Warren Buffett, the most worshiped investor on the planet, is being accused of authorizing a sham reinsurance transaction to help American International Group (NYSE: AIG) cook its books. Meanwhile, more details of Buffett's proposed reinsurance deal for the bond insurance industry suggests he has not lost any of his business savvy.
Bloomberg News reports that a lawyer for Ronald Ferguson, former General Re CEO, accused Buffett of approving a sham reinsurance transaction to help AIG cook its books. The trial suggests that in 2000 General Re aided phony accounting at AIG, and Buffett has so far been avoiding testifying in this trial.
Prosecutors claim the deal fraudulently helped AIG add $500 million in loss reserves, a crucial indicator of an insurer's health. Ferguson, who reported to Buffett after Berkshire Hathaway (NYSE: BRK.A) bought General Re, is suggesting through his lawyer, Michael Horowitz, that Buffett knew details of the transaction and approved a $5 million fee that AIG paid to General Re.
Meanwhile, Buffett's plan to rescue bond insurers through reinsurance would offer Berkshire an enormous profit.
According to MoneyNews.com, the bond insurers would transfer all liability to Buffett's Berkshire Hathaway in exchange for a one-time payment of 1.5 times the premium they are receiving. Thanks to its saintly credit rating, Buffett claimed that Berkshire is currently being paid a 2% premium for reinsurance, while the standard premiums are about 1%.
Meanwhile, given the default rates on municipal bonds of just 0.02%, Buffett could experience losses of as little as $160 million on that upside of $12 billion (1.5% of the $800 billion in liabilities he'd re-insure). Even if losses were to increase tenfold from historic levels, Buffett would still make a $10 billion profit.
They say that behind every great fortune is a great crime. While it's unclear whether Saint Warren committed a crime in General Re's deal with AIG, there's no question that Berkshire shareholders will be singing Buffett's praises if he can pull off this lucrative deal to "save" the bond insurers.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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