Yesterday, we told you about how several AIG execs reassured investors at a December 2007 presentation that company risk officers had closely scrutinized the transactions of the financial products unit — the part of AIG that made those credit default swaps. And about how several pieces of evidence have surfaced in recent months that appear to contradict those claims.
This is serious business: US and British prosecutors are already investigating former AIGFP chief Joe Cassano, and, it appears, former AIG chief Martin Sullivan, for potentially painting an unduly rosy picture of the firm’s exposure to the sub-prime crash — and are said to be focusing on that December 2007 presentation in particular. So it’s worth taking a moment to lay out what exactly we know here, and what it might amount to.
At that presentation, AIG was at pains to reassure nervous shareholders that the credit default swaps done by Cassano’s team at AIGFP hadn’t left the company fatally exposed to the sub-prime collapse that was already well underway. As part of that process, a parade of execs marched to the podium to talk about the extensive process of risk analysis that AIG routinely performed on Cassano’s deals, in which, supposedly, company risk officers ensured that nothing was being done that could expose the company as a whole to undue risk.
In addition to Cassano and Sullivan, two other AIG execs, chief risk officer Bob Lewis and chief credit officer Kevin McGinn, made statements to that effect.
Here’s what each said on the topic (all itals ours):
[W]e don’t have any shortcuts, including … the approval of the AIG Head Office Enterprise Risk or the Credit Risk Group at AIG. So there’s always two eyes, two teams reviewing our business. There is not one dollar of this business that’s been done that hasn’t gone through that double review check.
]W]e are very proud of our risk management culture and practices. The many years AIG has been a — has had a centralized risk management function that oversees the market, credit and operational risk management units in each of our businesses as well as at the parent company. We have our arms around what is happening through AIG and believe we have demonstrated this through timely and comprehensive disclosure and accuracy in our reporting. Most importantly, the effectiveness of AIG’s risk management efforts will come through in our results.
What we do at the holding level is to ensure that that’s done with integrity, done with quality and that the aggregation of those risks do not rise to anything that would be a concentration of risk at the AIG level.
[M]ost importantly we have portfolio reviews where all businesses in AIG, including all of these today, that have exposure to any sort of credit exposure but specifically to mortgages, at least once a year and, depending on risk, more frequently than that, come and have portfolio reviews of their business in front of the Credit Risk Committee which, as I said, is made up of this interdisciplinary group of executives in the corporation.
I just want to confirm this about the relationship that we have with AIG Financial Products. The Super Senior business of AIGFP is a business that we have been really involved with from the very inception of the business over ten years ago, initially through Bob when he was Chief Credit Officer of the corporation and since I took over in the middle of 1994.
But essentially every single Super Senior transaction does come down to our Committee. AIG Financial Products doesn’t have credit authority really to approve that on its own. We challenge Joe and his team on, we basically challenge his assumptions, we stress the book, we run some independent tests to make sure that all the assumptions that he’s made are valid and we indeed approve those transactions. Some of them are of a size that require the further sign off by either Bob or Steve and in some cases, if they go into very high amounts, by Martin Sullivan himself. So that’s a very, very active process.
McGinn, here, is particularly specific, assuring his listeners that the entire “Super Senior” tranche of the credit default swaps was inspected in detail by the committee.
Now lets look at the evidence that has since come to light, contradicting these claims.
- When AIG CEO Ed Liddy was asked during congressional testimony last month about this very question of risk management, he replied: “We had risk-management practices in place. They generally were not allowed to go up into the financial-products business.” Pressed as to how that could be, Liddy replied: “You need to get the people who ran FP — Mr. Cassano — and the people who ran AIG before my arrival, and ask them that question.”
- At a January 2008 meeting, AIG’s auditor, PricewaterhouseCoopers expressed concern about the access to AIGFP enjoyed by risk officers, including Lewis’ team, saying that that access “may require strengthening,” according to minutes of the meeting reported by the Wall Street Journal.
- And in March 2008, the Office of Thrift Supervision, which nominally regulated AIGFP, sent a letter to AIG, later released by Congress. OTS said that AIGFP “was allowed to limit access of key risk control groups while material questions relating to the valuation of the [swap portfolio] were mounting.” One of the risk control groups named by OTS was Lewis’ team.
So there’s substantial evidence that the comments of Cassano, Sullivan, Lewis, and McGinn at that December 2007 meeting were, to put it mildly, misleading.
Barbara Black, an expert in securities law at the University of Cincinnati College of Law, confirmed to TPMmuckraker that knowingly giving false information to investors about a material issue could potentially make one criminally liable. And Black said that on its face, the issue of risk control procedures could certainly be considered a material issue in this context.
Of course, there’s no evidence so far that criminal investigators have anyone in their sights beyond Cassano and Sullivan — and the former certainly seems to be the focus for now. But could others like Lewis and McGinn be next?