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Another Black Eye for AIG

When it rains, it pours. Does AIG (NYSE: AIG  ) have any eyes left to blacken?

It was reported Wednesday that former AIG chief executive Maurice “Hank” Greenberg might face civil charges for an alleged role in improperly inflating AIG’s loss reserves through fraudulent transactions with Berkshire Hathaway’s (NYSE: BRK-B  ) General Re.

What's going on with these knuckleheads?
This news comes just one week after AIG reported an astronomical $7.81 billion loss, which complimented the $11.12 billion loss the quarter before. Also, the company announced earlier this week that it would be raising much-needed capital through a larger-than-expected common stock offering that will dilute already battered shareholdings. Way to be, AIG.

Mr. Greenberg, the 83-year-old ex-chief executive, was served a “Wells Notice” by the Securities Exchange Commission (SEC) last Friday. A Wells Notice indicates that the SEC is only considering civil charges, and it provides the recipient with a chance to mount a defense, possibly persuading the agency not to pursue charges. U.S. District Judge Christopher Droney, who conducted the criminal trial in which former AIG and General Re executives were convicted of falsely inflating AIG reserves, said that there was enough evidence to show that a conspiracy began with a phone call from Greenberg.

Is that all?
But wait! There’s so much more. Mr. Greenberg was ousted as CEO (after nearly four decades at the helm) while AIG was under investigation for its questionable accounting practices. The former executive, who controls a 12% stake in the company, is currently leading a shareholder revolt against current management. You can’t make this up. That is one nutty insurance company.

AIG's massive writedowns, combined with those of Citigroup (NYSE: C  ) ,UBS (NYSE: UBS  ) , Wachovia (NYSE: WB  ) , Merrill Lynch (NYSE: MER  ) , Bank of America (NYSE: BAC  ) , and others, contributed to a whopping total of $300 billion so far in the worldwide credit crisis, according to analysts' estimates.

What to make of all this
So, what do we have here? AIG is so infected with subprime overindulgence that its numbers are atrocious even for this environment. The ex-chief executive, after being ousted amid a company accounting scandal, might be implicated in another scandal while he’s leading a shareholder revolt against current management. It’s quite a company.

I don’t now if Greenberg is guilty or innocent. But, in this day and age, one cynically wonders how many undetected offenses he committed in the nearly four decades he spent building AIG into the largest insurer in the world. Maybe this was the only one.

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Bank of America is a Motley Fool Income Investor recommendation. Berkshire is a Motley Fool Inside Value and Motley Fool Stock Advisor pick. The Fool owns shares of Berkshire. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Tom Hutchinson holds no financial position in any companies mentioned. The Motley Fool has a disclosure policy.

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  • Report this Comment On May 23, 2008, at 11:51 PM, oregonjon wrote:

    This entire matter is a mess. Greenberg seemingly initiated a reinsurance transaction, subsequently found to be fraudulent, that added $500 million to AIG's total loss reserves. At the time the $500,000,000 was a meaningful, but almost immaterial number given AIG's earnings and overall financial strength. It is difficult to understand exactly how the number deceived investors or the market, but fraudulent it has been found.

    Fast forward to today's world where AIG has absorbed derivative losses of almost $20 billion dollars, after management proclaimed the maximum possible loss to be several hundred million dollars. For reasons best explained by lawyers an obscure $500,000,000 million dollar reinsurance deal is deemed fraudulent while misrepresenting what became a $20 billion dollar loss is just poor communication, or something.

    I suppose it's a matter of intent. It's thought that Greenberg was smart enough to intend to defraud while current AIG management is seen as so incapable as to be not smart enough to intend to defraud.

    If we move away from the lawyering here, it's pretty clear which action deceived real investors and which was but a financial statement blip. Meanwhile AIG's lumbers aimlessly along looking for it's soul.

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