AIG's CDS operation intertwined with tax-evasion service for corporations and the rich

I previously blogged about how Joe Cassano bet hundreds of billions of dollars (AIG didn’t have) that the economy would not turn down… bets U.S. taxpayers are now paying off to AIG’s creditors. Well, ABC News reports Cassano also used financial gimmicks to hide AIG’s operations from U.S. regulatory and tax agencies:

Cassano set up some dozens of separate companies, some off-shore, to handle the transactions, effectively keeping them off the books of AIG and out of sight of regulators in the U.S. and the United Kingdom.

“This is the other very important issue underneath the AIG scandal,” said Blum. “All of these contracts were moved offshore for the express purpose of getting out from under regulation and tax evasion.”

The Wall Street Journal reports:

The Internal Revenue Service is challenging tax benefits received by Hewlett-Packard Co. from an offshore transaction it purchased from American International Group…

According to a person familiar with the business, AIG’s tax-structuring operation was even bigger than the credit-default-swaps business that led to the company’s meltdown.

Talking Points Memo suspects AIG’s massive tax evasion business was intertwined with its massive CDS business:

Today the Wall Street Journal explores AIG’s euphemistically-named “tax structuring” business in a story about an IRS battle with Hewlett-Packard over an offshore entity — or what the IRS terms a “sham that lacked economic substance and a business purpose” — that AIG set up for the company to collect $132 million in tax credits… We are beginning to suspect the credit default swap business and the tax “structuring” business were the same thing — not just because they served the same end.

An attorney and tax shelter expert we spoke with today says AIG FP was one of the biggest players in the business of engineering offshore tax shelters for corporate and private clients that resembled a multibillion dollar tax evasion scheme called Son of Boss… that thousands of corporations and wealthy individuals used to book phony capital gains losses and evade most or all of their income taxes in the late nineties and early 00s. The mind-numbing litany of esoteric loopholes such tax shelters employ to concoct said phony losses is something you don’t want to hear about at this hour — trust us — but they are generally anchored by a set of exotic unregulated derivative securities whose ‘notional value’ can help fabricate losses that don’t actually exist.

Posted by James on Tuesday, March 31, 2009