Different Investment Strategies re: Mortgage Backed Securities - AIGFP vs AIG Securities Lending

  • Kevin McGinn - AIG - Nero email - FCIC Interview (mp3)
    • <Bonk:  Who did he tell? Any Documentation?>
      • Bob Lewis FCIC Interview (mp3) - {Kevin told me he told them}
  • Richard Scott - AIG
    • FCIC Interview (mp3) - {Asked if he was told, he said no.}
  • The documents produced by PWC and AIG indicate that AIG Investments increasing exposure to subprime while AIGFP was reducing its exposure to subprime reflected an internal control breakdown and poor risk management.  - 2010-0630-AIG-Risk-Management - 29p
  • On 11/29/07, PwC told AIG management: “the fact that FP and AGF in late 2005 were reducing their exposure to subprime while AIG Investment and UGC were increasing theirs – seemed to show a lack of cross AIG evaluation of risk exposure to a sector” and combined with other items “raised control concerns around risk management which could be a material weakness.”22
  • On 11/19/07, Paul Narayanan emailed Kevin McGinn and stated that in the subprime crisis, “some parts of our organization were cognizant of the emerging risks and were able to avoid them whereas some others were not made aware of it and so did [not (sic)] avoid the risk.” 23
  • McGinn disagreed, and said that “all units were apprised regularly of our concerns about the housing market;” that “some listened and responded; others simply chose not to listen and then, to add insult to injury, [did] not spot the manifest signs” and that this was akin to “nero playing the fiddle while Rome burned.”24
  • McGinn told FCIC staff that the Securities Lending business was one of the divisions at AIG that “chose not to listen” and “played the fiddle while Rome burned.” 25

22 PWC notes of 11/29/07 Meeting, PWC-FCIC 000381-383.

23 11/19-20/07 email (AIG-SEC9422058-60) at 059.

24 11/19-20/07 email (AIG-SEC9422058-60) at 059.

25 Interview of Kevin McGinn.

2010-0630-AIG-Risk-Management.pdf - 29p

  • Material Weakness
    • 2010 0617 - FCIC Interview - Martin Sullivan - 139p
    • SULLIVAN: My recollection is that management did not agree.
      • In fact, I recall saying to Tim Ryan, "Did PwC believe there was a possibility that we had a material weakness?"
      • And I recall Tim saying, "Possibly."
      • Maybe a different word, but possibly is the sort of word I recall.
      • At that stage, I recall saying, "Well, I disagree. I think there are different business models that the units were operating under."
      • And we concluded that obviously PwC working with Bensinger and Lewis and others needed to really investigate that and drill down and see whether there was an issue.
      • At that stage, Lewis reported to Bensinger.
      • Bob only reported to me very latterly in my career at AIG.
      • And the conclusion was, obviously, after a very thorough investigation, is that we did not have a material weakness.
  • Senator Reed. Well, let me raise--because this has been publicly discussed. I think we actually discussed it last week. In 2005, the Financial Products Division of AIG concludes that mortgage-backed securities are too risky a bet. At the same time, the securities lending operation decides that they want to take the cash that they are getting and invest it decisively in these types of securities.
    • You know, where was the risk assessment at the enterprise, as you described it?
    • And where was the OTS to say, wait a second, you cannot have two contradictory approaches based upon, one, this is the best investment, and, two, this is the worst investment?
  • Mr. Polakoff <OTS>. So, Senator, you are right, and you identified what is either a hole or an overlap, depending on one's view. Those activities, as you remember, were regulated by the State insurance commissioners. So under Gramm-Leach-Bliley, the umbrella regulator typically will defer to the functional regulator to assess the risks and then report up to the umbrella regulator.
  • Senator Reed. But, you know, it goes back to the question I raised before, to which I think you affirmatively responded, that in terms of overall risk mechanisms or risk compliance, that it was clear that the umbrella regulator had that responsibility. And here, if you had communicated with the supervisor and they had indicated that this was the investment pattern of the securities lending--their regulated insurance part, it would have seemed to have raised a huge red flag. You both cannot be right.
  • Mr. Polakoff. Senator, I can assure you that there was ample communication between OTS in its umbrella responsibility and the functional regulators. But you are identifying an absolute inconsistency, which is, Why did we stop one function from performing that kind of activity? And why did another functional regulator allow its entities to move forward with it? There has to be a postmortem on what broke down in that process.
  • Senator Reed. Yes. Mr. Long, the same sort of set of issues about reliance upon information and being a captive of the regulated entity.

2009 0318 - GOV (Senate) - Lessons Learned in Risk Management Oversight at Federal Financial Regulators - [PDF-181p VIDEO-Senate-page