Written by by Lucy Komisar at 100r.org
Some of Wall Street’s biggest firms are using accounting gimmicks in life insurance companies to bolster their profits by overvaluing their assets and holding risky investments on books in secrecy jurisdictions, according to government, trade union and financial regulatory experts. They say the actions threaten the financial health of these firms and the pensions of millions of workers and retirees.
The companies include giants in the financial industry: Apollo Global Management, the third largest asset management company in the world run by private equity billionaires; Metropolitan Life Insurance Company, the biggest U.S. life insurer; and the investment banking giant Goldman Sachs and Company have all employed these practices.
A review of their annual statements and state filings shows the three have set up a complex web of lightly regulated affiliates in secrecy jurisdictions offshore or in five lenient U.S. states, overstated assets in those affiliates that would be valued at zero under standard U.S. accounting practices and diverted the ready cash from insurance premiums into riskier, more speculative investments. The examination shows that if conventional accounting practices were used on their affiliates instead of those state ones, some of the affiliates owned by big names on Wall Street would be considered insolvent.
Some of these practices bear striking similarities to those that led to the unraveling of the global financial system in 2008 and the bailout of the insurance giant AIG, as well as the collapse of energy titan Enron Corp. in 2001, government and financial analysts said. Federal Reserve economists for years have been warning of their mounting concern over the way that private equity owners in the shadow insurance industry take advantage of lax jurisdictions to pour cash into higher risk investments, which are less easy to sell in a market downturn. Trade unions are sounding the alarm about the potential danger to pensions of their members.