A while ago I read a long article on AIG whose url I don’t remember. The story was the usual success -> hubris -> fall, but to me, one striking thing was that the success, the stuff AIG-FP did before going crazy, was mostly related to tax avoidance.
In fact, they seem to have been in two businesses: helping clients avoid paying taxes and helping banks avoid capital controls. The second blew up. The first is coming back to haunt them.
One tax deal involved IIRC instruments which were considered debt in the US and equity in Europe. Thus interest paid on them was subtracted from earnings for the US corporate income tax as a cost and counted as repatriated profits (which are not taxed) in Europe. If I understand correctly, this WSJ article is discussing the same uhm creative finance. No wait, it seems to be a different one. AIG and a European counterparty would set up a subsidiary which would pay taxes in Europe. The same payment was somehow counted 100% as taxes paid by AIG and 100% as taxes paid by the European partner. I’m pretty sure the is it debt or is it equity is involved some how, but it’s not as simple as I thought.
AIG worked with Barclays to form a tax venture called Pyrus Investments Ltd., according to documents and a person familiar with the situation. The unit allowed both companies to claim joint tax credits for one tax payment.
According to Pyrus corporate filings in the U.K., Pyrus has no employees.
Now that AIG is a subsidiary of the US Treasury, one would think the new shareholders would not have need for the services of people whose speciality is reducing the income of the US Treasury no ? Why are they still employed by AIG ?
As far as is known, they broke no laws, but people who broke no laws are fired all the time if they hurt shareholders.
But the new twist is that the foreign counterparties of AIG in these deals were also counterparties of CDSs and have been getting money not explicitly owed them as part of the effort to wind down AIG’s CDS book.
Oh my oh my, looks like AIG-FP employees have some more explaining to do. They did manage to reduce taxes paid but, I suspect that it will have been a Pyric victory.