AIG's auditor scandal

[seemslikeadream]

SEE NO EVIL

SEE NO EVIL


AIG's former CEO Martin Sullivan ignored the resignation of an auditor who was looking at the insurer's derivatives unit, a congressional investigation alleged.

AIG's auditor scandal
Insurer could have avoided demise if it focused on swaps-unit claims by auditor, who resigned after being denied access, lawmaker charges



By Neil Roland
October 12, 2008 12:01 AM ET

American International Group might have averted disaster if its top executives had paid attention to an internal auditor sniffing around the edges of the insurer's derivatives unit, a congressional investigation found last week.

Instead, they turned away when the highly regarded auditor, a former assistant chief accountant in the SEC's enforcement division, resigned after being blocked from access to the unit's finances by its London-based chief, House Oversight and Government Reform Committee chairman Henry Waxman said.

The findings undercut the contentions of former chief executives Martin Sullivan and Robert Willumstad that the insurance giant was lashed by economic forces and regulatory policies outside its control.

The House panel's investigation found no record of the auditor's resignation in the notes of any board meetings, although the matter had been brought to the board's attention, the California Democrat said.

“It looks like you both brushed it aside,” Mr. Waxman told the former CEOs at a hearing. “He could have given you information that later brought AIG to its knees.”

The disclosures suggest the possible role of mismanagement or even fraud in the demise of the New York-based company that was once the world's largest insurer. It was taken over by the federal government last month, has received $122.8 billion in federal loans, and is trying to sell assets.

Federal investigations disclosed in June are looking into whether AIG executives misled investors about the value of credit default swaps tied to subprime mortgages. The swaps, contracts sold to investors to insure against bond defaults, have led to billions of dollars in AIG write-offs.

[aquart]

1. Then we CAN send them to jail? Please say "YES!"

[malaise]

8. YES

They should all be in prison

[BrklynLiberal]

2. Gawd.. What a PIG!!!

[Snazzy]

3. Joseph Cassano, Mike Milken's protege

Think the $400+K party was bad, check out this guy:

Former AIG Exec at Center of Meltdown Got Paid Millions for Little Work
by Paul Kiel, ProPublica - October 10, 2008 5:35 pm EDT
Tags: AIG, Joseph Cassano, Wall Street Bailout

AIG building on Fenchurch Street, London (Clive Gee/PA Wire)One of the biggest reasons for AIG's near failure -- a collapse halted by a government bailout of $120 billion and growing -- was the ballooning losses of a tiny subsidiary called AIG Financial Products. The unit was run by one Joseph Cassano, who resigned in February after his unit, which dealt in credit default swaps, posted $11 billion in losses. (The New York Times says February is also when AIG auditors "identified problems in the firm's swaps accounting.")

But when Cassano left, AIG gave him a sweet deal. Not only was he allowed to keep up to $34 million in unvested bonuses, but the company hired him as a consultant at the staggering fee of $1 million per month.

...

Ashooh couldn't provide an exact date for when Cassano stopped providing services, but said it was the early part of the summer. In other words, even after the U.S. government stepped in to save AIG last month, the man at the center of the company's problems, Cassano, remained on as a million-dollar-a-month do-nothing consultant.

The contract was for a nine-month period to end this coming December. But Cassano and AIG mutually terminated their agreement on Monday, the day before the hearing. The reason, Cassano's lawyer told the Wall Street Journal, was that Cassano's "services were no longer being used."

http://www.propublica.org/article/former-aig-exec-at-center-of-meltdown-got-paid-millions-for-little-work-101


---------
AIG Replaces Sullivan With Willumstad After Shareholder Outcry

June 16 (Bloomberg) -- American International Group Inc., the world's biggest insurer, ousted Chief Executive Officer Martin Sullivan after record losses, a sagging stock price and criticism from the man he succeeded in 2005, Maurice ``Hank'' Greenberg.

...

AIG's financial-products unit issues credit-default swaps, contracts that promise to reimburse investors for losses on securities that included subprime assets. The business started issuing swaps a decade ago under Greenberg.

Those guarantees declined in value by about $20 billion in the past two quarters. The financial products business was co- founded in 1987 by Joseph Cassano, a former executive at Drexel Burnham Lambert, the securities firm that helped popularize ``junk-bond'' investing before it collapsed. Cassano stepped down in February.

http://www.bloomberg.com/apps/news?pid=20601103&refer=us&sid=atr9TumqGJQo

-------

AIG Former Auditor Warned About Derivative Valuation in 2007

By Ari Levy

Oct. 11 (Bloomberg) -- A former American International Group Inc. auditor told the insurer in 2007 that methods used by its financial products division to value derivatives might be flawed, according to documents from a Congressional hearing.

AIG hired Joseph St. Denis to audit the company's accounting, according to testimony at an Oct. 7 hearing of the House of Representatives Committee on Oversight and Government Reform. St. Denis's written statement said he raised concern that certain credit-default swaps might be poised for losses, which wasn't supposed to be possible, and that financial products head Joseph Cassano blocked his input.

``I have deliberately excluded you from the valuation because I was concerned that you would pollute the process,'' Cassano allegedly told St. Denis, according to his written testimony and Committee Chairman Henry Waxman. In September 2007, St. Denis resigned in protest, according to his testimony and Waxman.

....

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=abA6LSQ.3KPM

------

The Reckoning
Behind Insurer’s Crisis, Blind Eye to a Web of Risk

By GRETCHEN MORGENSON
Published: September 27, 2008

“It is hard for us, without being flippant, to even see a scenario within any kind of realm of reason that would see us losing one dollar in any of those transactions.”

— Joseph J. Cassano, a former A.I.G. executive, August 2007


...

Although America’s housing collapse is often cited as having caused the crisis, the system was vulnerable because of intricate financial contracts known as credit derivatives, which insure debt holders against default. They are fashioned privately and beyond the ken of regulators — sometimes even beyond the understanding of executives peddling them.

Originally intended to diminish risk and spread prosperity, these inventions instead magnified the impact of bad mortgages like the ones that felled Bear Stearns and Lehman and now threaten the entire economy.

In the case of A.I.G., the virus exploded from a freewheeling little 377-person unit in London, and flourished in a climate of opulent pay, lax oversight and blind faith in financial risk models. It nearly decimated one of the world’s most admired companies, a seemingly sturdy insurer with a trillion-dollar balance sheet, 116,000 employees and operations in 130 countries.

...
The London Office

The insurance giant’s London unit was known as A.I.G. Financial Products, or A.I.G.F.P. It was run with almost complete autonomy, and with an iron hand, by Joseph J. Cassano, according to current and former A.I.G. employees.

A onetime executive with Drexel Burnham Lambert — the investment bank made famous in the 1980s by the junk bond king Michael R. Milken, who later pleaded guilty to six felony charges — Mr. Cassano helped start the London unit in 1987.

The unit became profitable enough that analysts considered Mr. Cassano a dark horse candidate to succeed Maurice R. Greenberg, the longtime chief executive who shaped A.I.G. in his own image until he was ousted amid an accounting scandal three years ago.

But last February, Mr. Cassano resigned after the London unit began bleeding money and auditors raised questions about how the unit valued its holdings. By Sept. 15, the unit’s troubles forced a major downgrade in A.I.G.’s debt rating, requiring the company to post roughly $15 billion in additional collateral — which then prompted the federal rescue.

Mr. Cassano, 53, lives in a handsome, three-story town house in the Knightsbridge neighborhood of London, just around the corner from Harrods department store on a quiet square with a private garden.

....

http://www.nytimes.com/2008/09/28/business/28melt.html?pagewanted=1&ref=todayspaper

(lots more there, good read on how AIG with the help of Cassano's junk bond Milken techniques turned onto mortgages ruined the economy. I know I've seen this here on DU before, but it really is right out of the mob playbook. They took an entity with the best credit there was, the company insuring everything else pretty much, and used it to back this entire market of junk mortgages that everyone (well everyone who had a clue, Krugman for example been saying this for years) knew would blow up one day. There was nothing backing it, just like the scene in Goodfellas where they are selling everything out the back door of a bar the mob has taken over, at a loss. Cassano probably bailed on Drexel just before hammer came down on Milken and the company itself became a felon--still hitting some google).

:hi:

[seemslikeadream]

4. Oh the humanity

NO MORE BOTTLED WATER!


:hi:

[Snazzy]

12. let them eat cake

Bankrupt AIG Underwrote McCain's 'Reform Institute'
By Mark Ames

September 19, 2008

John McCain is making a big show of criticizing the government "bailout" of insurance giant AIG. But it turns out that AIG, which received $85 billion in US tax dollars earlier this week, is one of the largest donors to McCain's pet think tank, the comically named "Reform Institute," which he co-founded in 2001 "in direct response to the millions of Americans who, during the 2000 presidential campaign, expressed profound disillusionment with corrupt fundraising activities."

Apparently, AIG was so troubled over the issue of corrupt fundraising activities that they loaded in as one of the top VIP donors in McCain's nonprofit think-tank, whose website lists AIG in the "over $50,000" donor category--although exactly how much over that $50,000 is still unclear. Nor is it clear why AIG had any business donating so much money to a think tank whose work in no way overlapped with the insurance company's--unless, of course, that money was just meant to gain access to McCain.

The "Reform Institute" has taken a lot of heat as a front organization designed to funnel money to McCain's political career. As Ari Berman wrote, McCain's campaign co-chair, Rick Davis, served as the president of the nonprofit Reform Institute for three years, earning $395,000 in salary. Davis also headquartered his lobbying firm, Davis Manafort, in the Reform Institute's offices at that time. He is just one of several McCain people who passed through the Reform Institute's revolving door while McCain prepared for the 2008 campaign. McCain formally stepped down from his own institute in 2005, but he remains deeply linked to the Reform Institute to this day.

So when McCain declared this week that "The government was forced to commit $85 billion" to his mega-donor AIG, the question becomes, "What forced you to do it?" The American taxpayers never got a red cent in donations from AIG--but now, they're being forced by people like McCain, whose career profited from AIG donations, to buy his backer's massively indebted trash heap in what can only be described as the worst business deal in this nation's history, or the worst example of crony nationalization. AIG isn't just funding McCain's policy think tank, it's also quite literally thinking for the presidential hopeful. Martin Feldstein, who serves on the board of AIG, is one of McCain's top economic advisers. Earlier this month, Feldstein gushed in the Wall Street Journal over McCain's plans to cut taxes even further, and to shift healthcare costs from employers to employees in a "tax credit" scheme that many believe will solely benefit insurance companies, at the expense of workers. Since AIG is--or was--the world's largest insurance company, it stood to gain from McCain's policies.

....

http://www.thenation.com/doc/20081006/ames

[DrDebug]

5. Drexel?

AIG-FP was founded as a partnership between Hank Greenberg of AIG fame and Howard B. Sosin who was also a trader at Drexel

Cassano was a protégé of A.I.G-Financial Products' first leader, Howard B. Sosin. Both men joined the insurance company from joined A.I.G. from Drexel Burnham Lambert, the Wall Street firm that grew into a junk bond powerhouse thanks to Michael Milken. Drexel collapsed in 1990.

Three years earlier, A.I.G.-Financial products was created as a joint venture between Greenberg and Howard B. Sosin., a former trader from Drexel.

Known as the "Dr. Strangelove of Derivatives," Sosin was regarded as a quantitative genius. He wrote scholarly articles on derivatives and briefly taught at Columbia Business School. Indeed, his inventive wizardry extends beyond the world of finance. He has registered numerous patents, one for a golf club that accomodates a golfer's special swinging style.

In his new job at AIG-Financial Products, Sosin he was given an unusual deal: a 20 percent stake in the unit, and 20 percent of its profits.

Under Sosin, the unit dived deeply into the nascent world of derivatives. It later branched out into energy, currencies, and commodities, and bought assets from cattle to the London City Airport.

But the fast-dealing culture caught Greenberg's wary eye. By the early 1990s, Greenberg, who ruled the company with an iron fist, had grown so concerned about the unit's derivatives dealings that he formed a secret "shadow team" of traders to mimic A.I.G,-Financial Product's trades, according to a former company executive.

(...)

The C.E.O. ordered Sosin to dial it back, but Sosin refused. He left the company in mid-1993 and sued A.I.G. He later received a payout of over $180 million from A.I.G.

(...)

http://www.bnet.com/2459-14037_23-237553.html

So Hank Greenberg's story that he trust his successors make sense, because he didn't trust that London unit. So with Greenberg out of the way, Sosin's protege finally had his hands free...

However the name Drexel is familiar:

Early years of J.P. Morgan

Morgan entered banking in 1857 at his father's London branch, moving to New York City the next year where he worked at the banking house of Duncan, Sherman & Company, the American representatives of George Peabody & Company. From 1860 to 1864, as J. Pierpont Morgan & Company, he acted as agent in New York for his father's firm. By 1864–72, he was a member of the firm of Dabney, Morgan & Company; in 1871, he partnered with the Drexels of Philadelphia to form the New York firm of Drexel, Morgan & Company.

During the American Civil War, Morgan was approached to finance the purchase of antiquated rifles being sold by the army for $3.50 each. Morgan's partner re-machined them and sold the rifles back to the army for $22 each. The military knew it was buying back its own guns, so the so-called 'scandal' turned out to be more about government inefficiency than any chicanery by Morgan (who never even saw the guns and acted only as a lender). Morgan himself, like many wealthy persons, including future Democratic president Grover Cleveland, avoided military service by paying $300 for a substitute.<1>

After the 1893 death of Anthony Drexel, the firm was rechristened J. P. Morgan & Company in 1895

(...)

http://en.wikipedia.org/wiki/J._P._Morgan

So what event involved London and J.P. Morgan as well? Wasn't that the Great Depression of 1929 ...

[seemslikeadream]

6. How did you know I needed the Dr.

:hug:

[DrDebug]

7. Thanks.

Still trying to fit some of the pieces of the puzzle, because even though AIG was my old nemesis, they failed, so my first reaction was a bit of schadenfreude and relief, because I thought that a tsunami was prevented, however it seems to have accelerate. So the question remains: How could AIG and others fail? And the information thus far gives some clue, however it is still not clear.

Drexel Burnham Lambert is the continuation of the same Drexel & Co which also gave birth to J.P. Morgan & Co. Even though I haven't figured it out and we are merely looking at possible related pieces of the puzzle, the Cui Bono points to J.P. Morgan, Goldman Sachs, and the Federal Reserve.

BTW Don't fight too much, my dear :hug:

[seemslikeadream]

10. I know

It's the celt

[middlegrounder]

9. They're rich. Expect a 3-month sentence

Whereas I would likely get 6 months for stealing a chicken.

[seemslikeadream]

11. ~Meet The Real Terrorists~

CEOs: (From left) Robert Willumstad (July 2008-September 2008), Martin Sullivan (2005-2008), Maurice (Hank) Greenberg (1968-2005)

Company: American International Group (AIG). world's largest insurance firm

On their watch: In Willumstad's brief tenure, AIG stock plunged from around $27 a share
to $2 a share, and the ailing firm agreed to an $85 billion government bailout. Sullivan left
after two quarters of record losses and $20 billion in sub prime-mortgage-related losses.
Greenberg was credited with shaping AIG into the world's largest insurer but was forced
out in 2005 due to a fraud investigation. No charges were filed against him.

Payout: $7 million for Willumstad's three months of work, $47 million for Sullivan and for Greenberg, despite the investigation, a 12 percent stake in AIG. That stake, however, isn't worth what it was once was. After the government bailout, Greenberg's $3billion interest nearly disappeared, and he dropped off the Forbes list of the richest people in the world





CEO: Ken Thompson

Company: Wachovia

On his watch: Shareholders called for his ouster at their annual meeting in April 2008 following a first-quarter loss and a dividend cut of 41 percent. Thompson had earlier promised the dividend would not be cut. He also came under fire for his $25 billion purchase of home lender Golden West, a deal he made at the height of the housing boom. He is shown here (at left) arriving at the April meeting. He resigned the next month.

Payout: $8.7 million



CEO: Michael Perry

Company: IndyMac Bank

On his watch: The bank collapsed in July 2008, in what regulators called the second largest bank failure in U.S. history. Despite mouting losses from delinquent loans in 2007, Perry insisted in December that the bank would be profitable by the second half of 2008. A protege of former Countrywide CEO Angelo Mozilo, Perry was 45 when he was removed from his 15-year tenure as CEO during the FDIC's takeover.

Payout: Unknown. Forbes, however, listed Perry's five-year compensation total from IndyMac as $37.49 million.





CEOS Daniel Mudd and Richard Syron

Company: Fannie Mae (Mudd) and Freddie Mac (Syron)

On there watch: Earlier this year, Mudd predicted Fannie would "feast" on the reduced competition in the mortgage insurer suffered four consecutive quarters in the red amid the worst housing crisis since the Great Depression. Likewise, Syron reportedly rejected internal warnings that could have protected Freddie from the crises that ultimately brought it down. Fannie shareholders lost $52 billion as the stock plummeted 83 percent,while Freddie shareholders watched $36 billion go down the drain as its share price slumped 85 percent and its value sank to negative $5.6 billion. By the time the U.S. government extended a $2.25 billion credit line to each in July, Fannie's debts had reached $800 billion and Freddie's had reached $740 billion.

Payout: Zero. Regulators axed contract provisions that would have awarded both men hefty exit packages. Mudd was set to receive $9.3 million in exit pay, on top of his $12.4 million in salary, bonuses and stock profits. Syron's exit package could have amounted to at least $14.1 million. He has made $17.1 million in salary, bonuses and stock profits since becoming CEO in 2003.





CEO: Richard Fuld

Company: Lehman Brothers

On his watch: The firm declared bankruptcy on Sept. 15. In April he proclaimed to shareholders that "the worst is behind us," but for months he had dodged queries about the firm's exposure to toxic subprime debt.

Payout $22 million






CEO: Angelo Mozilo

Company: Country Financial

On his watch: The founder of the ill-fated mortgage giant, Angelo Mozilo, 69, was at the helm during the subprime fiasco that led to the broader credit crisis, Mozilo swore Countrywide would ride out the turmoil and emerge bigger than ever. Instead, he cashed out his stock options as Countrywide headed into a nosedive this year. To date, the company's worth has shrunk from about $25 billion to $2.5 billion.

Payout: $121.5 million. Mozilo gave up $36.4 million in severance pay, but is under SEC investigation for his $121.5 million stock gains.





CEO: Stanley O'Neal

Company: Merrill Lynch

On his watch: Shortly before his ouster last October, Merrill reported $7.9 billion in write-downs related to O'Neal's blundering forays into risky subprime-mortgage territory. O'Neal had snatched up subprime lender First Financial in late 2006, a move Portfolio magazine had likened to having "all the strategic wisdom of a foray into Havana real estate in 1959." Merrill's write-downs have since climbed to $45 billion.

Payout: $161.5 million




CEO: Charles Prince

Company: Citigroup

On his watch: Before he stepped down in November 2007, Citigroup, the world's largest bank, reported a 57 percent drop in quarterly earnings and lost nearly a quarter of its market value. "It is my judgment that -given the size of the recent losses in our mortgage-backed securities business, the only honorable course for me to take as chief executive officer is to step down, "he said.

Payout: $68 million





CEO: Jimmy Cayne

Company: Bear Stearns

On his watch: After serving as CEO for 15 years, Jimmy Cayne was conspicuously absent in the firm's final months. When Bear first disclosed mortgage losses last year, Cayne was at a Nashville bridge tournament. Eight months later, as Bear's non-executive chairman and as the company began its final descent, Cayne was at the North American Bridge Championships, where he could not be reached. Bear was sold days later to JPMorgan Chase at the bargain-basement price of about $10 a share, down from about $170 a share in 2007. Cayne had been worth about $1 billion in 2007, before Bear's demise shaved his savings down to about $600 million.

Payout: $61.3 million. Cayne and his wife dumped their Bear stock during the JPMorgan takeover. He will also receive another $4.6 million in JPMorgan stock.