As Feds Probe Credit Default Swaps, AIG Knows Of No Crime At Fin'l Unit

American International Group said last week that despite the ongoing investigations by federal authorities, they know of no illegal activity by the company's controversial financial products unit.

"To date, neither AIG nor AIGFP is aware of any fraud or malfeasance in connection with the underwriting and creation of the multisector [credit default swaps] portfolio, as opposed to what, with hindsight, turned out to be bad business decisions," said a company representative, Mark Herr, in an e-mail.

"AIG and AIGFP are, however, aware of ongoing investigations by the Department of Justice and the [Securities and Exchange Commission] with respect to the subsequent valuation of the multisector CDS portfolio under fair value accounting rules and related disclosures," he added. "We have cooperated fully with these investigations and will continue to do so."

AIGFP in London was headed by Joseph Cassano, who left the company last year. The unit's massive losses forced the company to seek billions in government bailout money.

Mr. Cassano and two current AIGFP employees, Andrew Forster and Tom Athan, were reported by The Wall Street Journal to be under scrutiny in the federal probe.

In addition to the controversy over the losses that AIGFP caused, news that $160 million in bonuses were paid to key executives there caused a firestorm of criticism. The Journal said Mr. Forster and Mr. Athan were among AIG employees who had agreed to return their bonuses.

Special Inspector General Neil Barofsky with the Troubled Asset Relief Program recently informed the Senate Finance Committee that probes are underway into the bonus payments, and that his office is coordinating with the Department of Justice on the options available to recover the bonuses paid to AIG executives.

He also said his agency has an audit underway that seeks to determine the federal monitoring and enforcement of executive compensation restrictions imposed as a condition of federal financial assistance to organizations such as AIG.

Earlier in the week, New York Insurance Superintendent Eric Dinallo, in an article discussing insurance regulation in The Financial Times concerning AIGFP, wrote that "almost nonexistent regulatory capital requirements permitted that unit to take the risky bets that brought down AIG and resulted in its bailout, all the while regulated by the [federal Office of Thrift Supervision], whose expertise–savings and loans–represented just one-one-thousandth of its balance sheet."

CAPITOL HILL PARADE

In related news, AIG Chief Executive Officer Edward Liddy has been asked to testify before a House oversight committee on May 6 about what caused the company's downfall, prompting a federal bailout. The request was made by Rep. Edolphus Towns, D-N.Y., chair of the House Oversight and Government Reform Committee.

In an April 22 letter, Rep. Towns also asked Mr. Liddy to testify as to whether federal financial assistance was the only "thing that could save the company," as well as what AIG has done with its billions in federal financial assistance.

Rep. Towns told Mr. Liddy to be prepared to answer whether AIG will need federal financial assistance beyond that already announced, and what AIG is doing to stabilize the company.

Rep. Towns also asked that Mr. Liddy be prepared to testify as to the solvency of AIG's insurance operations, and how this kind of disaster can be prevented in the future.

According to AIG and government data, the company currently owes the government $80 billion–$40 billion in capital drawn from the Troubled Asset Relief Program, and $40 billion drawn from a $60 billion Federal Reserve-funded credit facility.

The Government Accountability Office estimates the government involvement in AIG at $173 billion, but according to AIG officials that includes its estimate of the government's total investments in the firm.

Meanwhile, three members of the government panel appointed to oversee the taxpayers' investment in AIG have been asked to brief the same House oversight committee on details of the status of the financially troubled company.

Rep. Towns, in a letter, asked Jill Considine, Chester Feldberg and Douglas Foshee to give his committee an update on May 6. In his letter to the oversight officials, Rep. Towns asked them to answer questions about:

o The roles and responsibilities of the AIG Trust.

o What efforts the trustees have undertaken to date in performance of their duties.

o Whether the U.S. taxpayer investment in AIG is being adequately protected.

Ms. Considine is former chair of the Depository Trust & Clearing Corp. and former superintendent of banks in New York. Mr. Feldberg is former chair of Barclays Americas. Mr. Foshee is president and CEO of Texas-based El Paso Corp.

The trustees were appointed in early January to represent the government's interests in AIG. The government took control of 79.9 percent of AIG Sept. 16 in exchange for an aid package of up to $85 billion, a package that has since been revised three times.