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THE FINANCIAL CRISIS

House panel rebukes ex-CEOs of AIG

Auditors were kept from knowing the level of the firm's risk, documents presented at a hearing show.

October 08, 2008|Andrew Taylor | The Associated Press

WASHINGTON — Executives at American International Group Inc. hid the full range of its risky financial products from auditors as losses mounted, according to documents released Tuesday by a congressional panel examining the chain of events that forced the government to bail out the conglomerate.

The panel sharply criticized AIG's former top executives, who cast blame on one another for the company's financial woes.

"You have cost my constituents and the taxpayers of this country $85 billion and run into the ground one of the most respected insurance companies in the history of our country," said Rep. Carolyn B. Maloney (D-N.Y.). "You were just gambling billions, possibly trillions of dollars."

AIG, crippled by huge losses linked to mortgage defaults, was forced last month to accept an $85-billion government loan that gives the U.S. an 80% stake in the company.

House Oversight Committee Chairman Henry A. Waxman (D-Beverly Hills) unveiled documents showing AIG executives hid the full extent of the firm's risky financial products from auditors, both outside and inside the firm, as losses mounted.

For instance, regulators at the federal Office of Thrift Supervision warned in March that "corporate oversight of AIG Financial Products . . . lack critical elements of independence." At the same time, PricewaterhouseCoopers confidentially warned the company that the "root cause" of its mounting problems was denying internal overseers in charge of limiting AIG's exposure access to what was going on in its highly leveraged financial products branch.

Waxman also released testimony from former AIG auditor Joseph St. Denis, who resigned after being blocked from giving his input on how the firm estimated its liabilities.

Three former AIG executives were summoned to appear before the panel. One of them, Maurice "Hank" Greenberg -- who ran AIG for 38 years until 2005 -- canceled his appearance citing illness but submitted prepared testimony. In it, he blamed the company's financial woes on his successors, former chief executives Martin Sullivan and Robert Willumstad.

"When I left AIG, the company operated in 130 countries and employed approximately 92,000 people," Greenberg said. "Today, the company we built up over almost four decades has been virtually destroyed."

Sullivan and Willumstad, in turn, cast much of the blame on accounting rules that forced AIG to take tens of billions of dollars in losses stemming from exposure to toxic mortgage-related securities.

Lawmakers also upbraided Sullivan, who ran the firm from 2005 until this June, for urging AIG's board of directors to waive pay guidelines to win a $5-million bonus for 2007 -- even as the company lost $5 billion in the fourth quarter of that year. Sullivan said he was mainly concerned with helping other senior executives.

Sullivan also was criticized for reassuring shareholders about the health of the company in December, just days after auditor PricewaterhouseCoopers warned him that AIG was displaying "material weakness" in its huge exposure to potential losses from insuring mortgage-related securities.

AIG's problems did not come from its traditional insurance subsidiaries, which remain healthy, but from its financial services operations, primarily its insurance of mortgage-backed securities and other risky debt against default. Government officials feared a panic might occur if AIG couldn't make good on its promise to cover losses on the securities; investors feared the consequences would pose a threat to the U.S. financial system, which led to the government bailout.

AIG suffered huge losses when its credit rating was cut, thanks largely to complex financial transactions known as credit default swaps. AIG was a major seller of the swaps, which are a form of insurance, though they are not regulated that way.

The swap contracts promise payment to investors in mortgage bonds in the event of a default. AIG has been forced to raise billions of dollars in collateral to back up those guarantees. It stopped selling credit default swaps in 2005 to limit its exposure, but the damage was done.

Sullivan said many of the firm's problems stemmed from "mark to market" accounting rules mandating that its positions guaranteeing troubled mortgage securities be carried as tens of billions of dollars in losses on its balance sheet.

This in turn, said former AIG Chief Executive Willumstad, who ran the company for just three months after Sullivan left, forced the firm to raise billions of dollars in capital. The federal rescue came after AIG suffered liquidity problems after its credit rating was lowered, forcing the firm to come up with even more capital.

"AIG was caught in a vicious cycle," Willumstad said in the testimony.

Greenberg said that AIG "wrote as many credit default swaps . . . in the nine months following my departure as it had written in the entire previous seven years combined. Moreover, "unlike what had been true during my tenure, the majority of the credit default swaps that AIGFP wrote in the nine months after I retired were reportedly exposed to subprime mortgages."

But Sullivan said the complex swaps had underlying value, even as the market for them froze, sending their book value plummeting and forcing AIG to scramble for collateral.

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