Throughout those trying years, Gen Re retained financial strength, maintaining its AAA rating (in 2003, only two reinsurers had AAA ratings: Gen Re and NICO). Gen Re became Berkshire’s largest source of float at $24 billion in 2007, confirming the restoration of underwriting discipline, conservative reserving, and careful business/client selection.56 Earnestness—which the Gen Re story shows must be jealously guarded—was back.
But Gen Re’s culture soon faced another test—of legacy, leadership, and resilience—amid a national investigation into dubious industry practices. Insurers had created arcane policies (called “finite covers”) for one another to achieve various accounting and operational objectives, including assuring adequate loss reserves. As early as 2003, Virginia state insurance regulators questioned practices at a Gen Re counterparty, the now-defunct Reciprocal of America. Gen Re cooperated by supplying information to the Virginia regulators as well as opening its books to authorities in other states and the federal Securities and Exchange Commission.
Scouring those books, authorities seized upon notes from a phone call of October 31, 2000, between Ferguson and Maurice R. (“Hank”) Greenberg, chairman of American International Group (AIG), a big Gen Re client. Greenberg explained that an AIG subsidiary had recently paid large losses on catastrophic policies and that, as a result, AIG wanted to refresh its reserves. He proposed for AIG and Gen Re to exchange some policy risks in a transaction that would allow AIG to increase reserves.
Ferguson assigned the transaction to two senior Gen Re underwriters, who negotiated the deal along with several colleagues. In doing so, however, it became intertwined with other AIG–Gen Re transactions such that, to an outside observer, it could have seemed as if no risk had been transferred, meaning AIG was not entitled to increase its reserves. If so, the transaction would appear to be an artifice. Prosecutors began a criminal case against Ferguson, several Gen Re managers, and another AIG employee. (Greenberg was not charged in the criminal case though for a decade he battled a civil case begun by New York attorney general Eliot Spitzer.)57
Two Gen Re managers soon entered plea bargains, agreeing to admit to concocting a fraud and testifying against others involved in exchange for leniency in their sentencing. The case against Ferguson and the others crawled along for six years, with a jury trial in 2007–08, followed by an appeal. The jury returned convictions in February 2008, but the appellate court threw them out in June 2012. At that point, the government settled, with each employee paying fines ranging from $100,000 to $250,000.58
Following standard practice in such cases, authorities had cast a dragnet, and in 2005, the SEC informed Brandon that it was investigating his role in the incident as well. He reported to Ferguson and one other target reported to him. Brandon cooperated without seeking immunity. In February 2008, buoyed by the short-lived jury verdict, government authorities felt as if they had a strong hand to play. As a result, during March and early April, they encouraged Buffett to fire Brandon.59
The pressure proved overwhelming—and may have been unfair.60 Prosecutors have strong leverage in a weapon called “corporate criminal liability.” It enables the authorities to hold corporations criminally liable for the crimes of employees. All it takes are credible allegations of one employee committing one crime while on the job. Harkening back to the case of Salomon Brothers, for corporations whose businesses depend on reputations, especially Gen Re (and Berkshire), a corporate indictment can be disastrous.
Prosecutors are supposed to avoid heavy-handed use of this power; specifically, they aren’t meant to pressure corporations to oust employees without traditional due process. For example, it is a violation of an employee’s constitutional rights for prosecutors to pressure a company into terminating promised funding for an employee’s legal defense.61 In practice, however, prosecutors are not always restrained.
Market reaction to Brandon’s dismissal was mild. Some thought the move was inevitable given the environment: the trial put a pall over Gen Re, and there are few better ways of clearing corporate air than firing a CEO.62 Observers agreed that Brandon was a great manager who had returned Gen Re to its conservative heritage with stringent standards and controls; they also knew that his replacement, Tad Montross, who had led the effort alongside Brandon, reflected Gen Re’s deep bench.63
Today, Montross stresses underwriting profit and believes underwriting discipline is ingrained in Gen Re’s DNA, as he put it in correspondence for this book. When he reviews quarterly results with Gen Re’s associates, he reminds them that Gen Re has a “no exit strategy”—that, like Berkshire, its time horizon is forever. Today’s Gen Re is like the Gen Re of the early twentieth century, taking commitments very seriously and planning to be around to make good on them.