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AIG's Sullivan: "Highly Unlikely" We'll Have To Pay Out On Credit Default Swaps
We took another quick look at that press release that AIG released in November 2007 about its third quarter earnings -- which is now reportedly being looked at by federal investigators as evidence that the firm may have deliberately misled investors.
And here's one line that jumps out. The release quotes CEO Martin Sullivan saying:
AIGFP reported an operating loss in the quarter due principally to the unrealized market valuation loss related to its super senior credit default swap portfolio. Although GAAP requires that AIG recognize changes in valuation for these derivatives, AIG continues to believe that it is highly unlikely that AIGFP will be required to make any payments with respect to these derivatives. (our itals)
Of course, we all know how that turned out.
This is hardly the only statement like this from an AIG exec expressing a rosy view of the company's position as late as the fall of 2007. But it's certainly a striking one.
There have been suggestions that Sullivan himself is among the AIG execs under scrutiny for misleading statements. Could this quote be one of the reasons?
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Josh
Zachary
I doubt Sullivan will suffer any legal consequences for making this statement. That's because Sullivan's statement, believe it or not, was probably true.
Obviously it wasn't true that it was "highly unlikely that AIGFP will be required to make any payments with respect to these derivatives." But that wasn't Sullivan's assertion. He asserted that "AIG continues to believe that it is highly unlikely that AIGFP will be required to make any payments with respect to these derivatives." I think it's probably true that AIG believed this. And once you get to that point, it's just a story about a horrible investment call, which isn't illegal.
Now, why they believed their CDO CDS would continue to be money-good is an interesting question. The rumor on credit trading desks since early 2008 has been that AIGFP literally didn't realize they were exposed to spread risk (a.k.a. mark-to-market risk) on their CDO CDS trades, and instead thought they were only exposed to default risk. That is, AIGFP thought they were only going to have to make payments when the CDO holder failed to receive a scheduled payment from one of the ABS underlying the CDO. They didn't think they were going to have to make payments to compensate for mark-to-market losses on the underlying. I tend to think that was probably a big part of the story, although I also think AIG just made a horrendous, horrendous call on the housing market.
April 28, 2009 9:45 PM | Reply | Permalink
I think what you mean is "criminal legal consequences" -- if what you say is true, that top managers simply didn't understand the provisions of the contracts to which the company was committed, that would be somewhere around the marianas trench on the fiduciary-responsibility scale.
April 29, 2009 9:53 AM | Reply | Permalink