Why AIG Stumbled, And Taxpayers Now Own It

Steve Kroft Reports On The Troubled Insurance Giant, And Talks To Its New CEO

(CBS)  The sprawling holding company, that controlled some of the biggest insurance companies in the world, owned and leased more jet aircraft than most of the major airlines, and provided investment income for pensions, municipalities and other institutions around the world, had its tentacles everywhere. And the threat of collapse walked the global financial system to the edge on an abyss.

"I know you're not to blame for any of this, but you are the current proprietor, so to speak. Big picture, what happened?" Kroft asked.

"We strayed from our core skills. … in the late '80s, we put in something called AIG FP. It wasn't an insurance company. It's a company that dealt in very sophisticated financial products," Liddy explained.

With offices in London and Connecticut, AIG Financial Products had fewer than 500 employees, but it made enough bad deals to destroy the rest of the company.

The division was created by longtime AIG Chairman Maurice "Hank" Greenberg, who was forced to resign after an accounting scandal in 2005, and was succeeded by Martin Sullivan.

Like most of Wall Street, AIG FP became enamored with the amount of money to be made in the subprime mortgage market.

Not only did AIG buy billions of the now toxic mortgage-backed securities, the financial products division looked at their computer models and decided that the securities were so safe it could make tons of money insuring them for other investors who bought them.

These private, unregulated insurance contracts were called credit default swaps, and would ultimately expose the giant conglomerate to $64 billion in potential subprime mortgage losses; when the housing bubble burst, AIG didn't have enough money to meet its obligations.

Liddy estimated that just 20 or 30 people were involved in bringing down the company.

"How can 20 or 30 people bring down a company the size of AIG? I mean, that requires a lot of failures, doesn't it?" Kroft asked. "On the part of a lot of different people, on the people in risk management?"

"You know Steve, I don't necessarily see it that way. I think it requires a belief that models are always right and human intervention won't offset them. It assumes that the kinds of risks that were viewed to be so remote could not occur. But in fact, they did occur," Liddy replied.

"This was a pretty colossal screw up. You would agree?" Kroft asked.

"Yeah, I'd say in hindsight, if the people that made that decision had to do it over again, my guess would be that they would not do it," Liddy said.

"What they did was that they underwrote the credit bubble in the U.S. They held up a sign. And they said, 'We're ready to buy the stuff.' It was a cash cow for them. They liked it. They loved the business. And they backstopped the credit bubble and the whole economy," Rich Ferlauto, director of pension investments for the American Federation of State, County and Municipal Employees [AFSCME], told Kroft.

AFSCME's members' pension plans lost $4.3 billion on investments in AIG stock. Ferlauto blames company executives, the board of directors, and a compensation system that rewarded short-term profits while ignoring long-term risk.

Asked why he thinks the people at AIG FP took these risks, Ferlauto told Kroft, "For the most part, I don't think they saw the risk. They knew the risk was out there But they were driven because they thought they could make a buck. They were sort of blindsided by the ability to make short-term money."

"And it was more than a buck," Kroft pointed out.

"This is the kind of money that most average people only dream of and then some. It's like hitting the jackpot every year," Ferlauto replied.

[Riskman]

Mr. Liddy was not all that honest with you in your interview. Mr. liddy was proud to say that he only earns $1.00 a year. What he didn?t tell you is that his benefits far exceed that of any normal employee. According to the company?s 10K filing with the SEC and the national underwriter, May 11, 2009 edition Mr. Liddy also received:
$47,578 for commuting from Chicago to NY
$38,368 for a NY apartment
$31,348 for car service
$180,341 toward his taxes
$162,686 paid to his attorneys for developing his compensation structure.
The article states another employee who worked on a ?voluntary Basis? actually received over $900,000 in compensation in 2009. This information shows that the people who received bonuses were not the only employees over compensated. As someone once told me,? the fish stinks from the head?.

[Azsandman]

Ok we own it right? How do we get rid of it then? No one asked me if I wanted to own a pink elephant. SO, I want to cash in my share. Please make the check payable to "BEARER" Where is the "cash out line?"
There is lesson from the past Mr. Obama needs to learn. When the Titanic was sinking the Captain ordered,"abandon ship," not, "we can bail this out if we all use our shoes as buckets."

[number1GI]

Now that I am one of the new share holders I want to vote myself a raise of Oh ! say ten billion dollars and some pillow cases to put it in and a jet plane to escape in. ROTFLMAO

[brianbwb-2009]

"AIG is struggling because of Obamas liberal policies forced them into this position." Posted by mrs_trepidatious

Get a grip, AIG was in the hole long before Obama became president.

Reading is fundamental, the first paragraph of the article states,

"...none has proved more costly or contentious than the rescue of American International Group (AIG). Its reckless bets on subprime mortgages threatened to bring down Wall Street and the world economy last fall until the U.S Treasury and the Federal Reserve stepped in to save it."

Now who was president last fall? When did AIG begin the practices outlined in the first paragraph? How much are you being paid to look like a limbaugh Bushbot?

[tedryfiak]

If less than a quarter of that bailout money was lent directly to US manufacturers to hire workers and produce useful goods, the economy would have turned around instantly. People that have jobs spend money. Financial institutions are only good at hoarding money unless they find someone to lend it to that doesn't really need it.
If our politicians and financial experts figure out that jobs for average citizens have to come first, there might be some hope for us but don't hold your breath.

[lovegetpeace]

I can't help but roll my eyes when someone suggests that we might get repaid on this deal..... It's not going to happen.. It was never intended... by anyone... for there to be a repayment... We were ripped off..... We'll STAY ripped off.....and I think we're wasting our time even discussing it. This whole thing is positive proof that the people cannot control the government, once the crooks in government decide to do something.......
Posted by WiseAsOwl at 7:09 AM : May 18, 2009

Can you train me how to predict the future? I want to make trillions in Walls Street.

[WiseAsOwl]

I can't help but roll my eyes when someone suggests that we might get repaid on this deal..... It's not going to happen.. It was never intended... by anyone... for there to be a repayment... We were ripped off..... We'll STAY ripped off.....and I think we're wasting our time even discussing it. This whole thing is positive proof that the people cannot control the government, once the crooks in government decide to do something.......

[walt1944]

I agree with Liddy when he says that only a handful of people brought the company down, but it doesn't mean he isn't in some way responsible for it!

I have worked in companies which hired upper executives who worked to satisfy their own egos rather than be concerned with making sure the company survives. That includes making bad decisions, getting the company involved in risky ventures, moving away from the company"s "core" to make a quick buck and not worry about any "flashback"!

And when that "flashback" happens, these guys who get the company in trouble end up walking away with a bag of money, while the top executives and the average employee at the company are holding the bag of "poop"!

This doesn't absolve the top management from blame. Top management should have been monitoring these greedy, egotistical corporate executives and should have acted on them when it became apparent that what these corporate "hotshots" were doing could really harm the company. Instead, top management gave them freedom to get involved in any outhouse they wanted and never said a word to reprimand them!

The one's who really suffer are the average worker at the company who has put his/her entire life into building the product or pushing the pencil, and ends up losing thir jobs because of it even though they had absolutely nothing to do with it!

As George W. Bush would say, THAT'S BUSINESS!!!!

HAIL OBAMA!!!!

[ramos1129]

Kudos to Libby. He has taken on a very hard job for the taxpayers at $1 per year.

AIG has been tagged way too big for us to allow it to fail. Good enough. But, AIG itself is akin to a holding company composed of about six different companies. Except for AIG Financial and possibly one more, all of the other four are financial solvent and perhaps even profitable.The two that are not are dragging AIG into insolvency.

Since we own AIG, we should immediately break AIG into a number of small companies. These could start repaying what AIG owes the government. The bad two firms could be quarantined and then either sold or liquidated. Problem solved.

[inachu1]

Now that taxpayers own it then..... shouldn't the service be cheaper?