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Fannie Mae's chairman left the board
Marsh needs a new chief
After Eliot Spitzer's investigation pushed out the heads of several big insurance companies, Marsh McLennan went looking for a new chief. They went to Steve Friedman, a legend who used to run Goldman Sachs, and he asked an insurance expert who knew the most about Marsh.
The expert pointed him to Todd Combs, a hedge fund investor who had been short Marsh for two years, waiting for exactly this to happen, and who was short AIG too. Friedman invited him to breakfast and asked what he would be getting himself into if he took the job. They went through Marsh for two hours.
The Fannie Mae answer
Then Friedman asked whether there was anything else he should know. Combs had no idea Friedman sat on the Fannie Mae board, and answered that Fannie Mae was ten times worse than Marsh, a complete accounting fraud, with people headed to prison over it.
Friedman turned three sheets of white and grabbed the table, sure he was being teased. He asked for another breakfast the next day, and Combs walked him through the derivatives accounting. Friedman, a lawyer, excused himself from the meeting and left the board that night at five. The next day he called to say they wanted Combs to start a fund, something they had been looking to do for seven or eight years.
How did Spitzer's probe reshape insurance brokerage?
In October 2004, New York Attorney General Eliot Spitzer's office sued Marsh & McLennan over how it was paid by insurers. The suit focused on contingent commissions, bonuses insurers paid brokers based on the volume or profitability of business placed with them. Marsh's chief executive resigned within two weeks of the suit. In early 2005, Marsh settled by agreeing to pay $850 million to clients and to stop accepting contingent commissions.
How do analysts spot accounting trouble in filings?
Forensic accountants often start with the cash flow statement, because profit can be shaped by accounting choices while cash is harder to disguise. A company that reports growing profits without matching operating cash flow draws scrutiny. The footnotes to financial statements hold details on derivatives, valuation methods, and commitments that do not appear on the balance sheet. Howard Schilit's book Financial Shenanigans catalogs these warning signs.
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