Financial Regulatory Forum

SEC review of AIG probed disclosure ‘inconsistencies’

August 18, 2009
AIG | SEC | USA

MARKETS-JAPAN-STOCKS    NEW YORK, Aug 17 (Reuters) – The adequacy of AIG’s disclosure on derivatives that drove it to the edge of collapse was questioned by regulators months before the insurer’s federal bailout last September, according to newly released correspondence.
   A series of letters between April 2008 and June 2009 were posted on the U.S. Securities and Exchange Commission’s website on Monday. The correspondence sheds light on specific concerns the SEC had about information provided to investors in AIG regulatory filings.
   In a Dec. 19, 2008, letter to then American International Group <AIG.N> Chief Executive Ed Liddy, an SEC official questioned an “apparent inconsistency” in the way AIG described the risk of losses from credit default swaps it had sold to European banks.
   Credit default swaps, a type of derivative, were sold by AIG’s financial products unit, which effectively guaranteed payments, and sometimes collateral, as underlying assets either sank in value or went into default.
    AIG was badly burned by losses on derivatives linked to the U.S. housing market, racking up losses in excess of $100 billion, and leading to a federal bailout last September that included more than $80 billion of loans.
   “You indicate that these contracts provide credit protection but not risk mitigation to the counterparties. Please explain this,” wrote SEC accountant Jim Rosenberg, in the Dec. 19 letter querying the European contracts.
   AIG had sold credit default swaps to numerous European banks, effectively allowing them to reduce the reserves they set aside for losses.
   The agency also demanded more information on AIG’s assertion in a regulatory filing that it did not expect to be hit by any additional costs on the derivatives contracts it had sold in Europe.
 The SEC’s review led AIG to add a risk factor and increase other disclosures related to these derivatives in its regulatory filings, it conceded in a letter dated June 29, 2009.
  
   PRE-BAILOUT QUESTIONS
   In a Sept. 5 letter to Robert Willumstad, who was CEO before Ed Liddy, the SEC said AIG could do much more to help investors understand its risky book of derivatives.
   The letter was written just 11 days before AIG begged for a multibillion-dollar line of credit from the U.S. Federal Reserve, saving it from bankruptcy.
   “We believe that your disclosure … could be improved so that an average investor can better understand how you establish the fair value of your CDS,” or credit default swaps, said the SEC.
   “While we acknowledge that the valuation of these instruments may be complex, we do not believe such complexities obviate the need to provide readable and understandable disclosure,” the SEC added.
   AIG has had a total of four chief executives since last year. In the course of its review, the SEC wrote to three of those, the letters show, starting with Martin Sullivan, who was forced to resign in June 2008.
   Robert Benmosche, a former MetLife chief, replaced Liddy as AIG CEO one week ago. (See related story: [ID:nN17332855])
   Benmosche has the unenviable job of trying to sell off enough of AIG’s businesses to repay its $80 billion taxpayer debt. The company is also trying to unwind trillions of dollars of trades and positions held by its financial products unit, thereby cutting the risk of being struck again by giant derivatives losses. (Reporting by Lilla Zuill; Editing by Steve Orlofsky) ((lilla.zuill@thomsonreuters.com;+1 646 223 6281)) Keywords: SEC AIG/
  
Tuesday, 18 August 2009 00:41:05RTRS [nN17390880] {C}ENDS

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