AIG’s complexity blamed for fall
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The complexity and international spread of AIG’s operations impeded regulatory oversight of the derivatives unit that helped bring down the insurer, according to former executives, analysts and regulators.
Three former chief executives of AIG, including Hank Greenberg, will testify in US Congress on Tuesday about the events that forced the government to de facto nationalise the company last month. They may face questions on AIG Financial Products, which specialised in writing derivatives insurance on mortgage-backed securities.
The unit, whose losses precipitated AIG’s collapse, was based in London, but its business was regulated in the US. French watchdogs oversaw a small bank it owned in the country.
Former executives said that the arrangement meant AIGFP was more lightly regulated than similar units at other financial institutions such as investment banks and commercial lenders.
The difficulties were compounded by the fact that AIGFP dealt in credit default swaps and other unregulated derivatives, one former executive said.
In the US, the Office of Thrift Supervision had responsibility for AIG’s holding company since 1999 because AIG owned a US-based lender.
OTS raised concerns over the risks embedded in AIGFP’s portfolio in March, according to Grovetta Gardineer, OTS’s managing director of corporate and international activities.
Experts said part of the problem was that, until November 2005, OTS’s primary responsibility was to oversee AIG’s savings-and-loans bank and ensure the holding company’s activities did not endanger the lender.
After that, the watchdog became AIG’s “consolidated supervisor” with responsibility for ensuring that company managers were aware of and adequately responding to risks in its business lines, including AIGFP.
The role enabled OTS to carry out “targeted reviews” of AIGFP but not the kinds of close examinations of portfolios that it usually conducts at banks.
“Our ability to look across the holding company structure to identify risks that might affect the business lines …did not give us the ability to reach into products that are not regulated,” Ms Gardineer said. “We added significant value …I can’t say there was no value added here or that we fell down on the job.”
AIG and the Commission Bancaire, the French regulator, declined to comment.
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