AIG FALLOUT:TOP EXECUTIVES at AIG knew of potential valuation problems in relation to the risky derivative contracts that ultimately necessitated a $123 billion US government bailout, months before investors were made aware of the issue, according to documents released by US congressional investigators, writes Proinsias O'Mahony
Former AIG auditor Joseph St Denis told investigators that he was "gravely concerned" after learning in September 2007 that the firm had been asked for billions of dollars in collateral in relation to the credit default swaps it had sold.
The swaps protected buyers from the risk of default on bonds related to the US housing market.
A month earlier, top AIG executive Joseph Cassano told investors: "It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions."
However, Mr St Denis found that "a potentially material liability position" was likely.
The auditor related his concerns to Mr Cassano, who subsequently excluded the auditor from valuation meetings on the grounds that he would "pollute the process".
Mr St Denis resigned soon after and reported events to Michael Roemer, AIG's chief auditor, who said he would inform AIG's audit committee of the matter.
Congress is investigating whether AIG misled investors in its public pronouncements of confidence. In December, chief executive Martin Sullivan told investors that any writedowns would be "manageable" and the probability of actual losses on its portfolio of swaps was "close to zero".
By February, however, PricewaterhouseCoopers found "material weaknesses" in AIG's financial reporting. Within weeks, AIG announced a $11.1 billion write-down. That led to the firm being sued by a Florida pension fund in May on the grounds that it had understated its exposure to the US housing market meltdown.
Mr St Denis's evidence undermines the positions of Mr Sullivan and Robert Willumstad, his replacement as chief executive. Mr Willumstad said AIG "explored every avenue" to protect its shareholders; Mr Sullivan blamed the company's woes on "mark-to-market accounting".
This requires that assets be listed on company books at the price they can be sold at in the market, even if the company has no intention of selling the asset.
Other financial firms have also called for changes in accounting rules although the practice has no shortage of defenders.
"Blaming fair-value accounting for the credit crisis is a lot like going to a doctor for a diagnosis and then blaming him for telling you that you are sick," JP Morgan analyst Dane Mott recently countered.
The investigation has found no mention of Mr St Denis's resignation in the notes of board meetings, despite the fact that it had been brought to their attention.
Henry Waxman, chairman of the investigating committee, said the chief executives had "brushed it aside", adding that Mr St Denis "could have given you information that later brought AIG to its knees".
Public anger against AIG's bonus culture is mounting. Mr Cassano, whose enthusiastic espousal of complicated financial products led to AIG being driven to the brink of bankruptcy last month, earned $280 million over the last eight years.
He resigned after the PricewaterhouseCooper findings in February but continued to receive a retainer of $1 million a month thereafter. The contract was terminated last week, just a day before a congressional hearing into AIG's collapse.
Mr Sullivan is also being criticised for proposing, while still chief executive, that losses in the firm's financial planning division should not be counted against executives when determining their bonuses for the previous year.
More recently, public outrage hit new heights after it emerged that AIG had spent $440,000 on a sales conference at a luxury resort just days after receiving $85 billion from the US Federal Reserve.
The bill included $200,000 for rooms, $150,000 for banquets, $23,000 for the spa and almost $7,000 in golfing fees.
This is not the first such investigation into AIG, which agreed to pay $1.64 billion as recently as 2006 to settle allegations of fraud and improper accounting practices. AIG is not the only firm feeling the heat, with Fannie Mae, Freddie Mac and Lehman Brothers all under investigation.
