Oct. 7 (Bloomberg) -- Three former American International Group Inc. chief executive officers deflected blame for the insurer's $85 billion U.S. bailout, while lawmakers lambasted the leaders for taking risks that pushed it to the brink of collapse.

Maurice ``Hank'' Greenberg, who ran AIG for 38 years until 2005, told Congress today that controls he put in place were weakened or eliminated after he left. Martin Sullivan, who was CEO for three years until June, and Robert Willumstad, an ex- Citigroup Inc. president who ran AIG until last month, blamed an accounting rule that forced the firm to book unrealized losses.

``When I left AIG, the company operated in 130 countries and employed approximately 92,000 people,'' Greenberg said in a written statement presented to the House Committee on Oversight and Government Reform in Washington. ``Today, the company we built up over almost four decades has been virtually destroyed.''

AIG, weakened by three quarterly losses of more than $18 billion tied to the housing slump, agreed Sept. 16 to a government takeover that gives the U.S. a 79.9 percent stake. CEO Edward Liddy, appointed by federal officials to run the New York- based firm, has already tapped $61 billion of the $85 billion credit line and must sell businesses to repay the loan.

Lawmakers expressed amazement that Joseph Cassano, former head of AIG's financial products unit, was allowed to make bets that nearly sank a company with more than $10 billion in profit in both 2005 and 2006 from traditional life insurance and property coverage. Cassano's unit sold credit-default swaps, contracts that plummeted in value as the securities they guaranteed declined, causing more than $25 billion in writedowns.

`To its Knees'

``It seems he single-handedly brought AIG to its knees,'' said Representative John Sarbanes, a Maryland Democrat. ``I don't see how, in your stewardship of the company, you can let this guy run up the losses,'' Sarbanes told Sullivan and Willumstad, who was chairman for more than a year.

The insurer's auditor PricewaterhouseCoopers LLP had raised questions about the company's transparency and complained about a lack of access to Cassano's unit, according to documents from a March 2008 audit meeting.

That same month, AIG's top federal regulator warned the insurer in a letter that the company's oversight of subsidiaries ``lacks critical elements of independence, transparency and granularity'' and contained ``a material weakness.''

`Wining and Dining'

Joseph St. Denis, a former AIG auditor, said in written testimony to the committee that he resigned in protest after financial products head Cassano denied his input on how the firm valued its liabilities, said Committee Chairman Henry Waxman. ``I was concerned that you would pollute the process,'' Cassano told St. Denis, according to Waxman, a California Democrat.

Cassano, who stepped down in March, is still being paid $1 million a month by AIG for consulting, according to a copy of his agreement with the company.

AIG is retaining Cassano because ``it was important to keep the existing employees'' in the unit, Sullivan said. Cassano's contract ensures that he doesn't compete with the company or poach AIG employees, Sullivan said.

Lawmakers lashed out at AIG for ``wining and dining'' its executives in a weeklong conference at the St. Regis Resort in Monarch Beach, California, just days after the bailout. The stay cost $440,000, Waxman said.

``Have you heard of anything more outrageous?'' said Representative Elijah Cummings, a Maryland Democrat, noting that the bill included $23,000 for spa services. ``They were getting their manicures, their facials, pedicures, massages while the American people were footing the bill.''

Waxman and three other Democratic members of the committee sent a letter to Treasury Secretary Henry Paulson asking him to ``protect the taxpayers' money'' and end ``profligate spending'' by AIG.

AIG's Response

The trip was scheduled a year earlier to reward top life insurance sales people, said AIG spokesman Nicholas Ashooh.

``It's as basic as salary as a means to reward performance,'' Ashooh said in a telephone interview. ``It was not top AIG executives running away to California.''

All three former CEOs submitted written testimony that was released by the committee. Greenberg, who didn't testify in person, was ill, said his lawyer Lee Wolosky.

Sullivan, 54, and Willumstad both said so-called ``mark-to- market'' accounting forced AIG to book unrealized losses on distressed mortgage-backed securities and credit-default swaps. The practice is being reviewed by the Securities and Exchange Commission as Wall Street faces a global financial storm.

AIG, which originates, insures and invests in home loans, actually bolstered accounting and risk management staff during his tenure, said Sullivan, who disagreed with Greenberg's accusation that he let risk controls lapse.

`Fire-Sale Prices'

``When the credit markets seized up, like many other financial institutions, we were forced to mark our swap positions at fire-sale prices as if we owned the underlying bonds, even though we believed that our swap positions had value if held to maturity,'' Sullivan said in a written statement.

Willumstad, 63, portrayed a company frantically trying to keep afloat. Soon after becoming CEO in June, he worried that declining markets would lead rating firms to further cut AIG's credit grades.

At a July meeting, rating company executives told Willumstad they wouldn't review AIG's credit grades until after he announced the company's long-term strategic plan on Sept. 25, he said.

The company was in talks with Warren Buffett's Berkshire Hathaway Inc. to improve AIG's liquidity if necessary, and was negotiating with banks including JPMorgan Chase & Co. to obtain more credit.

``These were precautionary steps,'' Willumstad told the committee. ``Through the first week of September, we believed AIG could weather the difficulties in the financial markets.''

`Vicious Circle'

As markets fell further, AIG's would-be partners backed out and ratings firms said they were unwilling to wait to downgrade the company's debt, putting the firm in a ``vicious circle,'' Willumstad said. Berkshire spokeswoman Jackie Wilson declined to comment.

The congressional committee is looking into who should be accountable for the ``financial excesses that led to the market breakdowns,'' according to the committee's Web site.

Lawmakers peppered Lehman Brothers Holdings Inc. CEO Richard Fuld yesterday for two hours with queries about excessive Wall Street pay and his failure to acknowledge the firm's financial woes until it was too late.

Lehman filed for bankruptcy Sept. 15, the same day the survival of 89-year-old AIG fell into doubt when Standard & Poor's and Moody's Investors Service cut the insurer's credit ratings. The reductions threatened to compel AIG to post more than $13 billion in collateral to fixed-income investors who purchased protection through credit-default swaps issued by AIG.

Stock Plunge

AIG couldn't raise enough money after the stock plunged to less than $5 a share from more than $70 in October of last year. The insurer had raised more than $20 billion in May selling debt and equity, diluting the stakes of long-time investors.

AIG faces probes from the U.S. Securities and Exchange Commission and the Justice Department into the way the firm valued credit-default swaps. After Sullivan downplayed the potential for losses, the company said Feb. 11 its auditor found a ``material weakness'' in its accounting for the holdings. The insurer has also been sued by investors.

Sullivan said that he took over for Greenberg at a time when government investigations ``cast a cloud of suspicion'' over the company and that ``my entire tenure as CEO was marked by unprecedented transparency with our investors and regulators.

Greenberg's Stake

Greenberg, 83, controlled the largest stake of AIG shares before the government takeover through personal holdings and investment firms and has said he may be interested in buying assets from the insurer.

Greenberg was forced to retire in March 2005 amid state and federal probes into the company's accounting and sales practices. He denies any wrongdoing in the case, which is still pending. Then-New York Attorney General Eliot Spitzer dropped portions of the lawsuit in 2006 that included four other allegations tied to the investigation.

The probes led to a $3.4 billion restatement of profits for a five-year period beginning in 2000. The company agreed to pay $1.64 billion to settle claims by Spitzer and the SEC that it misled investors.

Liddy, the current CEO, plans to sell life insurance operations in the U.S., Europe, Latin America, South Asia and Japan while maintaining most of its units that sell property- casualty commercial coverage. He also may sell AIG's plane- leasing unit, consumer finance division, U.S. auto insurer, a reinsurance business and an asset manager.

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Lorraine Woellert in Washington at lwoellert@bloomberg.net.

Last Updated: October 7, 2008 17:09 EDT