Posted by: Robert Hutchinson
October 23, 2008
Topic: AIG: Arrogant, Incompetent, and Greedy

Arrogance? How can anyone understand AIG begging for and receiving an $87 billion, now $12 billion, government bailout and then immediately throwing a $400,000 party at one of the most expensive resorts in the world? The amenities included "surf butlers." Who doesn't need those?

Incompetence? How can anyone understand how a company, just in September say that it would need $40 billion, then state it needs more than double that amount, $87 billion, and then later claim it needs more than triple the amount, $122 billion, all in a couple of months? Could it be incompetence?

Greedy? How can anyone understand how this company allowed itself to bet the farm on so-called "credit default swaps" that it could not possibly pay off, which then required it to go hat in hand to the government for a multi-billion dollar bail out? Could it be greed?

Perhaps it is not so surprising, given the company's recent history that clearly foreshadowed problems to come. This is the same company whose Chairman and CEO Maurice "Hank" Greenberg was forced to resign in 2005 (Elliot Spitzer reportedly said resign or I will file a criminal indictment against the company).

This was on the heels of the New York Attorney General charging Marsh & McClennan a large publicly traded insurance brokerage company in a massive price-fixing, contract steering, collusion and kick-back scheme that purportedly included AIG. M&M's CEO? It was AIG's Maurice Greenberg's son Jeffrey W. Greenberg. Meanwhile, two AIG executives pleaded guilty to criminal charges and were reported to be cooperating with the Attorney General's office. That story, which broke in the fall of 2004, shook Wall Street for days. Marsh & McClennan paid $850,000,000 to settle the charges.

Since then, It seems clear that AIG got to the point where its appetite for risk and the premium dollars it generated had no limit. The company made multibillion dollar bets that the subprime bonds, loaded with toxic subprime mortgages, would never default - so it could simply go on and issue what were basically "insurance" policies against their default. Of course, it could never make good on these bets, since it was basically betting money it didn't have. If this sounds crazy, it is. Abracadabra! Lousy credit risks will never default! Meanwhile, their houses will always go up - the sky's the limit. Arrogance, incompetence and greed.

One would think this was more than enough, but it does not stop there. On October 11, 2008 the Wall Street Journal reported that a federal criminal probe has been opened regarding whether AIG knew there were problems with the derivatives it was selling and whether it mislead investors. An internal AIG auditor Joseph St. Denis testified before Congress stating that he had "grave" misgivings about the company's ability to pay for the credit default swaps (CDS) for which it collected premiums to "insure" the mortgage bonds. He said that Joe Cassano (named the #1 "Culprit of the Collapse" by CNN), one largely attributed as putting AIG in its precarious position of underwriting massive amounts of the CDS's that almost forced the company into bankruptcy, paid $280 million by AIG in the last 8 years according to the WSJ, actually excluded St. Denis from discussions about valuing the assets, reportedly stating, "I was concerned you would pollute the process." Meanwhile, St. Denis states that AIG believed its ability to pay out on credit default swaps was "remote." This suggests that there was serious criminal conduct which deliberately defrauded investors, and of course, set the stage for its massive taxpayer/government bail out. Is this why AIG lurched from saying it needed $40 billion, $87 billion, and then $122 billion? As to its external auditors Pricewaterhouse Coopers, it reportedly stated that the company had a material weakness in its risk management, but was told not to interfere with its upcoming investor presentation, according to the WSJ.

The question arises again and again: Where was SEC Chairman Cox? He sat back and did nothing. See related blog article, "Asleep at the Switch - the Abject Failure of the SEC." As the article points out, his predecessor William Donaldson, who announced his intention to become an active regulator, was forced out, and ultimately replaced by the much more accommodating, Wall Street friendly Christopher Cox, also named a top "Culprit of the Collapse" by CNN.

Has AIG learned from its mistakes? Incredibly, the Wall Street Journal reported on October 16, 2008 that AIG is using its newly found government money to lobby various states for LESS REGULATION! You couldn't make this stuff up. "I find it disconcerting that there's still efforts to weaken our regulatory system, and that those efforts would be in any way subsidized by taxpayer dollars," said John W. Ryan, executive vice-president of the Conference of State Bank Supervisors. Does anyone think regulators should not watch this company like a hawk?

Separately, New York Attorney General Andrew Cuomo has demanded that AIG recover millions of dollars worth of "unreasonable" and "outrageous" payments it made to its executives when it was on the verge of collapse, or face legal action for violating state law. In the face of this, and the disclosure of its $400,000 party/fiasco, the company has now agreed to cooperate.
Not only investors, but now taxpayers have a vested interest in holding AIG strictly accountable for its misdeeds.

Robert W. Hutchinson
Copyright © 2008

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