Throughout the spring, the snowballing financial scandal at insurance giant American International Group has put the spotlight on the firm's partner in the improper deal, General Re Corp. Could the damage extend to Gen Re's owner, Berkshire Hathaway Inc. and its legendary chief, Warren Buffett?
"There clearly is some damage to General Re. And that, by definition, is damage to Berkshire," said Neil A. Doherty, professor of insurance and risk management at Wharton. "I'm not sure how much this will filter through to Berkshire. The issue really is how distant Warren Buffett is from this [scandal], and I'm not seeing direct connections there."
The questions about Gen Re come on top of another that gets larger every year: Can Berkshire continue to deliver outsized returns to shareholders after 74-year-old Buffett, who has run the company for four decades, passes from the scene? Since 1965, Berkshire's average annual returns have been about double those of the Standard & Poor's 500.
Gen Re, a reinsurance giant with worldwide operations, is among Berkshire's largest units. In 2000, it provided a $500 million finite insurance policy that AIG used to improperly dress up its financial statements to bolster AIG's stock price. The scandal led AIG directors to force out their chairman and chief executive, Maurice Greenberg, and AIG has since reported a number of other accounting improprieties.
Greenberg, according to AIG, was directly involved in the finite-insurance deal with Gen Re. But it is not clear whether Gen Re executives knew that AIG improperly booked the deal, which in itself was legal. AIG had called the contract an insurance policy when it was in fact a loan. By mid-May, one Gen Re executive had been notified by regulators that he could face criminal charges, and Gen Re put him and a second executive on leave.
Buffett has been interviewed by regulators, but he has been described as a cooperating witness rather than a target of the investigation.
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