Buffett Insurance Deals Warrant Spitzer Scrutiny

Of course, in reality the deal should result in a liability, because there is no risk transferred. But financial reinsurance deals can be structured so that the reinsurance company's illusory pledge to pay claims will be offset very closely by the reinsured company's payments. In essence, the reinsurance company is merely renting out its balance sheet, or providing financing.

Regulators and the Financial Accounting Standards Board, or FASB, spotted this abuse some years ago. Rules are in place to avoid the creation of false capital by financial reinsurance deals that don't truly transfer sufficient risk. However, recent allegations suggest that companies manage to get around the regulators and accounting rules.

Lunch Table

Currently, the most explosive allegations involving financial reinsurance focuses on General Re, a subsidiary of Buffett's Berkshire Hathaway (BRK.A Quote). The state insurance commission of Virginia is alleging in a suit filed in the U.S. District Court of Tennessee, Western Division, that a number of companies, including General Re, conspired to cover up financial difficulties at a now-collapsed Richmond, Va.-based malpractice insurer called Reciprocal of America, as well as a related company.

Among a range of allegations, the suit charges that General Re entered into a type of financial reinsurance maneuver to make Reciprocal's capital look stronger than it actually was. The commission found that the two firms were insolvent in June last year. Their collapse has left thousands of doctors and lawyers with $200 million in unreimbursed claims.

According to press reports earlier this year, Richard McCarty, General Re's assistant general counsel, said that the company didn't believe it, or its employees, did anything wrong in its dealings with Reciprocal. McCarty didn't return a call to his Stamford, Conn., office Wednesday.

The Tennessee insurance commission is also suing General Re and others. In its suit, it says that General Re used "secret side agreements" to reduce its exposure to Reciprocal, but this reduction allegedly wasn't disclosed publicly. "This is 'Enron,' the insurance industry version," the lead lawyer for the Tennessee commission said earlier this year.