Finite risk has become what derivatives were ten years ago—a hot button for controversy and the likely subject of investigations, litigation, and (heaven forbid) new regulations. American International Group (AIG) has borne the brunt of the assault to date as the target of New York State Attorney General Eliot Spitzer’s scrutiny. AIG’s troubles began with an investigation by the SEC into a relatively small finite risk deal. Before long, the company’s longtime chairman was gone and the company’s accounts faced significant restatement. Brightpoint and the now-defunct HIH Insurance in Australia—as well as an increasing number of other firms—have also been associated with potential finite risk abuses. This article deliberately avoids discussion of any company-specific alleged abuses of finite risk. There is too little in the public domain to permit fair and complete analysis and our article should not be used out of context to address the facts of those particular examples.
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