Maurice “Hank” Greenberg has once again captured the business news headlines in his continuing quest to convince the government to restructure the provisions of the AIG “bailout” that occurred in the fall of 2008. In his latest effort he has placed a “bull’s eye” on the role played by Goldman Sachs in AIG’s demise. Greenberg told the Wall Street Journal that he believes investigative journalists need to the bottom of the events that preceded and followed the government bailout of AIG.

Greenberg wants to shed light on the part played by the giant investment bank Goldman Sachs because he believes Goldman engineered the failure of AIG.

When asked by the WSJ reporter if he is really making such an accusation, he responded, “well, it certainly wouldn’t be difficult to come to that conclusion.” He theorized that the origins of the plot can be found in a 2005 effort by an organization known as the International Swaps and Derivatives Association (ISDA) to draft new standards for the kinds of credit default swaps (CDS) that AIG had been writing. Previously, Greenberg explains, losses on those CDS instruments were paid off at maturity. The standards were rewritten to require that cash payments would have to be forthcoming to cover any drop in value or credit downgrades even before actual losses were realized. “I don’t know whether Goldman Sachs was the force behind the ISDA change or Deutche Bank,” Mr. Greenberg concedes. “That’s something investigative reporters are going to have to spend their time digging out.” Greenberg also accuses Goldman of creating and promoting new subprime housing-backed derivatives at the same time they were shorting them. When the housing boom imploded, Goldman demanded giant cash collateral payments from AIG on a “mark to market” basis for those securities whose price was falling even if the underlying payment streams were intact.

Additionally, Greenberg argues that the size of the demands for cash made by Goldman based on its own “marks” (estimate of the securities own depressed value) was the highest of anyone in the financial sector. Greenberg concludes that AIG had to make huge cash payments to Goldman on insurance contracts that were still viable and, as recent market events have shown, will perform well in the long run. Greenberg is also suspicious of the Federal Government’s motive of forcing AIG to pay Goldman and other firms 100 cents on the dollar when the Government could have simply “guaranteed” AIG’s debts to avoid the massive collateral postings. He says that unnecessary aspect of the Government bailout combined with other onerous terms (such as interest payments) essentially caused AIG to go into “slow-motion liquidation”, instead of being designed to allow the company to recover. He also questions the need for the Government to own 79.9% of the company – an amount which he claims scares off any new private capital from moving in. He believes if the Government “scaled-back” its position to 15% or 20%, its reduced ownership share would actually become more valuable than its current 79.9% share. Greenberg has been promoting a wholesale restructuring of the Government rescue for some time now. His efforts have not been terribly successful, however. This could be why he has decided to “up the ante” with allegations of wrongdoing on the part of Goldman Sachs and the Government to grab the attention of the public, government officials and, apparently, investigative journalists. Of major concern for all New Yorkers is his assertion that AIG cannot rehabilitate in its current form. A full collapse of the still massive company would has continued tragic results for the Empire State, especially as we face more monumental State budget deficits and loss of financial sector jobs and prestige. Perhaps Greenberg is also trying to tell us that now that the immediate collapse of the financial services industry in New York is no longer an issue, we should not merely go about our merry way and think that all will automatically get better. If the Federal Government runs AIG out of existence, the negative effects of that tragedy will be collectively felt by New Yorkers for decades to come.

The effort to shed some light on the role W YO of the Government and AIG counterparties in the AIG rescue plan has gained some momentum in recent days. Rep. Edolphus Towns, D-New York, chairman of the House Oversight and Government Reform Committee has announced that he will hold a hearing on allegations that Federal Reserve officials ordered AIG not to disclose details concerning a decision to pay collateralized debt obligation counterparties 100 cents on the dollar. The allegations surround an e-mail provided by Rep. Darrell Issa, R-Calif. which indicates that the Federal Reserve pushed AIG to change a December 24, 2008 report filed with the SEC to leave out the names of counterparties and the amounts they were paid from the bailout funds. “There is no more urgent business before the Committee and this hearing should be given the highest priority,” Rep. Spencer Bachus, R-Ala., the highest ranking Republican on the committee. “For months, the public was prevented from knowing the names of AIG counterparties and the extent to which AIG fulfilled its obligations to those firms…This calculated attempt to withhold important information from the public and market participants runs counter to the principles of our capital markets.”

In addition, the manipulative role that Goldman Sachs may have played in AIG’s demise and rescue was also highlighted by reporter Matt Taibbi of the Rolling Stone magazine in the summer of 2009.

People have asked me why I have spent so much time in the column in the recent past on the AIG matter. AIG was the largest and most impressive insurance and financial services conglomerate in the world. While it is not a New York domestic, the company was, in all other respects, New York’s. It was a source of pride for the New York financial services industry and supported the state with jobs, tax revenue and charitable activities. Its demise led a downward spiral for New York’s economy from which we have yet to recover. We have a right and an obligation to know what happened. We want the company to succeed and restore itself to its former greatness. “Hank” Greenberg wants the same thing. Since he has systematically won or resolved each of the many actions brought against him for wrongdoing - and since he remains standing after all he has been through, unlike some of his accusers, perhaps we should pay more attention to the man who built the empire in the first place. We should also force our elected leaders to pay more attention to him as well. Before the empire is gone forever.

New York is Hard on Insurers Asking for Dividend

On December 10, 2009 the Governor Paterson issued a press release entitled “Updated: New York Health Insurers To Dividend More Than $1.2 Billion To Out-Of-State Corporate Parents – Increase from Last Year Reinforces Need to Give Insurance Department the Authority to Review Insurance Rates.” The Governor and the Insurance Department apparently decided to highlight the dividend requests and note that they are higher, in the aggregate, than the requests submitted by the three carriers last year, in an effort to promote the Department’s efforts to gain prior approval authority over health insurance rates. “The fact that health insurers take such large amounts of money out of the health care system while individual New Yorkers and small businesses struggle with skyrocketing health insurance premiums is deeply troubling,” Governor Paterson said. “While rising unemployment is swelling the ranks of uninsured, the health insurance industry is making record dividends. State law allows them to issue these dividends to their out-of-state corporate parents, and there is nothing New York State regulators can do about it; they need the authority to protect consumers.” Superintendent Wrynn said, “This is yet another reason the Legislature should reinstate the Insurance Department’s authority to prior approve premium rate increases. Under the current ‘file and use’ methodology, the Department has little if any ability to review whether rate increases are excessive or consider the financial health of the insurer when it files for a rate increase. This year we received file and use applications for rate increases up to 33 percent. Prior approval would allow us to consider the insurer’s overall financial condition when we review a proposed premium increase.”

The dividend requests were submitted by Oxford Health Plans (NY) HMO at $800 million Aetna Health HMO at $134 million; Empire Healthchoice Assurance at $200 million; and United Healthcare of NY, Inc. HMO at $75 million. The release further cites comments from several organizations condemning the dividends, but not supporting the argument for prior approval of rates. Earlier this year, the legislature held a public hearing on the issue of restoring the prior approval of health insurance rates to the Superintendent. The legislature collectively declined to move that legislation in the last session.

While the concern over the level rates is properly within the purview of the Governor and the Insurance Department, we should be concerned when the government mixes the issue of price adequacy and profit. Currently, under the file and use system for health rates, the Department has the right and obligation to review the rate charged, and if it determines that the rate was too high, the Department may order a refund to policyholders. While we know this process may occur a year or two after the initial rate was charged, it is nonetheless a check on excess price gouging by health insurers.

It is important to keep in mind that the insurers are businesses who are designed to make a profit, if run correctly. It is this return to the company’s owners that creates the environment for the capital investment of additional dollars to further grow and enable the company to become more efficient and better able to serve the policyholder. The ability to pass on a dividend may be based upon many factors, such as a favorable investment return due to an improving stock market, only one of which is increase premium amounts. Using the argument that authority over prior approval of rates will be needed to make sure that companies are not able to dividend monies to their ownership is essentially to socialize those dividend amounts. In the long run, it is not the best argument for prior approval of rates. Instead, to support the reinstitution of prior approval of health insurance rates the Department should focus on those instances in which they found it necessary to order refunds to policyholders because the charge was deemed to be excessive, from an underwriting and actuarial perspective. The proper question is, have these instances become more frequent in the recent past? An excessive need for the Department to order refunds would support the conclusion that health insurers may no longer be trusted to set rates accurately. If this is the situation, then the Department should make the case and cite the examples. In this way, the debate over prior approval may be better focused on improper pricing practices by the industry, instead of dividend issues.

NYSID Counsel- Electronic Transactions and Independent Agent Consent

The Insurance Department recently issued a counsel’s opinion dealing with the circumstances surrounding the consent given by an independent agent to engage in an electronic insurance transaction. The opinion, OGC Op. No. 09-12- 04, issued December 22, 2009, deals with the following two questions:

1. Must an insurer obtain an independent insurance agent’s consent to engage in electronic transaction prior to the insurer sending insurance policies and other related documents to the agent electronically?

2. If the insurance agent’s consent is required, how may the consent be obtained?

The Counsel responded that yes, the insurer must obtain the agent’s consent to engage in an electronic insurance transaction before sending insurance policies and related documents to the agent electronically. However, this consent may be obtained in a number of ways. The contract between the insurer and the agent may contain the consent. However, if such consent is not in the contract, consent may be established through a certain course of conduct, such as the insurer sending policies electronically to the independent agent for some time without an objection being raised by the independent agent. This “course of conduct” rule is found in the Court of Appeals case of Murphy v. Kuhn, 90 N.Y. 2d 266, 660 N.Y. S. 2d 371, 374. (Ct. App. 1997).

The Department is clear that no person is required to use an electronic record, communication or signature without consent. For those independent agents out there who like paper contact and consent, make sure that you do not fall into a trap of regularly receiving contact from the insurer by electronic means. You may be deemed to have consented to electronic transactions. You should make it clear in writing to the insurer that you do not wish to engage in any electronic transactions.