Punishing the Monkey at AIG

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

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About Wheelhouse Advisors
Wheelhouse Advisors LLC is the publisher of The ERM Current™, an online publication and blog dedicated to providing the latest updates on current trends in Enterprise Risk Management & Control. Wheelhouse Advisors provides cost-effective Enterprise Risk Management & Control solutions to both large and mid-size corporations. To learn more about Wheelhouse Advisors, please visit our web site at www.WheelhouseAdvisors.com.

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