Former AIG execs get the third degree

Published 5:00 am Wednesday, October 8, 2008

A day after Richard S. Fuld Jr. was compelled to explain the millions of dollars he made at Lehman Brothers, two former executives of the American International Group took their turns in government witness chairs on Tuesday, answering critical questions from lawmakers about business and pay practices and outsize spending that continued even after the company received an $85 billion lifeline from the government.

One particular point of contention during the hearing before the House Oversight and Government Reform Committee was a weeklong retreat that a life insurance subsidiary, AIG General, held for its top sales agents at the St. Regis Resort in Monarch Beach, Calif., only a week after the government extended its $85 billion loan last month. The $442,000 in expenses for the week included $150,000 for food and $23,000 in spa charges, according to documents obtained by the committee.

Joe Norton, AIG’s director of public relations, said in an interview that the event had been scheduled last year, though he did not know whether executives had considered canceling the retreat after the bailout.

In addition to questions about spending, the two AIG executives who appeared before legislators, Martin Sullivan and Robert Willumstad, faced sometimes heated inquiries into risky bets by the company on complicated financial products that insured mortgage-backed securities. AIG, for decades the largest insurance company in the world, must now sell wide swaths of its businesses to repay the government loan, made because of the potential catastrophe that the company’s bankruptcy would have unleashed.

Sullivan was criticized for his reassurances to investors about AIG’s health in December despite warnings from company auditors that its exposure to those contracts was growing.

And many legislators berated the two men for large pay packages dispensed to top executives despite evidence that the company’s financial health had begun deteriorating in 2007.

The nearly five-hour hearing was the second this week conducted by the House committee, after the pointed questioning on Monday of Fuld about the collapse of Lehman, the investment bank he led.

Sullivan, who was ousted as AIG’s chief executive in June, and Willumstad, who was the company’s chairman before succeeding Sullivan, blamed the company’s stumbles on wider market tremors. They also attributed AIG’s $25 billion in write-downs to mark-to-market accounting rules, which forced the company to take paper losses that led to debilitating credit downgrades.

Yet both Democratic and Republican lawmakers dismissed those arguments, citing testimony from a former chief accountant for the Securities and Exchange Commission.

“AIG is blaming its downfall on accounting rules which require it to disclose losses to its investors,” the witness, Lynn E. Turner, said. “That’s like blaming the thermometer, folks, for a fever.”

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