affiliate, National Union Fire, Gober maintains. But American has only $22 billion of total invested assets on its balance sheet, he says, and it has issued another $22 billion in guarantees to the other companies. "The American Home assets and liquidity raise serious questions about their ability to make good on their promise to National Union Fire," says Gober.
Gober has a vested interest in keeping up with such matters. He has a consulting business in Mississippi devoted to protecting policyholders. He doesn't like what he sees under the surface at AIG:
Gober says there are numerous other examples of "cooked books" between AIG subsidiaries. Based on the state insurance regulators' own reports detailing unanswered questions, the tally in losses could be hundreds of billions of dollars more than AIG is now acknowledging.
If Gober is right, things could get ugly. As Hirsh reports, perhaps things already are getting ugly:
One early sign of trouble came when Christian Milton, AIG's vice president of reinsurance from 1982 to 2005, was convicted last year in federal district court of conspiracy, securities fraud, mail fraud and making false statements to the Securities and Exchange Commission. (Milton was sentenced in January; his lawyers have indicated plans to appeal.)
Gober has brought his concerns to the attention of the House Financial Services Committee, chaired by Rep. Barney Frank (D-MA). What could it all mean?
If Gober is right, the implications are almost too awful to contemplate. Despite its troubles on Wall Street, AIG is still the largest insurance company in the United States, controlling both the largest life and health insurer and the second-largest property and casualty insurer. It has 30 million U.S. customers. AIG is also a major provider of guaranteed investment contracts and products that protect people in 401(k) plans, as well as being the leading commercial insurer in the U.S. It is one of the largest insurance companies in the world, with insurance and financial operations in more than 130 countries. These insurance businesses were once thought to be so solid that AIG was able to use the triple-A rating it was routinely awarded to start up its vast credit-default-swap business.
Tom Gober's history suggests that he knows what he's talking about. And that's where Alabama and UAB come into play. More on that coming up.