Oversight Committee Holds Hearing on the Causes and Effects of the AIG Bailout

Posted on by Karina

Today, the Oversight Committee is holding a hearing to examine the regulatory mistakes and financial excesses that led to government bailout of AIG. Watch the live webcast >>

Watch Chairman Waxman’s opening statement:


Today we are holding our second day of hearings on the financial crisis on Wall Street.

Yesterday, we examined the collapse of Lehman Brothers. Our focus today is AIG.

There are obvious differences between Lehman and AIG. Lehman is an investment bank; AIG is an insurance company. Lehman fell because it placed highly leveraged bets in the subprime and real estate markets; AIG's problems originate in complex derivatives called credit default swaps.

But their stories are fundamentally the same. In each case, the companies and their executives grew rich by taking on excessive risk. In each case, the companies collapsed when these risks turned bad. And in each case, their executives are walking away with millions of dollars while taxpayers are stuck with billions of dollars in costs.

The AIG CEOs are like the Lehman CEO in one other key respect: in each case, they refuse to accept any blame for what happened to their companies.

In preparation for this hearing, the Committee has received tens of thousands of pages of documents from AIG. Our review of the documents raises three fundamental sets of questions. Answering these questions will be the focus of today's hearing.

The first set of questions is whether AIG's executive compensation practices were fair and appropriate.

AIG has a “Senior Partners Plan” that provides cash bonuses for its top 70 executives. This plan is supposed to be performance based. In 2005, AIG's CEO, Martin Sullivan, received $2.7 million under this plan. In 2006, his first full year as CEO, he received $5.7 million under the plan.

These payments are not in question. Both years were good for AIG, and as CEO, Mr. Sullivan naturally was well rewarded.

2007 is a completely different story. AIG lost over $5 billion in the final quarter of 2007 due to losses attributable to its financial products division, called AIG FP. Under the terms of the “Senior Partners Plan,” Mr. Sullivan and the other top executives should have had their bonuses slashed due to poor performance.

But when the compensation committee met on March 11, 2008, to award bonuses for 2007, Mr. Sullivan urged the committee to ignore the losses from the financial products division in calculating his bonus and the bonuses of other top executives.

We obtained a copy of the minutes from that meeting. Here is what they say:

Mr. Sullivan next presented Management's recommendation with respect to the earnout for the Senior Partners Plan, suggesting that the AIGFP unrealized market valuation losses be excluded from the calculation.

The board approved this change in the “Senior Partners Plan,” ignored the losses from the financial products division, and gave Mr. Sullivan a cash bonus of over $5 million.

Today we will ask what could possibly justify this change in the compensation formula.

There are other compensation questions we will also ask. In March, the board approved a new compensation contract for Mr. Sullivan that gave him a golden parachute worth $15 million. We will ask why that was in the interests of the shareholders.

And we will ask about the compensation of Joseph Cassano, who was the executive in charge of the financial products division. Mr. Cassano was well compensated by AIG. He received more than $280 million over the last eight years.

After his division imploded, AIG terminated him without cause in February and did not seek to recover any of Mr. Cassano's compensation. Instead, AIG allowed him to keep up to $34 million in unvested bonuses and put him on a $1 million a month retainer.

Last month, the taxpayers bought out AIG in an $85 billion bailout. This was a direct result of the mistakes made by Mr. Cassano. Yet even today, he remains on the company payroll, receiving $1 million a month.

The federal bailout occurred on September 16. Less than one week later, AIG held a week-long retreat for company executives at the exclusive St. Regis Resort in Monarch Beach, California. A photograph of the resort is on display.

Rooms at this resort can cost over $1,000 per night. Invoices provided to the Committee show that AIG paid the resort over $440,000, including nearly $200,000 for rooms, over $150,000 for meals, and $23,000 in spa charges.

Average Americans are suffering economically. They are losing their jobs, their homes, and their health insurance. Yet less than one week after the taxpayers rescued AIG, company executives could be found wining and dining at one of the most exclusive resorts in the nation.

We will ask whether any of this makes sense.

The second set of questions we will ask is whether Mr. Sullivan and Robert Willumstad are right when they say they bear no responsibility for the collapse of AIG.

Mr. Sullivan was CEO from March 2005 to June 2008. Mr. Willumstad was his successor. He joined the AIG board in January 2006 and served as chairman from November 2006 until he was named CEO in June 2008.

According to their testimony, AIG failed because it was “caught in a vicious cycle” and hit by “a global financial tsunami.” Mr. Willumstad says: “I don't believe AIG could have done anything differently.”

The information we have received paints a different picture. We have obtained a confidential letter from the Office of Thrift Supervision to AIG's general counsel.

In this March 10, 2008, letter, the Office of Thrift Supervision writes: “We are concerned that the corporate oversight of AIG Financial Products … lacks critical elements of independence, transparency, and granularity.”

Internal company documents show that AIG's auditor, Pricewaterhouse Cooper, reported similar problems. Minutes from a meeting of the board's audit committee in March 2008 reveal that Pricewaterhouse Cooper told the committee that the “root cause” of AIG's problems was that risk control groups did not have “appropriate access” to the financial products division.

As part of our investigation, the Committee requested information from a former AIG auditor, Joseph St. Denis. Mr. St. Denis was a senior SEC enforcement official who was hired by AIG to address its ongoing accounting problems.

But when he expressed concerns about how the financial products division was valuing its liabilities, Mr. Cassano told him: “I have deliberately excluded you from the valuation … because I was concerned that you would pollute the process.”

Ultimately, Mr. St. Denis resigned in protest. As he explains, “Mr. Cassano took actions that I believed were intended to prevent me from performing the job duties for which I was hired.” Unlike Mr. Cassano and Mr. Sullivan, Mr. St. Denis's actions cost him his bonus.

There are other questionable actions by Mr. Sullivan and Mr. Willumstad. As losses were mounting and resources were getting scarce, AIG depleted its capital by over $10 billion through stock buybacks and rising dividend payments.

This prompted shareholders to write the board: “The management and board inexcusably and inexplicably raised the dividend while simultaneously issuing expensive preferred stock and common stock at a discount.”

Finally, we will ask whether AIG — and in particular Mr. Sullivan — misled investors and the public about the financial conditions of the company.

On December 5, 2007, Mr. Sullivan told investors: “we are confident in our marks and the reasonableness of our valuation methods. … [W]e have a high degree of certainty in what we have booked to date.”

What Mr. Sullivan didn't tell investors was that on November 29 — one week earlier — Pricewaterhouse Cooper had “raised their concerns with Mr. Sullivan …, informing [him] that PWC believed that AIG could have a material weakness relating to the risk management of these areas.”

There is one witness who should be here today, but who will be missing: Maurice “Hank” Greenberg, the long-time CEO of AIG. Mr. Greenberg blames Mr. Sullivan and Mr. Willumstad for the downfall of AIG. Many others think it is Mr. Greenberg who sowed the seeds that led to AIG's failure. Regrettably, Mr. Greenberg has told the Committee that he is too ill to appear today to answer questions.

There is a lot of ground for the Committee to cover today. We will probe AIG's executive compensation arrangements, the leadership of its top officials, and the veracity of their public statements. Our goal is to examine the details of AIG's fall so that we can learn lessons about the reforms needed to restore stability to our financial markets.

Like all of our witnesses, Mr. Sullivan and Mr. Willumstad know we will ask hard questions. I also want them and our other witnesses to know that we appreciate their cooperation and appearance before the Committee today.

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