AIG Leaders Slammed For Ignoring Risk Warnings At House Hearing

The London-based unit, now in runoff, sold credit default swaps to insure mortgage-backed securities owned by other investors, such as banks, institutions or individuals.

The OTS letter said: "We are concerned that the corporate oversight of AIG Financial Products…lacks critical elements of independence, transparency and granularity," Rep. Waxman related.

An OTS official would not release the letter. He said it is OTS policy not to discuss its oversight of institutions while they are still in business. The OTS became the federal regulator of choice for AIG because AIG has a federally-chartered thrift it operates out of offices in Connecticut.

Rep. Waxman said an investigation of AIG's records showed that AIG's auditor, PricewaterhouseCoopers, reported problems similar to those found by the OTS when it sought access to AIGFP's records.

He said that minutes from a meeting of the board's audit committee in March reveal that PricewaterhouseCoopers told the committee the "root cause" of AIG's problems was that risk control groups did not have "appropriate access" to the records of the financial products division.

Rep. Waxman also said that as part of its examination of thousands of pages of AIG documents, it contacted former AIG auditor Joseph St. Denis, a former senior Securities and Exchange Commission enforcement official hired by AIG to fix accounting problems that led New York authorities to sue the company for securities fraud–the basis of an expensive settlement.

Mr. St. Denis, according to Rep. Waxman, said he voiced concerns to Joseph Cassano, who headed AIGFP, about how the financial products unit was addressing its ongoing account problems.

Mr. Cassano's reply, Mr. St. Denis told the committee, according to Rep. Waxman, was: "I have deliberately excluded you from the valuation…because I was concerned that you would pollute the process."

Mr. St. Denis, who ultimately resigned, told the committee that "Mr. Cassano took actions that I believe were intended to prevent me from performing the job duties for which I was hired," noted Rep. Waxman, who added that "unlike Mr. Cassano and Martin Sullivan [AIG's CEO until August], Mr. St. Denis's actions cost him his bonus."

Rep. Waxman cited "questionable actions" by Mr. Sullivan and his replacement, Mr. Willumstad. "As losses were mounting and resources were getting scarce, AIG depleted its capital by $10 billion through stock buybacks and rising dividend payments," Rep. Waxman said.

With problems mounting in 2007–AIG lost $5 billion in the final quarter of 2007 alone–AIG's board in March accepted management's recommendation that AIGFP's "unrealized market valuation losses be excluded from the calculation" of AIG executive bonuses that went to 70 top executives, including Mr. Sullivan and Mr. Cassano. Mr. Sullivan was given a cash bonus of more than $5 million and a new compensation contract that provided him with a "golden parachute" worth $15 million, according to Rep. Waxman.

In addition, he said Mr. Cassano made over $280 million over the last eight years, noting that after Mr. Cassano was terminated in February without cause, AIG allowed him to keep up to $34 million in unvested bonuses and put him on a $1 million retainer.

Meanwhile, Rep. Waxman tore into the company for holding a week-long "executive retreat," lambasting AIG for "wining and dining at one of the most exclusive resorts in the nation"–the St. Regis in Monarch Beach, Calif.–less than one week after securing the government bailout, at a time when "average Americans are suffering economically…losing their jobs, their homes and their health insurance."

However, after the hearing, Mr. Liddy sent a letter to U.S. Treasury Secretary Henry Paulson, explaining that Rep. Waxman had mischaracterized the event as an "Executive Retreat," when in fact it was held by one of AIG's insurance subsidiaries for independent life insurance agents.

"The agents were top business producers for the company, and of the more than 100 attendees, only 10 were employees of the AIG subsidiary, who were there to represent their company," AIG said in a press release. "No AIG executives from headquarters attended. The meeting was planned months before the Federal Reserve Bank of New York's loan to AIG."

Among those scheduled to testify at last week's proceedings was Maurice "Hank" Greenberg, longtime chairman and CEO of AIG until he left in 2005, following allegations that the firm used bogus finite reinsurance deals to artificially boost the company's balance sheet.

"Regrettably, Mr. Greenberg has told the committee that he is too ill to appear today to answer questions," said Rep. Waxman.

However, Mr. Greenberg did submit a statement, asserting that AIG's involvement in derivatives only began to "explode" after he left the company in 2005.

"Mr. Greenberg blames Mr. Sullivan and Mr. Willumstad for the downfall of AIG," Rep. Waxman said. "Many others think it is Mr. Greenberg who sowed the seeds that led to AIG's failure."

Mr. Greenberg–now chairman and CEO of C.V. Starr & Company–also said in his written statement that taking bailout money from taxpayers was a bad deal for AIG and its shareholders, and that more value would have been realized by filing for bankruptcy.

In his written testimony, Mr. Greenberg said AIG's financial products unit "reportedly wrote as many credit default swaps on collateralized debt obligations in the nine months following my departure as it had written in the entire previous seven years combined."

Moreover, he said, unlike what had occurred during his regime, "the majority of the CDS that AIGFP wrote in the nine months after I retired were reportedly exposed to subprime mortgages. By contrast, only a handful of the CDS written over the entire prior seven years had any subprime exposure at all."

He said AIG's problems occurred because the "risk controls my team and I put into place were weakened after my retirement." For example, he noted, "it is my understanding that the weekly meetings we used to conduct to review all AIG's investments and risks were eliminated." These meetings kept the CEO abreast of AIGFP's credit exposure, he said.

Moreover, he said, the problem created by the larger exposure to CDS "may have been aggravated" by the fact that the new exposure "appears to have been entirely or substantially unhedged." He drew these conclusions based on what he said is "published data from AIG."

Mr. Greenberg also blasted the bailout deal, saying that to service the debt incurred through the $85 billion loan from the Federal Reserve Board, "AIG will have no choice but to engage in a fire sale of profitable assets."

Second, he asserted that the equity component of the deal–which gave the government a 79.9 percent ownership interest–was unnecessary. "AIG has more than $1 trillion in assets, including key AIG assets that already act as security for the $85 billion loan facility," he said. "It was not necessary to wipe out virtually all of the shareholder value held by AIG's millions of shareholders, including tens of thousands of employees and many more pensioners and other Americans on fixed incomes."

He contended that "those millions of Americans could have fared better if AIG had filed for bankruptcy protection, since they would at least have had the chance of recouping value on their investments in AIG over the longer term."

On Oct. 3, AIG's current CEO, Mr. Liddy, in response to an analyst's question, said the company will sell off assets in an orderly way to maximize their value in repaying the government loan, but added that "this is not a fire sale." Indeed, he said the two-year loan agreement allows AIG to sell assets in a flexible and orderly way.

The company plans to hold onto its U.S. property-casualty and foreign general insurance businesses, as well as a majority interest in its foreign life insurance operations, Mr. Liddy indicated. All other parts of the company may be sold off, subject to the sale price and need for capital to pay off the loan and ensure the solvency of the remaining operations, he added.

During the conference call, Mr. Liddy said AIG will sell its personal lines unit but retain its private client group, which he said is essential to its p-c insurance marketing.

He noted that the company, which as of Sept 30 had drawn $61 billion from the $85 billion credit facility the government has provided, may draw more, subject to need.

Concerning the sale of the assets, Mr. Liddy said the company does not intend to break up units, but to sell them as whole businesses to large corporations. "Larger is better," he said. "I think the demand for these properties will be very, very high, and we will move expeditiously in a way to maximize their value."

AIG is doing what it can to understand the value of the subprime-related assets, he said. This would help establish a floor for collateralizing those assets, making it easier to determine how much money AIG needs to cover those assets that are losing value.

Once that is established, he said the company will be in a better position to fully understand how much money it must raise to cover the defaults.

"We want to emerge from this with a capital structure that serves us well going forward," said Mr. Liddy.

Now that the federal bailout package has finally won congressional approval, bad assets held by AIG could be subject to purchase by the Treasury Department, said Mr. Liddy. However, he added a sale would be sought only if it made "economic sense."

He said while the company is in distress, some competitors are trying to take advantage of the situation, but AIG is holding onto clients. However, AIG will maintain underwriting discipline and pricing, not entering into soft market competition.

"You don't want to solve one problem and create another," he said.