AIG Hid Risky Bets From Auditors, So Why Pay Bonuses?

Last fall, Congress held a hearing in October about findings that AIG executives hid from its auditors the extent of its risky products as losses soared in AIG's financial products division, according to information obtained by lawmakers.

Given this potentially fraudulent activity, given that Congress heard about this controversy, given that taxpayers now own 79.9% of AIG, why are taxpayers paying any bonuses at AIG whatsoever?

AIG has gotten to date $165 mn in bonus money, with hundreds of millions of dollars more in taxpayer bonus money lined up awaiting to be paid out. AIG's financial products unit sold insurance on risky mortgage bonds, and lost $40.5 bn last year. That unit is expected to get $450 mn in bonuses.

Why not pay these executives in the form of the toxic debt they cooked up, or in AIG stock, instead of taxpayer cash? Credit Suisse did just that--why not AIG? Or any TARP recipient?

Also, hearing testimony indicated exactly how AIG executives had blocked auditors from digging into the financial product unit where the losses occurred, with one auditor providing a written statement that he was pushed aside because probing would "pollute the process." AIG executives had blamed the company's losses on mark to market accounting at the time.

And AIG executives excluded losses from executive pay calculations, arguing they were losses created by questionable mark to market accounting rules. The executive who ran the financial product unit was let go by AIG, but later won a $1 mn a month consulting contract from the insurer, which has since been rescinded.

This from the Associated Press:

October 7, 2008 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.

Amid the rising losses, federal regulators at the Office of Thrift Supervision warned in March that "corporate oversight of AIG Financial Products ... lack critical elements of independence."

At the same time, AIG's auditor, Pricewaterhouse Cooper 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.

AIG's problems as outlined at the House hearing did not come from its traditional insurance subsidiaries, but instead 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.

The former chief executive of AIG, Martin Sullivan, was called in to testify before the House Oversight and Government Reform Committee on Capitol Hill in Washington, Tuesday, Oct. 7, 2008, as lawmakers probed the role of insurance giant AIG in the financial meltdown requiring government bailout.

AIG suffered huge losses when its credit rating was cut, thanks largely to complex financial transactions known as "credit default swaps," a former AIG CEO said in prepared testimony. 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.

House Oversight Committee Chairman Henry Waxman, D-Calif., also said that even as losses were engulfing the company, AIG executives depleted AIG's capital through stock buybacks and higher dividends.

In prepared testimony, former AIG chief executive 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 Robert Willumstad, forced the firm to raise billions of dollars in capital. The federal rescue came after AIG suffered disastrous liquidity problems after its credit rating was lowered, forcing the company to come up with even more capital.

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

A third former AIG CEO -- Maurice "Hank" Greenberg, the company's largest individual shareholder -- canceled his appearance before the committee. Committee spokesman Karen Lightfoot said that Greenberg had bowed out because of illness.

In his prepared testimony, Greenberg said his successors were responsible for AIG's demise.

"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."

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.

"When the credit markets seized up, like many other financial institutions, we were forced to mark our swap positions at fire-sale prices as if we owned the underlying bonds, even though we believed that our swap positions had value if held to maturity," Sullivan said.

The hearing is the second in two days into financial excesses and regulatory mistakes that have spooked stock and credit markets and heightened fears about a global recession.

The Federal Reserve rescued AIG with the $85 billion loan Sept. 16, one day after investment bank Lehman Brothers declared bankruptcy when the government wouldn't come to its aid. Lehman Brothers' chief executive officer testified Monday before the congressional oversight panel but didn't shed much light on how the mid-September events cascaded into a collapse of credit markets requiring a broad bailout.

The government now holds warrants that can be converted into an 80 percent stake of AIG and there is hope taxpayers won't lose money on the deal since the company has profitable subsidiaries that could be sold to pay off the Fed's loan.

The Fed's move rescued the company from bankruptcy after the insurance conglomerate's exposure to enormous losses related to subprime mortgage securities forced it to the brink.

You want more? Here you go:

The Financial Crisis: Congress Grills Former AIG Chiefs --- Lawmakers Ask Whether Executives Glossed Over Warnings About Risks Insurer Faced

 

By Liam Pleven and Susanne Craig

8 October 2008

The Wall Street Journal

 

Lawmakers portrayed former executives of American International Group Inc. as running a high-rolling organization that glossed over warnings about the risks that helped necessitate a government rescue -- and continued to reward executives even as the big insurer headed toward a cliff.

 

The focus of Tuesday's hearing before the House Committee on Oversight and Government Reform differed in a key respect from the grilling on Monday of Richard Fuld Jr., chief executive of now-fallen Lehman Brothers Holdings Inc.. That company wasn't bailed out, while AIG received an $85 billion lifeline from the government -- $61 billion of which it has already tapped.

 

"I think you should be apologizing to the American people," New York Democratic Rep. Carolyn Maloney said to two former CEOs of AIG.

 

Lawmakers challenged former CEO Martin Sullivan about why he recommended that the insurer exclude massive unrealized losses tied to a key unit, AIG Financial Products, when calculating incentive pay for top executives -- including himself. Mr. Sullivan said the other executives weren't responsible for the unit's problems.

 

Mr. Sullivan and another former CEO and former board chairman, Robert Willumstad, were also questioned about AIG's decision to pay the former head of that unit, Joseph Cassano, $1 million a month as a consultant even after he left the firm. AIG and Mr. Cassano ended that deal Monday, a company spokesman said.

 

Lawmakers also asked who besides AIG has benefited from the rescue, in light of published reports suggesting that Goldman Sachs Group Inc. had significant exposure as a trading partner if AIG were to fail. A Goldman spokesman said Tuesday that at no point has the firm had "meaningful" exposure to AIG, after taking into account the collateral it held and other measures used to offset its risk.

 

The committee also released minutes of a meeting of AIG board members that said AIG's outside auditor had warned Mr. Sullivan on Nov. 29 that the giant insurer "could have a material weakness" in its risk management. That was less than a week before Mr. Sullivan told investors in December that AIG was "confident in our marks and the reasonableness of our valuation methods."

 

Two months later, AIG disclosed that its auditors had found a material weakness in its accounting controls, and said it would lower the valuation on complex derivatives by billions of dollars.

 

Mr. Sullivan said that when communicating with investors, he said what he truly believed to be accurate at the time.

 

Those derivatives, sold by the financial-products unit Mr. Cassano headed, were largely responsible for three consecutive multibillion-dollar quarterly losses AIG reported in the months before the government agreed to loan the company as much as $85 billion.

 

The government offered the backstop because federal officials feared the potential repercussions from an AIG bankruptcy could have been devastating. Many major financial institutions did business with AIG, and could have been at risk.

 

Now, AIG is scrambling to sell off assets to help pay down the loan, having drawn down $61 billion within roughly two weeks.

 

Lawmakers bored in on company expenditures, too, noting that it had spent more than $440,000 for a gathering at a posh California resort -- including $200,000 for rooms and $23,000 for spa treatments -- a week after the government stepped in.

 

An AIG spokesman said that meeting was held as a way to reward high-performing insurance agents who had been major producers of business for one of AIG's life-insurance subsidiaries. Top AIG corporate executives didn't attend.

 

Regarding AIG's dealings with Goldman Sachs, Mr. Willumstad said during Tuesday's hearing that the investment bank was an AIG counterparty to about $20 billion in credit-default swaps. He said it was unclear how much Goldman could have lost in the event of an AIG failure, or how its risk might have been hedged.

 

AIG documents released by the House committee show that as market conditions deteriorated, Goldman pushed AIG to provide it with more collateral to offset its exposure on the derivative contracts. Minutes from one February meeting cited "Goldman's acknowledged desire to obtain as much cash as possible from their collateral calls."

 

It isn't clear exactly how much collateral AIG has handed over to Goldman, before or after the downgrades on AIG's credit ratings that helped trigger the government loan last month.

 

A Goldman spokesman said Tuesday that the firm not only has "no material exposure" to AIG, but also that the firm's exposure is "insignificant." Goldman over the past year has had disputes with AIG on the value of some of the positions at issue, and of the collateral AIG posted. To the extent there were disagreements, Goldman said, it demanded and received extra collateral in cash and cash equivalents. Any material exposure that wasn't covered by collateral was hedged, the spokesman said.

 

At the hearing, lawmakers asked why AIG's leaders hadn't seen the looming danger the company faced. The committee released a March letter from the U.S. Office of Thrift Supervision raising questions about oversight of AIG's financial-products unit.

 

Rep. Henry Waxman, the committee chairman, asked both Mr. Sullivan, who was CEO from March 2005 until this June, and Mr. Willumstad, who had been AIG's chairman since 2006 and served as CEO from June to September, about concerns raised by a former auditor in the financial-products unit.

 

"It looks like you both brushed it aside," Rep. Waxman said.

 

Mr. Willumstad said he didn't recall the matter being discussed by the firm's audit committee, and Mr. Sullivan said the company had been putting additional controls in place.

 

As for Mr. Cassano's compensation deal, an AIG spokesman said the company and Mr. Cassano had "mutually terminated" the consulting agreement as of Monday. "His services were no longer being used," said F. Joseph Warin, an attorney for Mr. Cassano.

 

Mr. Warin said supervision of Mr. Cassano by AIG was "transparent" and "interactive." He said Mr. Cassano has been and expects to continue to be "cooperative" with a continuing federal probe.

 

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A.I.G. Takes Its Session In Hot Seat

 

By MICHAEL J. de la MERCED and SHARON OTTERMAN

8 October 2008

The New York Times

 

A day after Richard S. Fuld Jr. was compelled to explain the millions of dollars he made at Lehman Brothers, two former executives of the American International Group took their turns in government witness chairs on Tuesday, answering critical questions from lawmakers about business and pay practices and outsize spending that continued even after the company received an $85 billion lifeline from the government.

 

One particular point of contention during the hearing before the House Oversight and Government Reform Committee was a weeklong retreat that a life insurance subsidiary, AIG General, held for its top sales agents at the St. Regis Resort in Monarch Beach, Calif., only a week after the government extended its $85 billion loan last month.

 

The $442,000 in expenses for the week included $150,000 for food and $23,000 in spa charges, according to documents obtained by the committee.

 

Joe Norton, A.I.G.'s director of public relations, said in an interview that the event had been scheduled last year, though he did not know whether executives had considered canceling the retreat after the bailout.

 

In addition to questions about spending, the two A.I.G. executives who appeared before legislators, Martin J. Sullivan and Robert B. Willumstad, faced sometimes heated inquiries into risky bets by the company on complicated financial products that insured mortgage-backed securities.

 

A.I.G., for decades the largest insurance company in the world, must now sell wide swaths of its businesses to repay the government loan, made because of the potential catastrophe that the company's bankruptcy would have unleashed.

 

Mr. Sullivan was criticized for his reassurances to investors about A.I.G.'s health in December despite warnings from company auditors that its exposure to those contracts was growing.

 

And many legislators berated the two men for large pay packages dispensed to top executives despite evidence that the company's financial health had begun deteriorating in 2007. Mr. Sullivan was questioned by several lawmakers over why he had requested that accounting losses from A.I.G.'s exposure to these swaps be excluded from calculating one particular compensation plan.

 

The two former executives also took criticism from their outspoken predecessor, Maurice R. Greenberg, who sought to deflect responsibility in a statement to the committee. Yet Mr. Greenberg, who also questioned the need for the government's de facto takeover of the company as part of its rescue package, declined to appear, citing illness.

 

The nearly five-hour hearing was the second this week held by the House committee after the pointed questioning on Monday of Mr. Fuld about the collapse of Lehman, the investment bank he led. Committee members, led by Henry A. Waxman of California, are seeking more information from troubled financial companies after the passage of the Bush administration's $700 billion bailout plan last week and the chaos gripping the markets.

 

''A.I.G. had to be bailed out by taxpayers because of your investments in credit-default swaps,'' Carolyn Maloney, Democrat of New York, said. ''I don't believe any of your management deserves a bonus.''

 

Mr. Sullivan, who was ousted as A.I.G.'s chief executive in June, and Mr. Willumstad, who was the company's chairman before succeeding Mr. Sullivan, blamed wider market tremors for the company's stumbles. They also attributed A.I.G.'s $25 billion in write-downs to mark-to-market accounting rules, which forced the company to take paper losses that led to debilitating credit downgrades.

 

Yet both Democratic and Republican lawmakers dismissed those arguments, citing testimony from a former chief accountant for the Securities and Exchange Commission.

 

''A.I.G. is blaming its downfall on accounting rules which require it to disclose losses to its investors,'' the witness, Lynn E. Turner, said. ''That's like blaming the thermometer, folks, for a fever.''

 

Instead, lawmakers focused on efforts by company management to shield inquiries into the London subsidiary that had underwritten the derivatives contracts that became devalued during the global credit crisis.

 

Both PricewaterhouseCoopers, the company's auditor, and an independent accountant complained of a lack of access to the London unit and its leader, Joseph Cassano. The accountant, Joseph St. Denis, said in a statement to the committee that he had been deliberately blocked from questioning Mr. Cassano because he might ''pollute the process.'' Mr. St. Denis later resigned in protest.

 

Mr. Cassano has continued to draw $1 million a month in consulting fees from A.I.G., a fact that aroused ire from several lawmakers. He earned $280 million over the last eight years.

 

For his part, Mr. Greenberg sought in his written statement to cast A.I.G.'s troubles as arising after he left in 2005, under the shadow of an accounting inquiry.

 

''When I left A.I.G., the company operated in 130 countries and employed approximately 92,000 people,'' Mr. Greenberg said in a statement. ''Today, the company we built up over almost four decades has been virtually destroyed.''

 

When asked about Mr. Greenberg's contention that risk controls at A.I.G. had loosened after his departure, Mr. Sullivan argued that risk controls had actually tightened since then.

 

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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.

 

Andrew Taylor

The Associated Press

8 October 2008

 

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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AIG Leaders Hit For Ignoring Warnings About Risky Business In House Hearing

--Company also slammed for bonus payments, challenged on post-bailout junket

 

BY MATT BRADY, ARTHUR D. POSTAL AND MARK E. RUQUET

13 October 2008

National Underwriter Property & Casualty-Risk & Benefits Management

 

American International Group, even as its financial situation became risky, doled out millions in bonus money and ignored concerns voiced by regulators and auditors, according to material revealed at a congressional hearing last week.

 

One executive at the hearing-Robert Willumstad, replaced as chairman and CEO by former Allstate executive Edward Liddy after last month’s government bailout-testified that AIG was a victim of circumstances in the broader financial markets. “I don’t believe AIG could have done anything differently,” he said.

 

That assertion was disputed by Rep. Henry Waxman, D-Calif., chair of the House Oversight and Government Reform Committee, which is examining regulatory mistakes and company mismanagement that led to the need for an $85 billion federal loan to AIG.

 

Rep. Waxman disclosed that the U.S. Office of Thrift Supervision sent a letter to AIG’s general counsel on March 7 voicing concerns about the risk management and corporate oversight of AIG Financial Products, the unit whose losses prompted the firm’s financial crisis.

 

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.”

 

HANK ‘SPEAKS’

 

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.”

 

LIDDY’S TAKE

 

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.