Former American International Group (AIG) chief executive officers Martin Sullivan and Robert Willumstad today claimed AIG's downfall was not their fault at a Congressional committee hearing. At the same hearing, the firm was accused of wasting money from its government bail-out on "manicures, facials, pedicures and massages" on a week-long retreat for AIG executives.
The Committee on Oversight and Government Reform held a hearing on the causes and effects of the AIG bail-out. In his opening statement, Henry Waxman, a Democratic Representative and the committee's chairman, questioned the compensation received by Sullivan – who was CEO of AIG from April 2005 until June this year.
Waxman said that when AIG's compensation committee met in March this year to award bonuses for 2007, Sullivan urged the committee to ignore unrealised losses from the firm's financial products division – the source of AIG's problems – when calculating his bonus. Waxman said the board did so when approving a cash bonus of more than $5m for Sullivan, and also that month approved a new compensation contract giving Sullivan a $15m golden parachute package.
Waxman also criticised the compensation of Joseph Cassano, the executive in charge of the financial products division. Waxman claimed Cassano received more than $280m in the past eight years. Cassano left the firm in February, but Waxman says AIG allowed him to keep up to $34m in unvested bonuses and still pay him $1m a month in consulting fees.
Lastly, Waxman said that less than one week after AIG's $85bn bail-out was agreed the firm held a week-long retreat for company executives in a resort in Monarch Beach, California, costing more than $440,000 in total.
At the hearing, Elijah Cummings, a Democratic Representative, expressed his anger at this. He said: "Have you heard of anything more outrageous? A week after taxpayers commit $85bn to rescue AIG, the company's leading insurance executives spend hundreds of thousands of dollars at one of the most exclusive resorts in the nation."
He added: "AIG spent $200,000 for hotel rooms. And almost $150,000 on catered banquets. AIG spent – listen to this – $23,000 at the hotel spa and another $1,400 at the salon. They were getting their manicures, their facials, their pedicures and their massages while American people were footing the bill. And they spent another $10,000 for, I don't know what this is, leisure dining. Oh, at bars."
The retreat was for executives of AIG life insurance subsidiary AIG American General.
Waxman also questioned why Sullivan and Willumstad, who was chairman while Sullivan led the firm, depleted its capital by more than $10bn through stock buybacks and increasing dividend payments at the same time as losses were increasing.
In testimony at the hearing, Sullivan and Willumstad blamed the wider financial crisis and mark-to-market accounting rules for the firm's problems. Sullivan said the accounting rules had unintended consequences because of the "global financial tsunami". He said AIG had been hard hit by having to adjust the values of its credit default swaps even when it had no intention of selling them.
"In fact, just last week both the Securities Exchange Commission and this Congress recognised the effect of FAS 157 [the accounting rule that defines fair value accounting]. The SEC recognised that FAS 157 can have unintended consequences for financial institutions when markets seize up."
Sullivan added that measures that would suspend mark-to-market accounting make a lot of sense to him.
Willumstad, who was CEO of AIG from June this year to September, claimed at the hearing: "Looking back on my time as CEO, I don't believe AIG could have done anything differently." He added that when the AIG board asked him to replace Sullivan: "I was initially reluctant to do so."
Willumstad believes that at the height of the crisis "AIG was caught in a vicious circle. The rating agencies were considering a downgrade in large part because of market-driven liquidity concerns. But it was a downgrade by the rating agencies –or the threat of one – that would trigger a liquidity issue."
Hank Greenberg, another former CEO of AIG, had been requested to speak at the hearing but said he was too ill to appear. In a written testimony, Greenberg said the credit default swaps that got the firm into trouble were written after he retired from the firm in 2005.
"AIGFP [AIG Financial Products] reportedly wrote as many credit default swaps on collateralized debt obligations, or CDOs, in the nine months following my departure as it had written in the entire previous seven years combined," he said. "Moreover, unlike what had been true during my tenure, the majority of the credit default swaps that AIGFP wrote in the nine months after I retired were reportedly exposed to subprime mortgages."
Eric Dinallo, superintendent of the New York State insurance department, said at the hearing that AIG's problems had nothing to do with state insurance because the problems were not in any of AIG's state-regulated insurance companies.
"Some have tried to use AIG's problems as an argument for an optional federal charter for insurance companies," he said. "I am open to some federal role in regulating insurance and non-insurance operations of large financial services groups such as AIG. I have said as much in prior testimony to other House committees. But what happened at AIG demonstrates the strength and effectiveness of state insurance regulation, not the opposite."
New York state has announced plans to regulate part of the credit default swap market, when they are used to protect the value of investments held by the purchaser, and therefore similar to insurance.