Andrew Forster, an executive of American International Group Inc.’s derivatives unit, said he was surprised that the insurer’s managers were unaware of collateral-posting requirements included in the contracts.
“It’s a fairly standard feature of a derivative contract, so, to that extent, I’d be surprised,” Forster said today at a Financial Crisis Inquiry Commission hearing in Washington. “It was clear to me. I thought it was clear to them.”
Steven Bensinger, AIG’s former chief financial officer, and Elias Habayeb, former CFO of the division including the derivatives unit, told the panel they didn’t know of the provision until the third quarter of 2007, according to an FCIC document released yesterday. Goldman Sachs Group Inc. demanded $1.8 billion on July 27, 2007, saying the market value of the securities underlying credit-default swaps had declined.
“I find it just stunning that you have such a deeply siloed risk management system and that the CFO, who was in charge of liquidity-risk management, would be unaware of contractual obligations to deliver collateral,” said FCIC Commissioner Douglas Holtz-Eakin.
Goldman Sachs was the first firm to demand collateral on the swaps tied to mortgage-linked assets, testified Forster, an executive vice president in charge of the AIG Financial Products trading desk. Subsequent collateral calls from Goldman Sachs and banks including Societe Generale SA fueled losses that forced New York-based AIG to seek a U.S. government bailout in 2008.
‘A Whole Bunch of Cash’
AIG and Goldman Sachs disagreed on the value of assets covered by the swaps because a freeze in Wall Street trading in 2007 for mortgage-related assets made it difficult to get pricing data, Forster said.
“We don’t agree with their marks and are simply saying let’s use a third party and keep it friendly,” Forster wrote in an August 8, 2007 e-mail to a Financial Products colleague. “What do they expect us to do -- just give them a whole bunch of cash because they are Goldman Sachs?”
FCIC Chairman Phil Angelides called Goldman Sachs’s initial capital call a “stab in the dark” because the New York-based bank reduced its request to $1.2 billion from $1.8 billion by Aug. 2, 2007, according to the FCIC documents. AIG posted $450 million of collateral on Aug. 10, and Goldman Sachs said at the time that the funds were insufficient.
‘Not a Science’
For “illiquid assets like this, it’s not a science, there is judgment involved,” Goldman Sachs CFO David Viniar testified. “We used our best estimate at all times of what the market was.”
Robert Lewis, AIG’s chief risk officer, also didn’t know about the swaps’ collateral call provisions until after Goldman’s 2007 demand, according to the FCIC documents. When asked by FCIC staff if the provisions caused consternation within AIG, Lewis said, “I would say that’s an understatement.”
AIG’s former Chief Executive Officer, Martin Sullivan, testified yesterday he was unaware in 2005 of the tripling of risk through derivatives at AIG Financial Products. AIG’s swaps tied to asset-backed securities surged to $54 billion in the 12 months ended Dec. 31, 2005, Angelides said.
“My first knowledge of the super senior credit-default swaps portfolio was sometime in 2007,” Sullivan, 55, said yesterday during the first day of the hearing.
Before 2007, Sullivan had received reports about the “totality” of the swaps unit without being alerted to the specific trades that later contributed to AIG’s near collapse, he said. He was ousted in 2008 as the firm’s writedowns mounted on bets that he previously said would be “manageable.”
Angelides, who will report the commission’s findings to Congress and President Barack Obama in December, said Sullivan should have known more about risk at AIG.
“We will probably debate on this panel many, many issues, but I do not think that the failure of leadership and effective management at AIG will be a matter of much debate,” Angelides said yesterday.
AIG, once the world’s largest insurer, received a U.S. bailout designed to protect banks that bought more than $60 billion in swaps from the firm. The FCIC is reviewing decisions that led to the insurer’s rescue as lawmakers seek to prevent another company from accumulating so much risk that its collapse could threaten global economic stability.