Focus: Spitzer rides into town

www.times.online.uk
Times Newspapers Ltd. (UK)
April 24, 2005


The man dubbed 'the sheriff of Wall Street' has turned his aim to the IFSC. Who will walk out of this fight alive, ask Joe Brennan and Brian Carey

John Houldsworth, a middle-aged British insurance executive, fits the image of a senior International Financial Services Centre (IFSC) employee. An expat who lived in a quiet and comfortable housing estate in the south Dublin suburb of Killiney, Houldsworth commuted to the docklands offices of his employer, Cologne Re, for the best part of a decade.

At weekends, he played a round of golf at Glen O'The Downs in Co Wicklow and turned out for a local hockey club. A well-paid actuary, he served as chairman of the highly influential Dublin International Insurance and Management Association (DIIMA), the umbrella organisation for insurance companies in the IFSC.

Like so many well-known figures in the IFSC, Houldsworth, 45, was a totally anonymous figure to the rest of the Irish business community.

Until last month, that is. Now everybody wants to talk to Houldsworth. The Briton is the man providing many of the answers to two high-profile international financial investigations that have shone a very unwelcome light on the IFSC, the hardiest jewel of the Irish economic miracle.

THERE is nothing like dragging Warren Buffett, the world’s second-richest man, into a global reinsurance investigation to draw attention.

Fresh from being described as a "financial Wild West” in The New York Times, the IFSC is now getting the finger-wagging treatment from the Financial Times and some very special attention from Eliot Spitzer, the famed New York state attorney-general, dubbed "the sheriff of Wall Street” by the American media.

Cologne Re, a subsidiary of Warren Buffett’s General Re and Maurice "Hank” Greenberg’s American International Group (AIG), conducted a suspect-looking €300m transaction down in the docklands in 2001, which allegedly had the effect of artificially boosting AIG’s reserves. It was Houldsworth who handled the transaction.

"The evidence is overwhelming that these were transactions created for the purpose of deceiving the market,” said Spitzer.

"I think this is another example of companies finding soft spots or areas where laws are not very rigorous and taking advantage of those,” said Michael Gass, the head of securities litigation and enforcement at Palmer & Dodge, a Boston-based law firm.

In Australia, Royal Commission investigators, trawling over the country’s largest corporate collapse, have also traced a path to the Dublin docklands. HIH, an Australian insurance firm, left debts of A$5.3 billion (€3.2 billion) when it collapsed in 2001. One of the "straws to break the camels back”, according to the author Mark Westfield, was the group’s purchase of the reinsurer FAI for A$300m.

The claim is that FAI inflated its value prior to its sale to HIH through contracts written with Cologne Re.

The Australian financial regulator last October banned two Cologne Re executives, one of them Houldsworth, from operating in the market. The bans are under appeal, and two previous sanctions against Cologne Re employees have been overturned. The Australian regulator has also launched an investigation into the transactions.

"My general understanding is that Dublin is viewed, along with the Cayman Islands and Bermuda, as a haven for reinsurance companies to set up offices and get away with doing things they would not be able to do elsewhere,” added Gass.

FROM either side of the world, the IFSC has been pushed into the spotlight. The brainchild of the financier Dermot Desmond, the centre has risen from a disused dockyard 20 years ago to a thriving financial-services market that now accounts for 3% of Irish GDP. The IFSC prospered off low tax rates and a "light” regulatory touch. "Speed to market” was the phrase used by IDA Ireland when attracting companies here. Come to Ireland, and cut through red tape.

Reinsurance is effectively the sharing of insurance policies among multiple insurers to reduce the risk. As the business is conducted between the biggest players in the insurance market — AIG has assets of $800 billion (€479 billion) — many jurisdictions took a lax approach to regulation.

The AIG transaction was in the area of finite reinsurance, where an insurer obtains reinsurance coverage that is limited in some way. Dublin has earned a reputation as a centre for this type of reinsurance. Of the total $14 billion of reinsurance business written from the IFSC, about $2 billion is believed to be finite, making it the largest market for this type of business in Europe.

Already reeling from domestic scandals, the Spitzer investigation has turned up the pressure on Ifsra, Ireland’s fledgling financial regulator.

"There is criticism of the Irish and Australian regulators for allowing financial reinsurance (finite reinsurance) to be written,” said Stephen Carter, a partner with Charles Russell, a London insurance law firm. "As a product it can be used for legitimate or illegitimate purposes. It’s that it has been misused that’s the problem.”

And it is a problem that Ifsra, and the IFSC members, cannot ignore. "The suggestion that we are running a loose operation is completely false,” said one senior IFSC lawyer. "Certain areas are more closely regulated than others: funds are very closely regulated and Ifsra is very conservative when it comes to issuing banking licences.”

In reinsurance, the problem is that Ifsra’s role has centred on approval, with little or no supervision.

"What I would like to feel is that, as a regulator, we’re considered,” said Liam O’Reilly, the chief executive of Ifsra, in a recent speech. "We’re not a regulator that reaches for its gun and shoots people down before we know what the real situation is.”

A new EU reinsurance directive, due to be enacted later this year, will strengthen Ifsra’s role. However, a prominent Brussels lawyer said the Irish government lobbied hard for the regulation of finite reinsurance in the new directive to be left to the local authorities.

Two months ago, the opt-out would have been interpreted as another victory for the "light touch” regulation of the Irish market, protecting and preserving finite reinsurance business for the IFSC. Irish officials are now insisting that the directive will allow closer scrutiny.

"Reinsurers accept they should be regulated — for reputation and risk reasons,” said a senior Department of Finance official involved in talks on the new laws. "All accept there has to be an assessment of what they’re doing.”

How rigorous an assessment will depend on Ifsra. The authority is currently circulating its proposals on "probity and fitness” that will mean IFSC company directors may have to furnish personal bank account details and other private information to satisfy Ifsra rules.
For the neophyte regulator, this is a fundamental dilemma. In the compliance-obsessed financial community, it must earn its supervision spurs. At the same time it must try to preserve one of the key selling points of the IFSC, an absence of red tape.

The final irony is that Charlie McCreevy, the former champion of the IFSC, is now the EU commissioner charged with introducing the new reinsurance rules.

REPUTED to have sold his Killiney home last October, John Houldsworth is still working at the Cologne Re offices in Dublin. According to reports, he has been charged with examining all of the company’s finite reinsurance deals and reporting back on the probity of the transactions.

What Houldsworth discovers will have a huge bearing on the future course of the Spitzer investigation. If there are further revelations, and further adverse publicity, the hitherto unknown Houldsworth could also radically alter the future direction of the IFSC.

WINDING TRAIL ENDS IN DUBLIN

The New York attorney-general Eliot Spitzer’s scrutiny of the insurance giant AIG and its boss Maurice "Hank" Greenberg took a detour to Dublin in a most circuitous manner. The impetus came from discussions between the Virginia state attorney and executives of the Berkshire Hathaway subsidiary General Re over the collapse of a local insurer.

General Re lawyers discovered a number of unusual transactions. Further digging revealed records of a phone call from Greenberg to Ronald Ferguson, the then chief executive of General Re, in October 2000. It is alleged that Greenberg told Ferguson he wanted to do a deal to boost AIG’s reserves. Under the deal General Re’s Dublin unit, Cologne Re, transferred a block of business to a Bermuda subsidiary of AIG.

Cologne Re passed $500m (€383m) of premiums to the AIG unit, together with a chunk of potential losses to the same value. AIG booked the premiums as revenue and then added $500m to its reserves.

With the premium matching the potential losses, AIG faced no real risk, and so should not have treated the $500m as revenue or boosted its reserves. Cologne Re then passed an additional $100m of potential losses to AIG to suggest that risk was transferred. Regulators are now probing what risk AIG actually took on.

General Re "paid" AIG $10m in fees for the deal, only for this sum to be routed back to General Re through an AIG-affiliated broker with a $5m fee for General Re on top.

The deal has sparked a period of self-examination for the insurance industry. The big question for the IFSC now is how many other similar transactions took place.

Copyright 2005 Times Newspapers Ltd.




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