Resisting Corporate Corruption, 3rd Edition

Case 8Time to Drop the Hammer on AIG’s Controls?

While no conclusions have been reached, we believe that these items together raise control concerns around risk management that could be a material weakness.”¹

TIM RYAN, PRICE WATERHOUSE COOPER’S (PWC) global relationship partner on the AIG account, had spoken those words to AIG CEO Martin Sullivan on November 29, 2007. They were scary words for Sullivan to hear. If PWC acted on its concerns, AIG would have to file an immediate 8-K notice of the controls weakness with the SEC. The investment community would then have confirmation that AIG management couldn’t manage its business risks. Such news couldn’t come at a worse time. Since August, numerous banks, led by Goldman Sachs, had been bombarding AIG with demands for cash collateral. If these demands intensified, AIG could experience a severe liquidity squeeze.

It was now late January 2008. Tim Ryan’s concerns had not been allayed. If anything, his conviction that AIG was not on top of its risk positions had intensified. Despite Ryan’s November warning, top AIG executives told Wall Street analysts in December that:

“… because this business [insuring subprime mortgage securities] is carefully underwritten and structured, we believe the probability that it will sustain an economic loss is close to zero.”²

In the same meeting, AIG’s executives also stated they could not provide a figure for potential losses from its subprime underwritings and investments. Since then, Ryan had ...