October 8, 2008
Big Insurer’s Spending Habits Disclosed
By SHARON OTTERMAN
New York Times
Photo: Robert Willumstead, left, and Martin Sullivan, were sworn in Tuesday before testifying before a House hearing on the credit crisis. Mr. Willumstead and Mr. Sullivan are former chief executives of American Insurance Group. The company recently received an $85 billion federal bailout.A day after questioning the compensation and spending at the bankrupt Lehman Brothers, lawmakers exploring the causes of the credit crisis were treated on Tuesday to examples of the spending habits at another troubled financial firm.
A week after the insurance giant, the American International Group, received an $85 billion federal bailout, executives at its life insurance subsidiary, AIG General, held a weeklong retreat at the exclusive St. Regis Resort in Monarch Beach, Calif. Expenses for the week, lawmakers were told, totaled $442,000, including $200,000 for hotel rooms, $150,000 for food and $23,000 in spa charges.
In addition, the former A.I.G. executive who led the London-based division whose implosion is largely blamed for the insurance giant’s downfall, Joseph J. Cassano, continues to receive $1 million a month from the company, on top of the $280 million he received in the last eight years.
And even after A.I.G. reported $5 billion in losses in the final quarter of 2007, its chief executive at the time, Martin Sullivan, argued before a compensation committee that executives should receive performance bonuses. He received $5 million. “This unbridled greed, this callous abuse of trust of hard-working Americans’ savings is just so disgusting it is hard to put into words, and the anger level in America is coming, as it often has, at Wall Street," Representative Mark Souder, Republican of Indiana, said.
The disclosures came during a second day of Congressional hearings into the causes of the financial crisis roiling global markets, which led to the $700 billion bailout plan signed into law by President Bush last week. In language that echoed Monday’s hearing into the downfall of Lehman Brothers, lawmakers portrayed A.I.G. as a company in which irresponsible executives continued to reward themselves as the company’s fortunes fell.
While Lehman was an investment bank, and A.I.G., at its core, an insurance company, their abuses were fundamentally the same, Representative Henry A. Waxman, the chairman of the House Oversight and Government Reform Committee, said in his opening statement.
“In each case, their executives grew rich by taking on excessive risk,” Mr. Waxman said. “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.”
And in each case, he added, “they refuse to accept any blame for what happened to their companies.”
Martin Sullivan, who served as A.I.G chief executive from March 2005 until June 2008, and Mr. Robert B. Willumstad, who served from June 2008 until A.I.G. received federal assistance, spent more than two hours answering questions. The current chief is Edward M. Liddy.
In their testimony, both Mr. Willumstad and Mr. Sullivan attributed the company’s failure largely to mark-to-market accounting rules that forced A.I.G. to recognize tens of billions of dollars in accounting losses, as well as to a tsunami of market instability ignited by the collapse in value of mortgage-backed securities.
“Looking back at my time as C.E.O., I don’t believe A.I.G. could have done anything differently,” Mr. Willumstad said. “The crisis that required A.I.G. to seek assistance from the Federal Reserve is not limited to A.I.G. It is a marketwide crisis of confidence that has affected the entire financial industry and the American and global economy.”
“A.I.G. was caught in a vicious circle,” Mr. Willumstad said.
But Mr. Waxman and other lawmakers disputed Mr. Willumstad’s defense, as did a specialist who testified about the causes of A.I.G.’s collapse.
“A.I.G. is blaming its downfall on accounting rules which require it to disclose losses to its investors,” the specialist, Lynn E. Turner, the former chief accountant at the Securities and Exchange Commission, said. “That’s like blaming the thermometer, folks, for a fever.”
Lawmakers also heard other assertions about the actions of executives, which were culled from a review of thousands of documents obtained by the committee.
An accountant, Joseph St. Denis, who had been hired by A.I.G. to address accounting problems, was not given access to the very unit whose losses, mostly in toxic credit-default swaps, led to the bailout, lawmakers were told.
Mr. Cassano told Mr. St. Denis, according to testimony, that he had been “deliberately excluded” from the evaluation of AIG Financial Products, to avoid “polluting the process.” Mr. St. Denis resigned in protest.
On Dec. 5, 2007, the chief executive, Martin J. Sullivan, told investors that the company had, “a high degree of certainty in what we have booked to date.” But his comments came, Mr. Waxman told the committee, despite serious concerns raised a week earlier by the auditing firm PricewaterhouseCooper.
Lawmakers were also shown slides of the gilded lobby and sweeping staircases of the St. Regis hotel, where company executives had retreated after their company had been bailed out.
“Less than one week after the taxpayers rescued A.I.G., company executives could be found wining and dining at one of the most exclusive resorts in the nation,” Mr. Waxman said.
The federal government bailed out A.I.G., the world’s largest insurance company, with an $85 billion loan on Sept. 16, after the company failed to find private banks and investment firms to lend it money. It was a watershed event for lawmakers, who said the rescue put taxpayers’ money at risk to save a private enterprise that should have been regulated more closely.
The company, whose businesses stretched from leasing aircraft to selling life insurance in rural India, had become dangerously entangled with the financial industry because of its web of complex insurance contracts.
While the long-time chief executive Maurice R. Greenberg, 83, whose personal fortunes dropped by some $5 billion because of the bailout, did not appear, he did provide a written statement.
In his testimony, Mr. Greenberg said his successors were responsible for the record losses that led to the bailout.
“When I left A.I.G., the company operated in 130 countries and employed approximately 92,000 people,” Mr. Greenberg said in a statement. Today, the company we built up over almost four decades has been virtually destroyed.
From John Curry, 10/7/08