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Last Updated: Oct 10, 2008 - 12:48:28 PM |
According to a letter released Tuesday by the House Committee on
Oversight and Government Reform, which held a hearing on the firm's
downfall, federal regulators warned AIG executives of a "material
weakness" in the company's books five months before the insurance giant
had to be rescued by an $85 billion government bailout. The federal
Office of Thrift Supervision (OTS) wrote AIG on March 10, 2008 that its
asset valuations "lacked the accuracy and granularity necessary to
understand the impact… on AIG's accounting and financial reporting."
AIG's auditor, Pricewaterhouse Cooper (PWC), also warned the insurance
giant about its books. Oversight committee chairman Henry Waxman
(D-Calif.) pointed to minutes (PDF) from an AIG audit committee meeting
in March indicating the board was told that the "root cause" of AIG's
problems was internal auditors' lack of "appropriate access" to the
Financial Products division—the very division whose massive losses
eventually necessitated the $85 billion government bailout.
And even AIG's own employees warned the company that it had no way of
knowing how much risk it was exposed to. In a letter (PDF) to the
committee, Joseph St. Denis, the firm's former vice president for
accounting policy in AIG's Financial Products division, accused AIG
executives of stymieing his attempts to make sure the company was
properly reporting the liabilities stemming from its involvement in
risky financial products, including the $62 billion credit derivative
swap (CDS) market. St. Denis, who worked as a Securities and Exchange
Commission (SEC) enforcement official before joining AIG, said Joseph
Cassano, the head of the division, "took actions that I believed were
intended to prevent me from performing the job duties for which I was
hired."
Lynn Turner, a former chief accountant for the SEC who testified at the
hearing, said he didn't see how AIG's financial disclosures could
possibly be consistent with its exposure. "When you've got that sort of
exposure, you owe it to me as an investor [to disclose it]. That's the
disclosure I cannot find in these filings…. There's a question there as
to why we didn't get that."
In light of the evidence, a bipartisan chorus of lawmakers was quick to
condemn the former AIG CEOs who had been asked to testify. "Quite
frankly, based on a lot of the decisions you made, you deserved to
fail," Rep. Tom Davis, the committee's ranking Republican, told Martin
Sullivan, the doomed insurance company's CEO until June 2008. Rep.
Carolyn Maloney (D-N.Y.), was just as harsh, telling the AIG execs that
they had "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" by "just gambling billions,
possibly trillions of dollars."
Sullivan and Robert Willumstad, who served as AIG's chairman and CEO
from June until mid-September 2008, blamed obscure accounting rules and
actions taken before their time at the firm's helm for the company's
collapse. The buck-passing was mutual. While AIG's longest-serving
chief executive, Maurice "Hank" Greenberg, was unable to attend the
hearing due to illness, he took care to attack Sullivan and Willumstad
(although not by name) in his written testimony (PDF).
Tuesday's hearing was the second in a series of five scheduled to
investigate the ongoing financial crisis, and it bore many similarities
to Monday's hearing, which investigated the collapse of the investment
bank Lehman Bothers. Like Lehman's CEO Richard Fuld Jr., who testified
Monday, Sullivan and Willumstad spoke of a financial "tsunami" that
could not have been anticipated and a "crisis of confidence" that took
everyone by surprise. "The AIG CEOs are like the Lehman CEO in one
other key respect," Waxman said. "In each case, they refuse to accept
any blame for what happened to their companies."
But while there was bipartisan agreement among committee members that
the former AIG CEOs deserved much of the blame for the firm's
near-collapse, under the surface unity a bitter partisan battle over
the causes of the crisis was stewing. Republicans tend to place a lot
of the blame for the current crisis on Fannie Mae and Freddie Mac, the
two government-sponsored enterprises (GSEs) that owned or guaranteed a
huge percentage of America's home loans. Rep. John Mica (R-Fla.) called
Fannie Mae the "core perpetrator of all this." The GOP is frustrated
that Waxman has not yet scheduled hearings to investigate Fannie and
Freddie's role in the crisis, although the chairman promised on Tuesday
that such a hearing would be forthcoming.
So far denied a separate hearing on Fannie and Freddie, Republicans
decided to ask questions about the mortgage giants anyway. But their
line of questioning didn't get far with the former AIG execs. Asked by
Davis if they saw any connection between AIG's collapse and Fannie and
Freddie's problems, both Sullivan and Willumstad gave answers that
amounted to long versions of "no."
Members of the GOP don't think Fannie and Freddie alone caused the
crisis. They also blame an accounting rule called "mark-to-market" or
"fair value" accounting, which requires that companies list assets in
their books at their real market value, whether or not they have any
plans to sell the assets and actually realize a profit or loss. In
this, the GOP has CEOs on their side: Sullivan, Willumstad, and
Greenberg all claimed fair value accounting contributed to AIG's
downfall by causing ratings agency downgrades and, subsequently, a
downward spiral in the company's stock value.
Turner, the former SEC accountant, defended mark-to-market in a section
of his written testimony titled "Don't Shoot the Messenger," arguing
that simply changing disclosure rules would not have changed the fact
that the market for mortgage-backed securities has essentially dried
up. Rep. Maloney accused Sullivan and Willumstad of "blam[ing]
accountants for saying a product has no value when no one wants to buy
it."
In contrast to the Republicans' fixation on Fannie, Freddie, and fair
value accounting, the Democrats have focused on credit derivative swaps
as the salient issue in this crisis. Credit derivative swaps are
unregulated bets on whether or not companies will default on debt. They
were originally designed as a form of insurance, or hedging, but now
only a small percentage of the $62 trillion swap market is backed by
collateral. (Since $62 trillion is close to the combined annual
economic output of the entire world, the lack of collateral is
understandable). AIG's financial products division had sold billions of
dollars in swaps before 2005, when they halted the practice. But when
AIG's credit ratings were lowered in 2008, the company had to post
enormous amounts of collateral for credit default swaps that it had
previously held with low collateral or collateral-free. The need to
raise this collateral soon led to the government bailout.
Eric Dinallo, the Insurance Superintendent for New York State, argued
before the committee that the credit default swap market has to be
regulated, calling it a "major contributor to the emerging financial
crisis." Asked if the unregulated swap market "could bring down our
entire economy," Dinallo said, "Well, we'll see." In the meantime, SEC
Chairman Christopher Cox has already asked for the power to regulate
the market. It was a testimony to the damage the credit derivative swap
market has wrought that even the former AIG CEOs have come around to
the idea of regulating it. Both Sullivan and Willumstad said under
questioning that they would prefer if the market were regulated. "With
benefit of hindsight, if there is good regulation that could be put in
place... I would support that," Sullivan said.
Source:Ocnus.net 2008
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