How AIG began losing billions
Later today, three former executives from AIG will testify on Capitol Hill about their company's near collapse. Steve Henn tells the story of how AIG incurred billions of dollars in losses -- and where they are now.
AIG logo (Stan Honda/AFP/Getty Images)
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TEXT OF STORY
Renita Jablonski: As we continue with Fallout: our coverage of America's financial crisis, we turn to Washington. Later today, three former executives from AIG will testify on Capitol Hill about their company's near collapse. This is what Lehman Brothers executives did yesterday. And AIG too can expect a couple dozen very angry members of Congress. Marketplace's Steve Henn has more.
Steve Henn According to one accountant who's reviewed AIG's books, executives there sold billions in financial insurance or credit default swaps without really understanding what they were getting into.
These contracts guaranteed the value of mortgage-backed securities against default. And just over a year ago, executives at AIG said publicly they didn't expect these deals to cost the company a dime.
Months later, AIG had to set aside a billion dollars to cover losses. Then $5 billion. Then in February, its accountant said AIG had a material weakness on its books. Basically the company had no clue what the downside was.
John Coffee is a securities law expert at Columbia University:
John Coffee: And this is exactly in the area where AIG later incurred its extraordinary losses.
By June, those losses were $14 billion. As of late last week, AIG had borrowed more than $61 billion from the federal government to cover the ballooning costs.
In Washington, I'm Steve Henn for Marketplace.
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From Constantine, MI, 10/07/2008
The mindset and behavior revealed in this and similar recent financial stories is not just an affect of Wall Street or Washington. Our own local government is constantly spending beyond the means of the local taxpayers, ignoring the aggragate effect of increasing debt and the financial danger to their citizens. I have watched our local govt. fail to provide accounting of project costs, instead operating on a belief "if [physical] cash doesn't change hands, no money is involved", approve projects [debt] without having paperwork stating the bank loan requirements, and making extemperaneous purchases like new furniture and remodeling above planning how to pay for upgrading the aging infrastructure. There are local officials that still do not understand how their activity budget works and that taxpayer money brings with it rules and regulations - one long-sitting official saying, "It all goes to bettering our community, so what does it matter what fund it comes from?".
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