Watchdogs With Eyes Wide Shut

As investigators pore over the books of AIG, it's becoming clear that for years regulators failed to detect lapses

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April 25, 2005 at 4:00 AM UTC

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Where were the watchdogs? State and federal investigators are examining the accounts of insurance giant American International Group Inc. (AIG ), drawing out super-investor Warren E. Buffett, and sparring over Fifth Amendment rights with ousted AIG Chairman and CEO Maurice R. "Hank" Greenberg. But the feverish enforcement activity obscures the fact that AIG's admitted misstatements -- so far worth, by the company's estimate, $1.7 billion to shareholders -- and other industry transgressions went undetected by many of the same agencies, in some instances for 14 years or longer.

What's emerging from the probes is a portrait of failed regulation. Unlike banking or Wall Street, which answer to federal regulators, the $1.2 trillion insurance industry is overseen by small, usually obscure state offices. Outgunned by the insurance giants, state commissioners, interested in pleasing voters, usually focus on such consumer issues as setting rates and taking complaints on auto and homeowners' insurance. Many admit that they're out of their depths on sophisticated financing deals with offshore reinsurers, like those that fogged AIG's books and snarled Berkshire Hathaway Inc.'s General Re Corp. subsidiary in disputes from Memphis to Melbourne. "State regulators are doing the best they can, but they're not equipped to police multistate or international scams," says Jay Aughtman, a Montgomery (Ala.) lawyer who represents insurance regulators in Tennessee and other states.