How did AIG use insurance contracts to sell accounting fraud?
Steven Gluckstern and Michael Palm figured out how to minimize insurers’ risk and give customers an accounting edge and a tax break: Multiyear contracts in which the premiums covered most if not all of the potential losses — but refunded much of the unclaimed money at the end of the contract. Buyers loved the policies because they could offset losses with loan-like proceeds without disclosing liabilities that would muddy their bottom lines. And the premiums were tax deductible. Such policies became among the industry’s hottest products. Now, two decades later, they are the focus of multiple state and federal investigations into companies suspected of using them to manipulate earnings. And this week, those probes helped topple Mr. Greenberg as chief executive, although he will remain chairman. His company sold one policy later declared a sham by federal authorities and itself bought another — now the focus of intense scrutiny — from Berkshire Hathaway Inc., where Messrs. Gluckstern a
