AIG execs hid risks from auditors, panel finds

updated 2:37 p.m. ET Oct. 7, 2008

WASHINGTON - Former top executives of insurance giant American International Group Inc. were on the receiving end of a verbal smackdown Tuesday as a congressional panel probed the chain of events that forced the government to bail out the conglomerate.

Maurice “Hank” Greenberg, who ran AIG for 38 years until 2005, again blamed the company’s financial woes on his successors, former CEOs Martin Sullivan and Robert Willumstad. They, 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.

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 percent stake in the company. Last week, AIG said it has drawn down $61 billion of the loan, and planned to sell off some of its business units to pay off the loan.

“Both of you seem to be saying that those events had nothing to do with your management, it had to do with a tsunami of activities over which you had no control,” said a House Oversight Committee Chairman Henry Waxman, D-Calif.

“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 Maloney, D-N.Y. “You were just gambling billions, possibly trillions of dollars.”

Lawmakers also upbraided Sullivan, who ran the firm from 2005 until June of this year, 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 4th quarter of that year. Sullivan countered that he was mainly concerned with helping other senior executives.

Sullivan also came under fire for reassuring shareholders about the health of the company last December, just days after its auditor, Pricewaterhouse Cooper, warned of him that AIG was displaying “material weakness” in its huge exposure to potential losses from insuring mortgage-related securities.

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AIG’s problems did not come from its traditional insurance subsidiaries, which remain healthy, 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.

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. AIG stopped selling credit default swaps in 2005 to limit its exposure, but the damage was done.

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