The ERM Current™

Yesterday, the US House Committee on Oversight and Government Reform had quite a session receiving testimony from those involved in events leading to the massive bailout of American International Group (“AIG”).  Of particular concern was a letter from Joseph St. Denis, an AIG accounting policy expert that had been hired, as he explained, “as part of an entity-wide effort to address material weaknesses by AIG’s external auditor”.   Unfortunately, Mr. St. Denis could not participate in this effort because he was restricted from reviewing the area with the highest risk – accounting for credit default swap derivatives.  

Mr. St. Denis resigned from AIG after serving just over a year due to restrictions placed on him by senior executives. After surfacing many legitimate issues, he was demoted even though he had received a stellar performance rating only a few months before.  Then, according to Mr. St. Denis, he was prohibited from reviewing the very area that led to AIG’s ultimate demise.  Joseph Cassano, head of AIG’s Financial Products group, was the executive responsible for the valuation of AIG’s Super Senior Credit Default Swap portfolio and the same executive who made the following statement to Mr. St. Denis:

“I have deliberately excluded you from the valuation of the Super Seniors because I was concerned you would pollute the process.”

The improper valuation of this portfolio led to another material weakness in 2007 and ultimately led to AIG’s death spiral.  Meanwhile, Mr. Cassano retired from AIG earlier this year and continues to receive $1 million per month in consulting fees from AIG.  In the words of famous musician Mark Knopfler, I think this is a clear case of “punishing the monkey while letting the organ grinder go free”.  Your thoughts?

Click here to read Joseph St. Denis’ letter to Congress

According to recent reports about investigations into the corporate governance and accounting practices at Fannie Mae and Freddie Mac, it appears that the two Government Sponsored Entities (GSEs) did not learn their lesson from improper disclosures made only a few years ago.  This is what was reported by the Associated Press yesterday.

The mortgage finance companies said Monday that a federal grand jury in New York is investigating accounting, disclosure and corporate governance issues at Washington-based Fannie and McLean, Va.-based Freddie.  Critics have long questioned the companies’ bookkeeping.  Last November, for example, a Fortune magazine story said new accounting procedures at Fannie Mae masked potential losses on bad loans.  And several years ago, both Fannie and Freddie were forced to restate billions in earnings after federal regulators discovered accounting irregularities at both companies.

If we can’t trust these GSEs to clean up their act and root out fraud, how can we again trust our government with $700 billion of our money to handle the very same mortgage-backed securities that ran through these corrupt GSEs?  What are your thoughts?  Please join the conversation below.