Lawmakers criticized American International Group Inc. Tuesday for ignoring financial warnings and for executive compensation deals and lavish spending, including a company gathering at an expensive resort just days after getting an $85 billion rescue loan.
Former top executives, who blamed the insurer’s woes on aggressive accounting rules and short sellers of AIG stock, drew further fire at a congressional hearing for a company life insurance sales gathering at a resort and a $1 million-a-month consulting contract given to an executive who once headed its financial products unit.
The Federal Reserve extended the two-year loan on Sept. 16 as AIG faced a cash crunch following $18 billion of losses over three quarters, mainly on complex securities tied to mortgages that have declined in value.
“They were getting facials, manicures, and massages, while the American people were footing the bill,” said Rep. Elijah Cummings, a Maryland Democrat on the House Oversight and Government Reform Committee, criticizing the company sales outing held after the government loan.
Robert Willumstad, chief executive of AIG from June until he was replaced last month, told the oversight committee he was not aware of the retreat that included $200,000 in hotel rooms and $23,000 for spa services. “… had I been aware of it, I would have prevented it from happening.”
The oversight committee examined thousands of pages of internal documents produced by AIG and former executives.
Committee Chairman Henry Waxman revealed a letter from the Office of Thrift Supervision (OTS) and a warning by AIG’s accountants about material weaknesses at AIG.
“A material weakness exists within corporate management’s oversight of (the company’s financial products unit) super senior Credit Default Swap (CDS) valuation process and financial reporting,” said the March 10 letter to AIG’s board from the OTS, a division of the Treasury Department.
CDS are designed to protect against the risk a borrower will default on a debt.
ACCOUNTING RULE BLAMED
Former AIG chief executives blamed the company’s downfall on several factors, including mark-to-market accounting rules, which require companies to price their assets at current values, even when there is no market.
Beside Willumstad, the oversight panel also received testimony from Hank Greenberg, who left in 2005 after an accounting scandal for which he has denied wrongdoing. Martin Sullivan, who was CEO between Greenberg and Willumstad, appeared before the committee.
Greenberg submitted written testimony but did not appear at the hearing due to an illness.
Eric Dinallo, the top New York State insurance regulator, and former AIG CEOs Sullivan and Willumstad, told lawmakers they would back some type of regulation of the fast-growing $55 trillion CDS market.
“With benefit of hindsight, if there is good regulation that could be put in place… I would support that,” said Sullivan.
The Lehman and AIG hearings come just days after Congress passed and President Bush signed a $700 billion financial bailout package, giving the government vast powers to buy up bad mortgage-related debt.
But global markets have continued to swoon this week, prompting calls for a coordinated multinational cut in interest rates, aimed at encouraging the resumption of lending.
Republican lawmakers, as they did Monday at a hearing with Lehman Brothers chief executive Richard Fuld, tried to focus attention on housing finance companies Fannie Mae and Freddie Mac, that were seized by the government early in September.
Some Republicans are calling for a special counsel, or the Justice Department, to examine the companies’ role in the financial chaos. Waxman said his committee will hold a hearing on Fannie and Freddie’s role.
BONUSES AND VALUATION
Former AIG CEO Sullivan was quizzed by lawmakers for urging a compensation committee meeting in March to exclude losses from AIG’s Financial Products unit when calculating bonuses.
Accused of helping himself to more compensation, Sullivan said he did it to retain key executives. “I was focusing on them more than me.”
The congressional panel also found that AIG auditor Joseph St. Denis was kept off a valuation review of CDS because then financial products division chief Joseph Cassano worried he would “pollute” it. St. Denis, who later resigned in protest and lost his own bonus, had expressed concern about AIG’s valuation of financial product liabilities.
A decision to retain Cassano on a $1 million-per-month consulting contract when he left AIG also drew criticism from lawmakers. “I wanted to retain the 20-year knowledge that Mr. Cassano had,” Sullivan responded.
But lawmakers were incredulous. “It appears to me that he (Cassano) single-handedly brought AIG to its knees and is the reason taxpayers had to step in,” said Rep. John Sarbanes, a Maryland Democrat.
Lynn Turner, a former Securities and Exchange Commission chief accountant, said AIG had failed to be open about problems it was facing, even when it had hints of trouble. “I don’t think the company was ever honest with the investors about the potential magnitude of these things,” Turner testified.
New York’s Dinallo said lawmakers should consider revising the Gramm-Leach-Bliley law, which broke down barriers between investment and commercial banks and let them combine in new ways under one umbrella.
Some blame the landmark 1999 law for contributing to the current financial turmoil.
“I would take a serious look at Gramm-Leach-Bliley… and whether the supermarket of financial services is worth it when things kind of smell in aisle six,” Dinallo said.
(Reporting by Rachelle Younglai, Kim Dixon, Diane Bartz; Editing by Lisa Von Ahn and Tim Dobbyn)