Probe of AIG Financial Products Unit Focusing on 3 Executives

By | April 29, 2009

Federal investigators are focusing their attention on three employees at American International Group Inc.’s financial products unit amid a probe into derivatives contracts that nearly destroyed the insurance giant, according to a report in The Wall Street Journal.

In a statement, AIG said it is aware of ongoing investigations by the Department of Justice and Securities and Exchange Commission tied to the valuation of derivatives contracts and related disclosures. AIG noted it is cooperating with the investigation, but added it is not “aware of any fraud or malfeasance in connection with the underwriting and creation” of the derivatives contracts.

The investigation is focused on possible ways the three executives might have misled AIG’s auditors and investors about the value of derivatives products AIG sold, according to the report citing anonymous sources.

In September, AIG was undone not by its traditional insurance operations, but its financial products business which underwrote risky credit derivatives contracts known as credit default swaps. The swaps are essentially insurance contracts protecting an investor against default on an underlying investment, such as mortgage-backed securities.

Rising defaults amid the underlying investments led to worries that AIG would not be able to cover all the outstanding swaps contracts and the effects would touch of a new, even more intense period of the credit crisis.

On the brink of collapse amid the mushrooming credit crisis and amid fears that AIG could not cover all its potential obligations, the government provided AIG with an $85 billion loan in September. As market conditions worsened and losses piled up at the insurer, the government has revised and expanded its loan package to AIG multiple times. The package of loans now totals nearly $180 billion after being expanded in March when New York-based AIG reported a fourth-quarter loss of $61.7 billion, the largest ever quarterly corporate loss in U.S. history.

As part of the loan package, the government has also taken a roughly 80 percent stake in the insurance giant.

A spokesman for the SEC declined to comment. The Justice Department was not immediately available to comment.

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