Disability Law

AIG Knew About Valuation Problems

By Patrick Hindert

Despite denials by former AIG CEO Martin Sullivan last week before a Congressional subcommittee, a Wall Street Journal article (subscription required) published this weekend offers evidence that top AIG officials knew about problems in valuing derivative contracts as early as October 2007.

During his October 7, 2008 testimony, Sullivan stated he truly believed what he told AIG investors on December 5, 2007: "that AIG has accurately identified all areas of exposure to the U.S. residential-housing market; ...we are confident of our marks and the reasonableness of our valuation methods".

Criminal prosecutors are currently investigating whether AIG executives misled AIG's outside auditor and AIG investors about the value of its derivatives.

The WSJ article reports that Joseph St. Denis, a former AIG internal auditor who resigned October 1, 2007, has written a letter of the House Committee on Oversight and Government Reform stating that he learned in early September 2007 that AIG Financial Products had been asked by its trading partners for billions of dollars of collateral related to AIG derivatives. In his letter to Congress, Mr. St. Denis stated the valuation model of one of AIG's trading partners indicated AIG Financial Partners "was in a potentially material liability position."

Another reason for his resignation, according to Mr. St. Denis, were statements made to him by Joseph Cassano, CEO of AIG Financial Products, that Cassano had "deliberately excluded" Mr. St. Denis from evaluating the AIG derivatives "because [Cassano] was concerned that [St. Denis] would pollute the process."

In his letter to Congress, Mr. St. Denis claims that later in October 2007, following his resignation, he told AIG's chief auditor, Michael Roemer, why he had resigned and Roemer said he would report those reasons to AIG's audit committee.

In addition, in November 2007, the WSJ article reports AIG's external auditor, PricewaterhouseCoopers, told Mr. Sullivan, then AIG's CEO and Steven Bensinger, AIG's Chief Financial Officer, that "it believed that AIG could have a material weakness" in its risk management according to minutes of an AIG audit committee meeting which were also released to Congress.

In other weekend news about AIG, Senator Max Baucus, Chairman of the Senate Finance Committee and a longtime supporter of structured settlements, wrote to Federal Reserve chairman Ben Bernanke on Friday denouncing AIG's earlier sales retreat in California. Senator Baucus stated: ?If AIG was throwing money around for tee times and hot stone massages while begging for Federal Reserve dollars, it?s a scandal and an outrage and heads will roll. I want to know who we can fire and how we can get this misspent money back, and I want both of those things to happen pronto.?

For additional S2KM coverage of AIG, see this AIG Structured Settlement Wiki which features an updated AIG structured settlement timeline.

Full post as published by Beyond Structured Settlements on October 12, 2008 (boomark / email).