Or maybe it’s the whole damn system.

The folks at Institutional Risk Analytics have concluded that AIG’s reinsurance business was little more than a Ponzi scheme well before it set up its Financial Products division that took down the firm with its credit default swaps (CDS) business:

One of the first things we learned about the insurance world is that the concept of “shifting risk” for a variety of business and regulatory reasons has been ongoing in the insurance world for decades. Finite insurance and other scams have been at least visible to the investment community for years and have been documented in the media, but what is less understood is that firms like AIG took the risk shifting shell game to a whole new level long before the firm’s entry into the CDS market.

In fact, our investigation suggests that by the time AIG had entered the CDS fray in a serious way more than five years ago, the firm was already doomed. No longer able to prop up its earnings using reinsurance because of growing scrutiny from state insurance regulators and federal law enforcement agencies, AIG’s foray into CDS was really the grand finale. AIG was a Ponzi scheme plain and simple, yet the Obama Administration still thinks of AIG as a real company that simply took excessive risks. No, to us what the fraud Bernard Madoff is to individual investors, AIG is to the global financial community.

The crux of this accusation is that they reinsurance contracts that they did not have the resources to back up.

So their reinsurance, essentially insurance bought by insurance companies to insure themselves against a catastrophe, was essentially meaningless, and all the parties involved knew this:

One of the most widespread means of risk shifting is reinsurance, the act of paying an insurer to offset the risk on the books of a second insurer. This may sound pretty routine and plain vanilla, but what most people don’t know is that often times when insurers would write reinsurance contracts with one another, they would enter into “side letters” whereby the parties would agree that the reinsurance contract was essentially a canard, a form of window dressing to make a company, bank or another insurer look better on paper, but where the seller of protection had no intention of ever paying out on the contract.

My guess is that both the CDS and reinsurance business functioned the same way, which means that neither had legally binding contracts.

Essentially, it means that much of the insurance industry, whether reinsurance or CDS, is simply an attempt to deceive regulators, and defraud investors.

This raises an obvious question: if what was largely thought to be the largest insurer in the world was little more than a Ponzi scheme, how many other huge fraudulent enterprises are out there.

H/T The Big Picture.