AIG’s former CEO Maurice “Hank” Greenberg has indicated that he is ready to testify regarding AIG’s transaction with Berkshire Hathaway’s General Re group in 2000. The transaction in question was orchestrated by General Re in a manner that allowed AIG to inflate its loss reserves by $500 million. Mr. Greenberg was never charged with a crime but prosecutors identified him as an unindicted co-conspirator and he refused to testify citing his fifth amendment right against self incrimination. Now that the statute of limitations has apparently expired, Mr. Greenberg is willing to provide testimony in the case.
The AIG situation has been a headache for General Re and Berkshire Hathaway over the past decade. On January 20, General Re finally reached a settlement with the federal government which will allow the firm to avoid prosecution for its role in the accounting fraud. General Re paid $92 million in total fines as part of the settlement. Several General Re executives were implicated in the sham transaction and the entire episode threatened to tarnish Berkshire Hathaway’s reputation. (The AIG matter is not the only trouble Berkshire ran into after the 1998 General Re acquisition. We provide extensive detail regarding Berkshire’s troubled history with General Re in the Berkshire Hathaway 2010 Briefing Book.)
Warren Buffett was never accused of any wrongdoing in the case and willingly spoke to prosecutors regarding his knowledge of the situation. When the $92 million settlement was announced, Mr. Buffett made the following statement regarding the matter:
“We did something wrong and we paid the price,” Buffett said during an interview on the Fox Business Network. “It shouldn’t have been done, and there’s nothing inappropriate about the fine we paid, so I have no problem with it.”
So on one hand we have Mr. Buffett who willingly cooperated with prosecutors and has taken responsibility for the actions of one of his companies and on the other hand we have Mr. Greenberg who refused to testify years ago and is only coming forward now that the statute of limitations has expired.
Mr. Greenberg had every right to exercise his fifth amendment protection against self incrimination, but Mr. Buffett has clearly set the better example in this case.
Disclosure: The author owns shares of Berkshire Hathaway and is the author of The Rational Walk’s Berkshire Hathaway 2010 Briefing Book which provides a detailed analysis of the company along with estimates of intrinsic value.
General Re, a Berkshire Hathaway subsidiary, has reached a $92 million settlement with the federal government which will allow the firm to avoid prosecution for its role in an accounting fraud involving AIG. The Wall Street Journal reports that the settlement also includes corporate governance changes that will require Berkshire Hathaway’s Chief Financial Officer to attend meetings of General Re’s audit committee and mandates that General Re appoint an independent director.
The terms of the settlement call for General Re to pay $60.5 million toward restitution for investors who suffered losses in the AIG fraud, $12.2 million to settle the charges with the Securities and Exchange Commission, and $19.5 million to the U.S. Postal Inspection service.
Berkshire Hathaway’s acquisition of General Re in 1998 ran into difficulties almost immediately when underwriting standards proved to be inadequate and large losses ensued. The September 11, 2001 terrorist attacks demonstrated continued underwriting weakness at the company which Warren Buffett discussed in his 2001 annual letter to shareholders. Berkshire also inherited General Re’s problematic derivatives book which took years to wind down at a significant loss, as described in Mr. Buffett’s 2002 annual letter to shareholders where he famously referred to derivatives as “financial weapons of mass destruction.” It should be noted that underwriting issues at General Re appear to be fixed based on results in recent years and the company does provide a large amount of float for Mr. Buffett to invest.
Beyond the financial troubles at General Re, the most troubling aspect has been the serious risks to Berkshire’s reputation based on the alleged impropriety surrounding AIG. A number of General Re executives were implicated in the case and there were some convictions as well. All companies depend on their reputation to varying degrees, but none as much as Berkshire Hathaway. Berkshire’s sterling reputation has enriched shareholders over the years by making it possible to acquire companies whose founders weigh such matters very highly. Now that the AIG matter is settled, Berkshire and General Re can move past this unfortunate chapter.
The author owns shares of Berkshire Hathaway.
Warren Buffett is not one to deny a friendly helping hand to companies in financial distress — at a price, of course! The Wall Street Journal reported today that a subsidiary of Berkshire Hathaway signed “cut-through endorsements” with AIG and XL Capital when they were struggling last year due to impaired credit ratings. Cut-through endorsements directly protect the buyer of a policy by providing backup coverage in cases where the primary insurer defaults on its obligations.
A brief excerpt from the Wall Street Journal article:
“Buffett is able to do this because of his credit rating, and if there are no claims, he puts the 5% in his pocket,” said Andrew Barile, a reinsurance consultant in Rancho Sante Fe, Calif. He called the surcharges very high for such coverage. A potential concern for AIG and XL Capital would be “the detail [Buffett] gets on your biggest accounts,” which could give Berkshire Hathaway’s insurers a competitive advantage when it came time for the policies to renew.
Just as we have seen in the deals with General Electric, Goldman Sachs, and others, Berkshire Hathaway’s “helping hand” can be a win-win proposition. The entity seeking help gains credibility and Berkshire shareholders earn healthy returns made possible by the company’s Fort Knox balance sheet. And of course, that competitive intelligence on insurance pricing should be useful for underwriting as well.
Disclosure: The author owns shares of Berkshire Hathaway.