AIG Accounting Scam

American International Group, Inc. (NYSE: AIG) or AIG is an American multinational insurance corporation. Its corporate headquarters is located in the American International Building in New York City. The British headquarters office is on Fenchurch Street in London, continental Europe operations are based in La Dfense, Paris, and its Asian headquarters office is in Hong Kong. According to the 2011 Forbes Global 2000 list, AIG was the 29th-largest public company in the world. It was listed on the Dow Jones Industrial Average from April 8, 2004 to September 22, 2008. AIG history dates back to 1919, when Cornelius Vander Starr established an insurance agency in Shanghai, China. Starr was the first Westerner in Shanghai to sell insurance to the Chinese, which he continued to do until AIG left China in early 1949as Mao Zedong led the advance of the Communist People's Liberation Army on Shanghai. Starr then moved the company headquarters to its current home in New York City. The company went on to expand, often through subsidiaries, into other markets, including other parts of Asia, Latin America, Europe, and the Middle East. In 1962, Starr gave management of the company's lagging U.S. holdings to Maurice R. "Hank" Greenberg, who shifted its focus from personal insurance to high-margin corporate coverage. Greenberg focused on selling insurance through independent brokers rather than agents to eliminate agent salaries. Using brokers, AIG could price insurance according to its potential return even if it suffered decreased sales of certain products for great lengths of time with very little extra expense. In 1968, Starr named Greenberg his successor. The company went public in 1969. Beginning in 2005, AIG became embroiled in a series of fraud investigations conducted by the Securities and Exchange Commission, U.S. Justice Department, and New York State Attorney General's Office. Greenberg was ousted amid an accounting scandal in February 2005; he is still fighting civil charges being pursued by New York state. The New York Attorney General's investigation led to a $1.6 billion fine for AIG and criminal charges for some of its executives. Greenberg was succeeded as CEO by Martin J. Sullivan, who had begun his career at AIG as a clerk in its London office in 1970. On June 15, 2008, after disclosure of financial losses and subsequent to a falling stock price, Sullivan resigned and was replaced by Robert B. Willumstad, Chairman of the AIG Board of Directors since 2006. Willumstad was forced by the US government to step down and was replaced by Edward M. Liddy on September 17, 2008. AIG's board of directors named Robert Benmosche CEO on August 3, 2009 to replace Mr. Liddy, who earlier in the year announced his retirement.

Back in 2009, the Institutional Risk Analyst (IRA) looked at AIG's business and reported on various shady insurance practices that had come to light in the past and appeared oddly similar to what AIG did. Big Picture published the report at the time. This analysis almost immediately disappeared into the memory hole, from whence analysts are hereby hoping to rescue it. Let's briefly recapitulate the role of debt insurers, such as the mono-lines (ABK, MBIA) in Wall Street's securities production machinery. The main role of such guarantees was not really to 'guarantee' anything, since it was clear (or should have been clear) to all concerned that in extremis, these insurers could never ever be expected to survive paying all the potential claims. 'In extremis' describing the situation that finally became reality in 2007-2008, namely the long overdue implosion of the credit bubble. If investors insure a number of different debt securities during an economic boom, everybody naturally assumes that at worst, investors may have to pay claims on just a handful of them. In a mild downturn, there may be a few more claims, but nothing that is likely to deplete the capital of the insurer, or so the thinking went. Well, since analysts recall numerous people warning about the dangers inherent in the credit insurance business as far back as 1999 (for instance 'Credit bubble bulletin' author Doug Noland), analysts can well imagine that the people in charge at big sophisticated financial institutions must have been able to assess the growing risks as well, or at least have had some inkling that things might one day go wrong. However, the post Nasdaq bubble recession once again showed that the Fed's money spigot stood ready pump money and credit into the economy and reignite the credit bubble in a reasonably short time. The repeated example of credit booms being reignited in the wake of crises may well have lowered many peoples' guard. These guarantees were of course extremely convenient for the Wall Street sales machinery after all, even shoddy credits could be transformed into highly rated securities that way. The credit insurance business took off well before credit default swaps became the preferred instrument of insuring debt against default risk, going from the rather mundane business of providing insurance for municipal debt to insuring an ever wider range of debt securities. Finally, in the blow-off phase of the housing bubble and the invention of CDOs and ever more complex varieties of securities all of which were on purpose designed to actually hide risk credit insurers seemed to have (re-)discovered the proverbial 'free lunch'. Rating agencies, Wall Street banks and insurers worked hand in hand to churn out an ever larger pile of 'AAA' rated securities that were in reality complete junk. The buyers of these securities mainly institutional investors that were 'hungry for yield' but were forced by their statutes to eschew debt securities below certain rating threshold happily, and stupidly snapped such securities up. After all, the rating agencies had

given their placet and were not at all reluctant to slap high ratings on the senior tranches of mortgage backed CDOs and many other insurance-enhanced debt securities. Their models allegedly proved that the likelihood of default was very small except, of course, in extremis. Curiously, few people seemed disturbed by the inherent conflicts of interest attending the debt rating business. The fact that a state-sanctioned cartel gets paid by the issuers of debt to rate it, should have been a major red flag for every thinking person. Analysts notice by the way that even today, many analysts look at the economy and markets solely through the lens of of the post war experience, which consists largely of a single huge credit bubble that grew into a veritable monster. Similar to the ratings agencies whose models of default probabilities regarded only this era, they make the cardinal mistake of not considering the last time when a major credit bubble burst. But analysts digress. AIG as a large insurance company felt compelled to enter this business, a decision which the IRA found rather odd. From the report: "For some time now, we have been trying to reconcile the apparent paradox of American International Group (NYSE:AIG) walking away from the highly profitable, double-digit RAROC business of underwriting property and casualty (P&C) risk and diving into the rancid cesspool of credit default swaps (CDS) contracts and other types of high beta risks, business lines that are highly correlated with the financial markets." Well, analysts happen to think that CDS actually have a valuable function, so analysts would not necessarily generalize about them in this manner ('rancid cesspool'). However, analysts do acknowledge that it seems odd that AIG went into this business a business it evidently poorly understood. At this point, let us recall what AIG said in early 2008 when its CDS contracts began to go sour. In essence AIG's management stated on earnings calls 'analysts cannot properly estimate the size of the loss or exposure'. Why could they not? Were the contracts that obscure and difficult to understand? Their counterparties sure had an opinion regarding the size of the collateral they wanted posted after all (i.e. AIG got a margin call). The IRA analysis continues: "We also learned from [Robert] Arvanitis, who worked for AIG during much of the relevant period, that the decision by Hank Greenberg and the AIG board to enter the CDS market was, at best, chasing revenue. No rational examination of the business opportunity, assuming that Greenberg and his directors were acting based on a reasoned analysis, could have resulted in a favourable decision to pursue CDS and other high beta risks, at least from our perspective." In short, AIG was doing something that made no obvious sense for the insurer. To use an old metaphor, it was picking up pebbles in front of a steamroller. It was 'easy money', but the increasingly evident mispricing of risk in 2006-2007 meant that in order to make sizable amounts of aforementioned 'free lunch money', it had to take ever larger risks. It made no sense to do this on a risk-adjusted basis (and insurers are supposed to have some basic understanding of risk taking).

In wondering about AIG's motives to enter such a business line, the IRA then looks at the so-called 'side letter' practice, a specific type of reinsurance fraud. This used to work as follows: "One of the most widespread means of risk shifting is reinsurance, the act of paying an insurer to offset the risk on the books of a second insurer. This may sound pretty routine and plain vanilla, but what most people dont know is that often times when insurers would write reinsurance contracts with one another, they would enter into side letters whereby the parties would agree that the reinsurance contract was essentially a canard, a form of window dressing to make a company, bank or another insurer look better on paper, but where the seller of protection had no intention of ever paying out on the contract." A-ha! IRA's report details the scam further: "Lets say that an insurer needs to enhance its capital surplus by $100 million in order to meet regulatory capital requirements. They can enter into what appears to be a completely legitimate form of reinsurance contract, an agreement that appears to transfer the liability to the reinsurer. By doing so, the ceding company an insurance company that transfers a risk to a reinsurance company gets to drop that $100 million in liability and its regulatory surplus increases by $100 million. The reinsurer assuming the risk does actually put up the $100 million in liability, but with the knowledge that they will never have to actually pay out on the contract. This is good for the reinsurer because they are paid a fee for this transaction, but it is bad for the ceding company, the insurer with the capital shortfall, because the transaction is actually a sham, a fraud meant to deceive regulators, counterparties and investors into thinking that the insurer has adequate capital. Typically the fee is 6% per year or what is called a loan fee in the insurance industry." Now consider for a moment how 'insurance' on various forms of debt securities tended to automatically enhance the ratings that Moody's, S&P and Fitch would slap on them. And now consider further the regulations concerning bank capital namely, the amount of capital that banks must hold relative to their assets and liabilities. Do investors see where this is going? The less capital or 'reserves' the fractionally reserved banking system must hold, the more profit opportunities it can pursue at the price of taking ever more risk. Looking at the main counterparties of AIG when its CDS business blew up, is it really credible that these sophisticated money-shufflers didn't know AIG would be bankrupted in the event the insurance provided by the CDS it sold to them were to come due? Naturally, given that not even Bernanke could 'see' the housing bubble for what it was, every single one of them would probably claim that 'nobody saw it coming', the standard excuse of policy makers and other bubble culprits alike. At the very least then analysts must assume gross incompetence at every level of the financial system it's either that, or they are all lying. As the IRA further notes: "As best as we can tell, the questionable practice of using side letters to mask the economic and business reality of reinsurance transactions started in the mid-1980s and continued until the middle of the current decade. This timeline just happens to track the creation and evolution of the OTC derivatives markets. In particular, the move by AIG into the CDS market coincides with the increased awareness of and attention to the use of side letters by insurance regulators and members of the state and federal law enforcement community."

As it turns out, AIG was definitely no stranger to this fraudulent practice. In fact, it was fined by the SEC for helping to disguise the true state of the finances of Bright point (CELL). "Wayne M. Carlin, Regional Director of the SECs Northeast Regional Office, said of the settlements: In this case, AIG worked hand in hand with CELL personnel to custom design a purported insurance policy that allowed CELL to overstate its earnings by a staggering 61 percent. This transaction was simply a round-trip of cash from CELL to AIG and back to CELL. By disguising the money as insurance, AIG enabled CELL to spread over several years a loss that should have been recognized immediately." Later AIG helped another firm, PNC, in a transaction that like the Bright point sideletter fraud, merely aimed at hiding the true financial situation of PNC, instead of legitimately insuring a business risk. In 2003, at the tail end of the 'mild' post Nasdaq bubble recession, several side letter frauds actually blew up. This made it very difficult to continue the practice. There were the cases of Rodney Adler's HIH and FAI insurance companies in Australia, where A$5,3 billion went to money heaven. Then followed the case of ROA in both of these cases, GenRe provided a 'helping hand' in the form of the side letter reinsurance scam. As the IRA says: "These reinsurance deals made ROA look better than it really was, one investigator with direct knowledge of the ROA matter tells The IRA. They went into the ROA home office in VA with the state insurance regulators and law enforcement, and directed the employees away from the computers and records. During that three-year investigation, GenRe learned that local regulators and forensic examiners had put everything together and that we now understood the way the game was played. I believe the players in the industry realized that that they had to change the way in which they cooked the books. A sleight- of-hand trick that had worked for 25 years under the radar of regulators and investors was now revealed." So suddenly, this lucrative and evidently fraudulent business no longer worked. Regulators had finally caught on to it. However, AIG had, in the words of the IRA, become 'addicted' to the side letter scam. The firm, which had already encountered serious financial problems in 2000-2001, reportedly saw the side letters as a way to mint free money and thereby help the insurer to look stronger than it really was. AIG not only helped banks and other companies distort and obfuscate their financial condition, but AIG was supplementing its income by writing more and more of these reinsurance deals and mitigating their perceived exposure via side letters. The IRA concludes that given the problems AIG and other insurers/reinsurers suddenly encountered with this lucrative game, they simply moved the whole game to a new arena namely credit default swaps. Notes the IRA: It appears to us that, seeing the heightened attention from regulators and federal law enforcement agencies such as the FBI on side letters, AIG began to move its shell game to the CDS markets, where it could continue to falsify the balance sheets and income statements of non-insurers all over the world including banks and other financial institutions.

Indeed, the IRA concluded back in 2009 that the CDS transactions that were fully satisfied by tax-payer financed payouts in the course of the AIG bail-out were actually nothing but a fraudulent variation of the 'side letter scam' and that very likely such side letters really existed. In that case however, the contracts were not valid contracts at all, but where fraudulent from the outset intending to help securities on the banks books to masquerade as something they weren't. To quote from the IRA's report once more: "The key point is that neither the public, the Fed nor the Treasury seem to understand is that the CDS contracts written by AIG with these various non-insurers around the world were shams with no correlation between fees paid and the risk assumed. These were not valid contracts as Fed Chairman Ben Bernanke, Treasury Secretary Geithner and Economic policy guru Larry Summers claim, but rather acts of criminal fraud meant to manipulate the capital positions and earnings of financial companies around the world. Indeed, our sources as well as press reports suggest that the CDS contracts written by AIG may have included side letters, often in the form of emails rather than formal letters, that essentially violated the ISDA agreements and show that the true, economic reality of these contracts was fraud plain and simple. Unfortunately, by not moving to seize AIG immediately last year when the scandal broke, the Fed and Treasury may have given the AIG managers time to destroy much of the evidence of criminal wrongdoing. Only when we understand how AIG came to be involved in CDS and the fact that this seemingly illegal activity was simply an extension of the reinsurance/side letter shell game scam that AIG, Gen Re and others conducted for many years before will we understand what needs to be done with AIG, namely liquidation. Seen in this context, the payments made to AIG by the Fed and Treasury, which were then passed-through to dealers such as Goldman Sachs (NYSE:GS), can only be viewed as an illegal taking that must be reversed once the US Trustee for the Federal Bankruptcy Court for the Southern District of New York is in control of AIGs operations." Here it must be pointed out that the IRA never offered proof for these assertions, but given how ratings of securities held by banks could be improved via CDS insurance, and given how this enabled banks to free up more capital for lending and / or investment, and given the sordid past of AIG with the side letter scam, it is not something that can be dismissed out of hand. In fact, it sounds like a fairly reasonable suspicion. If this could ever be proved, it would be highly embarrassing for all involved parties, not to mention quite costly for some of them. It is very much thinkable that regulators in their panic thought they had to make good on AIG's CDS, to keep the 'entire system from crashing'. It is equally thinkable that should AIG's CDS business indeed have represented a variation of the side letter fraud, that they were not aware of this. Analysts can only speculate on these points. The fact that AIG had to relinquish all future claims against the banks speaks of a desire to make the bail-out legally 'air-tight' or it could alternatively speak of a desire to 'bury' certain finer details forever. The fact remains that the whole affair continues to look highly suspicious and since the NYT's report failed to mention the old IRA investigative report on AIG, we deemed this a good moment to rescue it aforementioned memory hole.

The NYT says: "A spokesman for Mr. Geithner, Andrew Williams, said it was easy to speculate about how the A.I.G. bailout might have been handled differently, but the government had limited tools.At that perilous moment, actions were chosen that would have the greatest likelihood of protecting American families and businesses from a catastrophic failure of another financial firm and an accelerating panic, Mr. Williams said." Oh well if 'American families were protected' and not the avaricious banks that proved to quote John Hussman 'the worst stewards of capital in the economy', then it must be alright! Analysts would note one major reason to give credence to the IRA's analysis is that during major credit and asset bubbles, embezzlement and fraud tend to grow like weeds alongside the bubble, attracted by the seeming 'free lunch'. It is an empirically verifiable fact that after bubbles burst, all sorts of frauds tend to come to light (see the Madoff, Stanford, Enron and Worldcom scandals for fairly recent examples of this phenomenon). Simply put, all the Ponzi schemes tend to suddenly blow up once liquidity dries up. Moreover, it should be clear that the inflationary fractional reserves system makes all these bubble activities possible in the first place. On the one hand analysts have those who profit directly from creating money and credit 'from thin air', on the other hand analysts find often gullible investors who are forced to speculate in order to preserve the purchasing power of their savings. Analysts should not be surprised that such a fraudulent wealth redistribution scheme brings forth even more fraudulent activities. That the tax payer has been selected as the involuntary ultimate guarantor for the mistakes and frauds committed is certainly rather disturbing. Imprudence and fraud have ended up reaping rewards, while the citizenry reaps an economy on its knees, and eventually, higher taxes and even more inflation. The House committee on Oversight and Government Reform that headed the Congressional investigation into the more than strange events surrounding the massive AIG bail-out (we remember, some $182 billion in tax cow money were thrown down that swirling drain), has released some 250,000 (!) pages of documents in May (mainly e-mails) relating to the crime, which the NYT has helpfully sifted for a few juicy bits by now. AIG inter alia had to sign that it would, as a condition of its bail-out, relinquish all claims it may have against counterparties 'from the beginning of the world to the termination date of the CDS (although they didn't write 'until judgment day' there, they did mention the term 'forever' quite a few times), including, it appears all 'unknown claims' this is to say potential claims arising from future information not yet available at the date of AIG's signing away of its rights. 'Claims in AIG's favor that is does not know or even suspect exist at the date of the termination agreement', as it is put in the documents. As the NYT reports: "Mr. Benmosche, steward of an insurer brought to its knees two years ago after making too many risky, outsize financial bets and paying billions of dollars in claims to Goldman and other banks, said he would continue evaluating his legal options. But, in reality, A.I.G. has precious few. When the government began rescuing it from collapse in the fall of 2008 with what has become a $182 billion lifeline, A.I.G. was required to forfeit its right to sue several banks including Goldman, Socit Gnrale, Deutsche Bank and

Merrill Lynch over any irregularities with most of the mortgage securities it insured in the pre-crisis years." In other words, although some of the securities AIG insured via CDS were quite possibly fraudulent, it can no longer pursue any claims it may have against the big banks. Naturally, even blind Freddie could see that the Fed and Treasury used the AIG bankruptcy/bailout situation to arrange a 'back door bailout' for the banksters. After all, the Fed is the center of the banking cartel and not necessarily in the business of helping out insurers. Incidentally, although at least one bank namely UBS - offered to accept a 'haircut' in the payout of its CDS claims against AIG (which is quite a normal procedure in bankruptcies, and one might argue that AIG was a de facto, if not de iure bankruptcy i.e. it was clearly bankrupt absent a bailout), the Fed would not countenance such an idea. Instead the full amount was paid out in every case. Naturally it was not possible to treat the various CDS claimants differently that would have invited lawsuits for sure so in order to make sure that, say, Goldman Sachs, got the full amount due to it, no exceptions could be made. Offers to accept haircuts were thus politely refused by the Fed. Such haircuts were in fact discussed, but most of the banks involved pointed out that since a haircut would mean they would have to bear a loss (duh!), this was not acceptable. The French Banks even insisted that it was 'against the law' for them to accept a haircut, unless AIG actually went bankrupt. The tax cows were not asked for their opinion. The details of the haircut saga can be found here. The MBS collateral contained in the toxic waste type CDOs that AIG insured was in part transferred to the Fed's balance sheet in 'Maiden Lane III', where it slowly withers away ever since. As the NYT dryly remarks regarding the Fed's and Treasury's handling of the bailout: "As a Congressional commission convenes hearings Wednesday exploring the A.I.G. bailout and Goldmans relationship with the insurer, analysts say that the documents suggest that regulators were overly punitive toward A.I.G. and overly forgiving of banks during the bailout signified, they say, by the fact that the legal waiver undermined A.I.G. and its shareholders ability to recover damages." And further along these lines: "About $46 billion of the taxpayer money in the A.I.G. bailout was used to pay to mortgage trading partners like Goldman and Socit Gnrale, a French bank, to make good on their claims. The banks are not expected to return any of that money, leading the Congressional Research Service to say in March that much of the taxpayer money ultimately bailed out the banks, not A.I.G." How was AIG able to live so dangerously for so long? In part because for years Washington looked the other way. The company befriended politicians with campaign cash $9.3 million divided evenly between Democrats and Republicans from 1990 to 2008, the Center for Responsive Politics reported. And it spent more than $70 million to lobby them over the past decade, escaping the kind of regulation that might have prevented the current crisis.

The fact that AIG was in Washington long before the current Administration hasn't spared the Obama team from criticism over the recent bonus payouts. The main target for the opprobrium is Geithner. He still enjoys the confidence of U.S. allies abroad and understands the deeply complicated world of global finance far better than the lawmakers who may soon write new legislation to regulate it. But he has not been a strong public face for a government that needs to project confidence. He has been slow to staff his department, hampering the Administration's ability to react to the crisis and possibly helping explain Treasury's leaden-footed reaction to the AIG bonuses, which were first reported in January. A former Treasury official blames Geithner for a "strategic hesitation that has really affected the confidence index, not just in the financial marketplace but in the political marketplace." A veteran Washington Democrat was more direct: "He's not a wartime consigliere." Geithner's backers note that he took over an office that was drowning in crises and has had to address failing banks; impossible-to-price toxic securities; a continuing auto-bailout program; woes at Citigroup, AIG and other financial houses; a housing crisis; and an upcoming G-20 summit all at the same time. Even his detractors admit that the to-do list is the deepest any Treasury boss has faced in 80 years. Which helps explain why at least for now, Geithner benefits from a rare bipartisan agreement? Republicans have largely been reluctant to scare away a Treasury chief who has roots in the Bush era and understands their benefactors' core businesses; Democrats are even more reluctant to publicly criticize the President's choice at a moment of economic peril. "I have complete confidence in Tim Geithner and my entire economic team," Barack Obama said. "He is making all the right moves in terms of playing a bad hand." Still, a longtime Treasury observer says, "his margin for error has been reduced." Geithner's failure to reckon quickly with the existence of large retention bonuses for AIG employees in the Financial Products division is perplexing. On Jan. 27, Bloomberg News reported that AIG has offered "about $450 million in retention pay" to the AIG FP staff, a program that AIG confirmed. Representative Elijah Cummings, a Maryland Democrat, knew about the bonuses two weeks earlier, on Jan. 15, when he met with Liddy, and the Congressman never kept his displeasure secret. Nor was he alone in raising alarms. In January, Richard Shelby, the ranking Republican on the Senate Banking Committee, called the bonuses a "waste of taxpayer money."

But Geithner, who was overseeing the AIG rescue effort with the Federal Reserve, says he had no idea until March 10 that more bonuses were in the pipeline for AIG FP. The President found out two days later, igniting an internal firestorm of White House indignation as officials scrambled to stem the public-relations damage. And now both the White House and Congress are determined to limit the pay packets of executives of any company that is getting TARP money or other government assistance. There are proposals in Congress to reverse some of the bonuses through legislation, and Liddy called on executives to spit back half their bonus. Some have done so. The program for 2009 has already been pared. That my placate, for now, Main Street constituents who want to get back at those overpaid Wall Street types. But, considering the risks still infecting the system, the clawback is pointless. Geithner and Bernanke have way more important things on their plate. Did analysts mention the economy, with unemployment headed toward 10%? And the upcoming G-20 meeting that has the U.S. and Europe at odds over what to do first regulate the global economy or stimulate it? Nor will the albatross of AIG be removed from the government's neck anytime soon. Liddy said his goal is to restructure AIG's core businesses into "clearly separate, independent" companies that are "worthy of investor confidence." AIG has "made meaningful progress," but the company is still at the mercy of the economy. In the businesses it wants to keep, like commercial insurance, competitors sense an opportunity to grab market share. For the assets it wants to sell, there are few buyers. What remains is still a huge, vulnerable company. Lastly, the Obama Administration will need perhaps $750 billion in new funding merely to stabilize U.S. banks, which it hopes will be enough to ease the credit markets, stimulate lending and get the economy moving again. There's no telling what kind of political wrangling will happen over that, but one thing seems certain: if investors are an executive of a bank that gets federal money, it wouldn't be a smart idea to count on a bonus. AIG acknowledged that it had improperly accounted for the reinsurance transaction to bolster reserves, and detailed numerous other examples of problematic accounting. It also announced the delay of its annual 10-K filing, and said the moves may have inflated its net worth by up to $1.7 billion. While AIG says it does not yet know if the review will force a restatement of prior results, its stock dropped 2.1% on the news; all together, AIG shares have dropped 22%, to $57 apiece, since the company was served with subpoenas by state and federal regulators six weeks ago. The announcement also caused Standard & Poor's (MHP ) to downgrade AIG's debt rating from AAA to AA+. FORTUNE -- The Ohio Attorney General's office announced on July 16, 2010 that a class of three pension funds it represented in fraud complaints against AIG (AIG, Fortune 500) have settled with the federally-owned insurance giant for $725 million. The statement reads in part, "The settlement resolves allegations of AIG's wide-ranging fraud from October 1999 to April 2005 involving anti-competitive market division, accounting violations and stock price manipulation, and brings total expected recovery for AIG shareholders to over $1 billion. The settlement is subject to court approval."

The case was the largest in a series of fraud claims against AIG. The Ohio Attorney General, Richard Cordray, has led the suits and previously announced the following settlements, according to the release:

a $72 million settlement with General Reinsurance Corporation a $97.5 million settlement with PricewaterhouseCoopers LLP a $115 million settlement with CEO Maurice R. "Hank" Greenberg and other AIG executives (Howard I. Smith, Christian M. Milton and Michael J. Castelli) and related corporate entities (C.V. Starr & Co., Inc. and Starr International Co., Inc.)

Reuters, who first reported the settlement, noted that AIG may raise up to $550 million of the amount it owes through a stock offering, "or other means, including cash, when it decides it is commercially reasonable to make such an offering." According to the Attorney General's statement, "This case involved three types of claims:

AIG engaged in accounting fraud, culminating in a $3.9 billion restatement in May 2005 that included numerous different types of transactions, including allegations relating to a $500 million no-risk fraudulent reinsurance transaction that AIG entered into with General Reinsurance Corp. in order to artificially boost AIG's reported claims reserves. One AIG executive and four Gen Re executives were found guilty of securities fraud in relation to that transaction. AIG paid tens of millions of dollars in undisclosed contingent commissions to insurance brokers and participated in a bid-rigging scheme with insurance brokers and certain insurance companies in order to divide the market for certain types of insurance. AIG engaged in straightforward stock price manipulation, in which company executives ordered company traders to inflate AIG stock price."

The settlement is "the first and only billion-dollar class action settlement since the financial crisis began to unfold in 2008." Cordray has been notably active in pursuing securities crimes in his tenure as Attorney General. His office is keeping a running tally of their actions against AIG and other firms including Bank of America (BAC, Fortune 500), Standard & Poor's, Moody's (MCO) and Fitch.The company had no immediate statement on its website, but as required a notice has been filed with the Securities and Exchange Commission. It has installed longtime AIG exec Martin J. Sullivan, 50, as the new CEO, and named independent director Frank G. Zarb as chairman. In addition, it has launched its own internal investigation, which has so far revealed several arrangements and deals that were not properly accounted for. The company says that its review is not yet complete. Moreover, AIG has pledged to change how it accounts for deferred compensation that's now paid to senior executives through Starr International Co. (SICO) -- one of several controversial private entities that also are under investigation. Insiders say the new chief, who began his AIG career at the age of 16, is aggressively leading the charge for changes necessary to create a more transparent organization. But the longtime AIG manager -- formerly a vice-chairman and co-chief operating officer -- is also under scrutiny by regulators. A close confidante of Greenberg, who essentially hand-picked

Sullivan as his replacement, he also serves as a director in C.V. Starr and SICO. Sullivan has not been accused of any wrongdoing, but regulators are looking for signs that he knew of or oversaw the dubious transactions. Any hint of that and he, too, could be forced out. An AIG spokesman says Sullivan has no comment on his future or the company's direction while AIG cooperates with investigators For years, AIG had a board that was notoriously clubby and close to Greenberg. Says Patrick McGurn of Institutional Shareholder Services: "Was there a reform Hank ever put in place that he liked?" But, thanks to shareholder pressure and new governance regulations, the board has become more independent in recent years. More important, perhaps, the investigations have made directors nervous about their own liability -- and determined to take proactive action to distance them from any scandal, insiders say. They even demanded Greenberg's resignation -- unthinkable act just months ago Regulators or other critics propose to fix these conflicts of interest by disbanding the entities, banning business dealings with the public company, or force AIG executives to end any direct roles in those companies. While a source familiar with the federal probe says regulators haven't yet demanded any specific action, he notes that "none of this is stuff I've seen in other walks of life."