Friday, November 12, 2004

Marsh Mac Fallout

New York Attorney General Elliot Spitzer’s suit against Marsh & McLennan, filed on October 14, 2004, has triggered a near avalanche of federal and state investigations of insurance companies and their various practices ranging from the sale (and accounting for) sophisticated financial products to the submission of fake bids to give the appearance of competition.  An AP report this morning indicates that Spitzer will file a suit today against another company, and the speculation is that the defendant will be Aon Corp., which is (or was) second to Marsh Mac in the insurance brokerage arena.  According to the article:

"We're working as hard as we possibly can. There will be new chapters, some of them perhaps later today in terms of cases that will come out," Spitzer said at the 2004 Reuters Finance Summit in New York. "There may be a filing later today."

In one section (Money & Investing--Section C) of today’s Wall Street Journal (Nov. 12), there are three (3) articles detailing issues related to investigations of the insurance industry, and Marsh Mac in particular:

  • A story on Berkshire Hathaway’s sale of finite (or retroactive) insurance products through its General Re subsidiary. The controlling shareholder and CEO of Berkshire Hathaway is Warren Buffett, who is an oracle-like presence in the market and known (or prone?) to make pronouncements about improper practices in other industries. The Berkshire Hathaway annual report contains a long letter from Buffett, written in a plain style, discussing his take on the markets and the latest scandal du jour. Will the letter issued in next year's annual report contain a mea culpa? For those who follow the company, General Re has been a millstone around the company's neck since it was acquired a few years ago, one that is only getting bigger.
  • A story about 42 subpoenas issued by Connecticut Attorney General Richard Blumenthal to leading insurance companies asking about possible bid-rigging, which is the focus of the Marsh Mac suit in New York. Given the resignation this past summer of Governor John Rowland (in a hail of corruption allegations), one wonders if Blumenthal is the next "Governor-in-waiting," piggy-backing on the Spitzer investigation.
  • Finally, a story about the dismissal of two executives from the Los Angeles office of Hartford Financial Services Group, which was identified in Spitzer’s Marsh Mac complaint as one of the locations that submitted inflated insurance bids to facilitate the bid-rigging scheme. A number of executives have already left Marsh Mac, and expect more resignations from other companies in the scramble to show the company’s are cooperating in the government investigation (the subject of an earlier post here).

When Enron collapsed, terms like "special purpose entities" and "off-books transactions" entered common parlance. The demise of WorldCom brought to the forefront the difference between capitalizing and expensing costs, something that few outside the accounting world would have ever thought about. The fallout from Marsh Mac and the growing SEC investigation of the insurance industry likely will allow us to learn even more about the murky world of reinsurance. Neat! (ph)

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