AIG: Derivative Danger Known in 2007
How aware was AIG that it had a major, company threatening derivative problem?
Very:
"Top officials at American International Group Inc. knew of potential problems in valuing derivative contracts long before these risky transactions caused the insurer's shareholders severe pain, according to documents released by congressional investigators.
The disclosures come as prospects dimmed this past week for AIG's efforts to quickly sell assets to repay its bulging debt to the government. The derivative-contract problems would have driven AIG into bankruptcy; in the past month, the government has made available to AIG nearly $123 billion in a rescue plan...
At congressional hearings Tuesday, a former internal AIG auditor wrote that he had early on raised concerns about being excluded from conversations about the valuation of the derivatives. The auditor, Joseph St. Denis, wrote in a letter to the House Committee on Oversight and Government Reform that in early September 2007, he learned that AIG's financial-products unit had been asked for billions of dollars in collateral related to derivatives it had sold...
[November 2007] AIG said it would discuss the financial-products business at an investor conference on Dec. 5. An official at PricewaterhouseCoopers, AIG's external auditor, said the firm told then-AIG Chief Executive Martin Sullivan and his chief financial officer, Steven Bensinger, on Nov. 29 that it "believed that AIG could have a material weakness" in its risk management, according to minutes of a January meeting of the AIG board's audit committee, also released by Congress."
Fascinating stuff . . .
>
Source:
Documents Show AIG Knew Of Problems With Valuations
LIAM PLEVEN and AMIR EFRATI
WSJ, OCTOBER 11, 2008
http://online.wsj.com/article/SB122368147261224877.html
See also:
Behind Insurer’s Crisis, Blind Eye to a Web of Risk
GRETCHEN MORGENSON
NYT, September 27, 2008
http://www.nytimes.com/2008/09/28/business/28melt.html
Insurance Industry Joins Banking Giants on the Hot Seat
MARY WILLIAMS WALSH
NYT, October 9, 2008
http://www.nytimes.com/2008/10/10/business/10place.html
Sunday, October 12, 2008 | 08:00 AM | Permalink
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They were so aware, they cut the 24-hour in-room cavier buffets from their retreat.
Posted by: Steve Barry | Oct 12, 2008 8:21:11 AM
This fits in precisely with the ratings agencies. It reminds me of the Financial Times article last spring when it was found that Moody's had made a mistake in its computer code for valuing CPDOs. Moody's was trying to find ways to fix the error in February 2007. The problem, when the mistake was fixed, a AAA derivative would be rated substantially less.
Posted by: Don | Oct 12, 2008 8:26:13 AM
Steve Barry,
Seems such a long time ago from your post in January, that this would be S/P worse year. I was, and am still with you every step of the way. I honestly though didn't think we would see the 850's till spring of 09'. Nice call Steve. Scary, we still have a rise in unemployment, commercial r.e., and state/local governments to take the hits. For the last 12 months I have been in cash (posted in here back then), but finally wanted to dip my toe back in the water. I wanted to get back in the market on Friday. Some of the 'values' seem decent.
Posted by: Brian | Oct 12, 2008 8:35:06 AM
The "material weakness" seems to be in admiting the truth - in much the same way an addict has trouble with the truth when confronted by a cop, or a tipsy teenager has trouble when facing the parents at 3 a.m.
Posted by: Winston Munn | Oct 12, 2008 8:40:44 AM
Brian...good move to you as well...just remember, as I posted the last few days...if you apply an average market trough to the S&P of price to sales, the S&P should trade at around 700...that assumes sales will stay flat with current levels (very risky assumption).
As for state governments, I haven't checked universally, but NY munis are in utter collapse.
Posted by: Steve Barry | Oct 12, 2008 8:47:05 AM
If this is true, then Sullivan needs to be charged with perjury in his testimony before Congress last week. If you watched his testimony and questioning that followed, he was a model of obsequious denial in claiming he had no inkling whatsoever about the risks his company was facing.
Posted by: number2son | Oct 12, 2008 9:12:18 AM
Steve,
Yes, I understand, for the lower s/p number. Market just needs a nice dead cat bounce for about 6-8 weeks. Was thinking about taking that long, then exiting into it. Selling last year when CNBC was throwing ticker tape cause dow went over 14,000 was a clear signal to exit. Now, they are having constant specials on how to protect your portfolio. Mouthwatering to buy now when everyone is selling. I should explain that in the long run, I agree we should see much lower and experience further extreme financial difficulties.
Posted by: Brian | Oct 12, 2008 9:18:38 AM
At some point I think we will see a Special Commission charged with putting some people from the Boy's Club away in the Big House. I think that AIG is a good place to begin forensic criminal accounting investigations. I would suggest Meredith Whitney and Janet Tavakoli as suitable panel members. Any other ideas?
Posted by: leftback | Oct 12, 2008 10:15:48 AM
If this is true, then Sullivan needs to be charged with perjury in his testimony before Congress last week. If you watched his testimony and questioning that followed, he was a model of obsequious denial in claiming he had no inkling whatsoever about the risks his company was facing.
Posted by: number2son | Oct 12, 2008 9:12:18 AM
#2son,
the only thing that could 'save' Sullivan, from a CJ-POV, is the hoary retinue of: "what did he know? and when did he know it?"-- Compartmentalization exists for more than one reason..
Past that nit, though, should be interesting to see if SarbOx is ever utilized in gathering any of the heads that pulled this off..
Further, AIG is hardly unique, though, the 'music' stopped for these firms, en masse, last year--I had a post, to that effect, last year @ Econbrowser, but, it seems, it has been Memory Holed..I guess that's what happens when your Tenure gets threatened..
Posted by: Mark E Hoffer | Oct 12, 2008 10:57:10 AM
lb,
didn't see your post, good as it is, don't hold your breath--few, if any, of these guys will get a Sun-free vacation..
+ they're just cut-outs, anyways..we'd be better served to : "Defund to Defend"/ take the Engine (the FedRes) out of their Boat, and cut them adrift..
Posted by: Mark E Hoffer | Oct 12, 2008 11:01:33 AM
Senior Execs at AIG should begin the perp walk parade, no? It's obvious there was rampant systemic criminality here. This is just the beginning. It's going to take years to sort through this mess and charge/indict/convict these criminals but it needs to be done as one step to restoring this country's faith in our capital markets.
Posted by: Jeff M. | Oct 12, 2008 11:04:04 AM
I agree Jeff M, the nation demands perp walks !!
BTW, sorry I didn't communicate Friday re:GDX, it was the first day I can recall being temporarily out of my mind and I had to go cold turkey for 24 hours to recover!
I had an epiphany on Friday - I saw the possibility of mass nationalization and another short ban coming down the pike so I bailed from all except my short bond positions. Opportunities can be made up later.
I have a few thoughts on GDX. Obviously it is a leveraged play on the price of gold, but it is a basket of stocks so when there is index short selling it goes down with the ship as we have seen in recent days.
You will have also noticed that gold has been going up overnight recently (gold here acting as a safe haven or fear trade) and then selling off during the day, esp when the $ is gaining (eg Friday). My best GDX trades have been to buy it at the end of big down days and then sell at the open in the morning after gold has run up overnight.
The second function of gold (as inflation hedge or even future monetary standard) is obviously a longer term issue, and remains very much in play over the next few months of this crisis.
Posted by: leftback | Oct 12, 2008 11:44:48 AM
Jeff + lb,
let's see what happens, though, if you want 'perp walks' and Show Trials, it'll be like living through WW II, in Reverse.
IOW, it'll be just a 'Bread 'n Circuses' Distraction, role played by inconsequential/never severely penalized 'Scapegoats', while the real Carnage rages in the streets..
Jeff,
to this: "restoring this country's faith in our capital markets."
Peep would be better served using the 'years', you mentioned, to rebuild their Faith in Themselves, their Families, Communities...
The sooner Main St. tears up the, one-way, Path to Wall St., the quicker it'll be back on the road to Health.
Charlie Merrill should be burned in effigy.
Posted by: Mark E Hoffer | Oct 12, 2008 4:58:00 PM
