Letter from... US

As reports of the widening, deepening and broadening of investigations into AIG mounted, swirled and leapt off the newsstands in recent weeks, it may have surprised some to learn on 4 April that the New York attorney-general Eliot Spitzer and other regulators were confident of reaching a civil settlement with AIG.

In a statement, Spitzer said that AIG's board and current management 'are now co-operating with this investigation', and that an eventual civil resolution to inquiries by multiple law-enforcement authorities of past AIG transactions and accounting 'will ultimately be achievable'.

Hours earlier, AIG's newly appointed chief executive, Martin Sullivan, sent a letter to shareholders in which he described as unfortunate '..that current circumstances had obscured the reality that AIG's unique global franchise is sound, our financial position is solid and cash flow remains strong'.

Plenty of CEOs have made statements in defence of their companies in the past while almost simultaneously filing for bankruptcy, but the New York attorney-general is not in the habit of backing them up.

From February, when regulators issued subpoenas requesting more information on how AIG accounted for a number of insurance transactions, until Spitzer's words of calm, stock in the world's largest insurer had fallen 29%.

The deal that has gained the most attention is the transfer of $500m in expected claims from Berkshire Hathaway's General Re to AIG's books, along with $500m in premiums, followed by the addition of $500m to AIG's reserves to cover the risk. AIG admitted in March that the 2000-2001 transactions should have been recorded as a loan rather than an insurance deal because, in reality, the deal contained no risk.

The scandal forced out AIG's chairman and chief executive Maurice 'Hank' Greenberg after four decades.

Before this is over, AIG will likely no longer decide the pay of its officials through a separate entity called Starr International, a vehicle owned by AIG directors including Greenberg, and a novel way of doing things.

Warren Buffett, Berkshire Hathaway's chairman and chief executive, and one of the most respected voices in corporate America, has been drawn into the fray.

The so-called sage of Omaha, where the modest-living financier still lives, had been invited to attend by the US Securities and Exchange Commission on 11 April. Investigators from Spitzer's office also attended, although Spitzer has made it clear that Buffett himself is not under any suspicion. Criminal investigators are also involved in the wider inquiry but it was not clear (at the time of going to press) if the Department of Justice was to be represented.

Doubtless, the allegations are serious, but industry experts believe that appetite in the press for headlines has blown the AIG scandal out of proportion.

Last week, when AIG admitted to unearthing documents that showed the General Re transaction had been misrepresented, Enron comparisons emerged.

Whitney Tilson, a managing partner at a New York hedge fund, calls the Enron and AIG situations 'like night and day.'

'Enron never made any sense; it was a complete fraud and anyone with any sense, who knows anything about AIG, will know that it is an enormously powerful company of global reach. We think that there is a high probability that a large majority of its earnings power remains intact. It's primary sin was earnings smoothing, not earnings fabrication.' Tilson took a small position in AIG recently to take advantage of the low share price, and he jokes: 'We hope that as many other shareholders as possible think that this is an Enron scenario so that we can buy the stock cheaper.' Robert Hartwig, chief economist from the Insurance Information Institute, agrees: 'The [AIG] investigation is expanding and they are still following an accounting trail, as opposed to Enron, when, as they dug deeper, they found a house of cards. There is no accusation of that in this case.' Hartwig is concerned that hysteria over the case will lead to prohibitive regulation that will be detrimental to business.

'While we should not condone any of the irregular accounting methods that were used, we should be very careful that any regulations that are implemented down the road do not extinguish the economic viability of those very important products that thousands of businesses around the world rely on.'

Hypothetically, at least, anything is possible. The jury is still out. AIG could soon collapse into a sea of faulty numbers. On the evidence that is available so far, however, that seems unlikely and it seems unfair to doom a company that has as much global reach and apparent earnings potential as AIG, on the strength of a series of, albeit serious, accounting irregularities.

Abigail Rayner is New York correspondent for The Times (of London).