Insurance giant AIG's role in market crisis probed

WASHINGTON (AP) - Executives at the American International Group Inc. hid from its auditors the full range of risky practices at its financial products division even as losses mounted, according to documents obtained by a congressional panel examining Tuesday the chain of events that forced the government to bail out the conglomerate.

As losses from risky financial products mounted in March, the Office of Thrift Supervision warned that "corporate oversight of AIG Financial Products ... lack critical elements of independence, and granularity."

At the same time, AIG's auditor, Pricewaterhouse Cooper confidentially warned the firm that the "root cause" of AIG's problems was that internal overseers in charge of limiting AIG's exposure were denied adequate access to the activities of the highly leveraged financial products branch.

Problems at AIG did not come from its traditional insurance subsidiaries, but instead from its financial services operations, primarily its insurance of mortgage-backed securities and other risky debt against default. Government officials feared a panic might occur if AIG couldn't make good on its promise to cover losses on the securities; investors feared the consequences would pose a threat to the U.S. financial system, which led to the government bailout.

House Oversight Committee Chairman Henry Waxman, D-Calif., also said that even as losses were engulfing the company, AIG executives depleted AIG's capital through stock buybacks and higher dividends.

Three former AIG chief executive officers were scheduled to testify before the committee, but one of them - Maurice "Hank" Greenberg, the company's largest individual shareholder - canceled his appearance. Committee spokesman Karen Lightfoot said that Greenberg had bowed out because of illness.

The hearing is the second in two days into financial excesses and regulatory mistakes that have spooked stock and credit markets and heightened fears about a global recession.

The Federal Reserve rescued AIG with the $85 billion loan Sept. 16, one day after investment bank Lehman Brothers declared bankruptcy when the government wouldn't come to its aid. Lehman Brothers' chief executive officer testified Monday before the congressional oversight panel but didn't shed much light on how the mid-September events cascaded into a collapse of credit markets requiring a broad bailout.

The government now holds warrants that can be converted into an 80 percent stake of AIG and there is hope taxpayers won't lose money on the deal since the company has profitable subsidiaries that could be sold to pay off the Fed's loan.

The Fed's move rescued the company from bankruptcy after the insurance conglomerate's exposure to enormous losses related to subprime mortgage securities forced it to the brink.       Despite the government's move on AIG and Congress agreeing to spend up to $700 billion to buy up soured mortgage-based securities and other bad debt, credit remains tight and the stock market continued to plunge downward Monday despite a brief rally at the end of the day.

For four decades Greenberg oversaw AIG's growth into a sprawling conglomerate with businesses in 130 countries. Also on deck is Robert B. Willumstad, the former CEO just ousted by Treasury Secretary Henry Paulson.

On Monday, Paulson named Neel Kashkari, 35, to head the office created under the emergency bailout enacted Friday. Kashkari, an assistant Treasury secretary for international affairs, helped draft the bailout legislation and is one of Paulson's closest advisers on the crisis.

(Copyright 2008 by The Associated Press.  All Rights Reserved.)