THE INTERNAL CONTROLS AND
FINANCIAL ACTIVITIES THAT LED TO THE BAILOUT OF OUR NATION’S LARGEST INSURANCE COMPANY
Anyone who watches TV has most likely seen the American International Group (hereinafter AIG) commercial with the little boy who walks into his parent’s room while they are sleeping. When his mother asks if he had a nightmare, he says “no” and that he’s worried about his parent’s financial future. After a twenty-second spiel about his worries, the father says, “Buddy, we’re with AIG” and he goes, “Oh!” and walks out of the room and (assuming) back to his bedroom. AIG, established as a Delaware corporation in 1921 by Maurice “Hank” Greenburg, is primarily engaged in insurance-related and financial activities in the United States and European countries (over 130 combined total); including but not limited to home insurance, car insurance, life insurance and various investments. Imagine that this boys parents’ discover one day with their financial planners that they lost all of their investments and insurances in which they paid dearly. The parents had agreed to make an investment so they and their children could have a secured future protection against market risks. Well, it became a reality for many Americans. This devastating loss left many taxpayers with misappropriated assets along with a burden to pay the “bill” for the bailout of AIG.
PART I: HOUSING MARKET SCANDAL:
VIOLATIONS IN BUSINESS OPERATIONS
To understand the accounting scandal of AIG, one must first understand its business transactions and operations leading up to the SEC investigations. In 1993, President Bill Clinton signed into law the Omnibus Budget Reconciliation Act, commonly known as the OBRA-93 or the Deficit Reduction Act. Part XIII, is our primary focus, the Revenue Reconciliation Act which allows limitations on executive compensations by limiting the deductible for tax purposes to $1 Million unless the compensation was earned through performance, bonuses or equity: ultimately increasing the average executives paycheck. When an executive’s paycheck percentage is primarily a bonus, those profits can lead to decisions that are not in the best interest, short-term and long-term, of taxpayers or shareholders. You may think what this Act has to do with AIG, but this act is the very essence of why AIG failed as a business. AIG had paid its top executives a whopping $165 million in bonuses after it had received bailout funds. In early 1995, the Clinton Administration issued new and revised regulations to the Community Reinvestment Act, or CRA (in which was created by the Jimmy Carter administration) which de-emphasize a lender to make subjective assessment measures in favor of strictly numerical quotas, or as others may say, racial quotas. In simpler terms, private banks were compelled to provide loans to low income families and minority neighborhoods as long as the person was making some sort of income to repay the loan and did not require any initiation of a credit check. In more ways than one, this was a Federal scheme that pressured and extorted banks into loaning money to people at high-risk. The new regulations also instructed lenders to take into account how well they responded to complaints from groups such as Minority Community Activist organizations like ACORN. In December of the same year, Henry Cisneros (herinafter Cisneros), then head of Department of Housing and Urban Development (hereinafter HUD), moved Fanny Mae and Freddie Mac towards a requirement that 42% of the mortgages would now serve predominantly minority neighborhoods and low to moderate income families. In 2000, Andrew Cuomo (hereinafter Cuomo), Cisneros’ successor, established an even more aggressive social-engineering goal by increasing the number of mortgages to 50% by method of dramatically hiking Fanny Mae’s and Freddie...
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