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Exuberant optimism vs. total bull****

WaPo has a long article with terrific links to an email trail from AIG. The article essentially message tests the defense arguments in the civil or criminal prosecutions of AIG and its Officers and Directors. When you are working up a case, it is helpful to have a timeline to enable you to get a handle on things like cause and effect and “what did he know and when did he know it”.


July 11, 2007- The major securities ratings services begin peppering AIG with questions about subprime mortgage exposure.

July 12, 2007 – A member of the AIG Audit committee convenes a meeting at AIG’s HQ at 70 Pine Street.  Joe Cassano, chief of the Financial Products Unit at AIG puts on a dog and pony show to quiet concerns from the Audit Committee.

July 13, 2007 – AIG chief credit officer Kevin McGinn  writes in an email ”We are getting questions on the subject from all three rating agencies, the OTS [Office of Thrift Supervision] and PWC [Price Waterhouse, AIG’s auditors]. I am giving highly edited versions of AIG sub-prime exposure material to the rating agencies (e.g. nothing on mezz etc), unless they explicitly request it.”

August 2, 2007 – During a conference call between AIG executives and senior people at Goldman Sachs, GS demands that AIG post additional collateral to demonstrate that it can meet its obligations on policies sold by AIG to protect against losses on mortgage backed securities.

August 13, 2007 – The Wall Street Journal publishes a story called “AIG Might Be Deceiving Itself on Derivatives Risks”

August 15- August 31, 2007 – More questions pour in from rating services Moody’s Investor Service and AM Best, and AIG’s auditors Price Waterhouse.

September 20, 2007 – Elias Habayeb of AIG wrote an email to the Financial Services division telling them that they had to be prepared to defend the “fair value” amount that they were putting on their exposure related to the policies written to insure the mortgage backed securities.

This is an area that will receive heightened attention from analysts / investors and is also on the audit committee’s radar screen. It is the most significant item in financial services for Q3. Further, it is a possible area where we may receive a comment from the SEC on.

September 30, 2007- AIG’s 3rd quarter filing.

October 31, 2007 – Cassano sends an email to other AIG executives with proposed language for a public statement trying to spin the following as positives:

1)  AIG is able to charge far more in fees and points for its credit default swaps (the policies that insure against losses in mortgage backed securities) because

2)  AIG’s competitors have lost their appetite for writing these kinds of policies

Digression #1 –OK, so all your competitors have backed off selling a product, AND you have been getting weeks of inquiries about whether you have enough collateral to pay off on the policies you have written with respect to this same product, AND a customer to whom you have sold a ton of this product is demanding that you put up  more collateral to back up this product, AND the reason that you can charge more for the product is that everybody else is afraid to write any more policies like this…..

SO, YOU THINK IT’S A GOOD THING? Nah ah, “Danger Will Robinson! Danger Will Robinson!”

November 7, 2007 – AIG reports a $352 million decline in the value of its credit default swap portfolio and the possibility of another $550 million in future losses.

November 8, 2207 – In a conference call with AIG’s investors Cassano pooh poohed these write downs saying it was the fault of uneven accounting procedures by the customers to whom AIG had sold the insurance policies on the mortgage backed securities. He said that some of AIG’s trading partners were valuing those securities at 55¢ on the dollar [could that be Goldman Sachs?] while others valued them at 95¢ on the dollar. He does admit that if the lower number turns out to be the correct one, there could be huge losses for AIG, but assures the investors that AIG had plenty of assets to meet any collateral calls.

Digression #2 – There is a 40% variation in the valuations of the same deals? How is it possible? We’re not talking about somebody forgot to “carry the one “ type minor math errors here. We are talking about difference of millions and billions of dollars, and there isn’t a more precise figure? What, did they just guess? Or throw darts at a board with random numbers? How could they not know what these policies might have to pay out?

You cannot believe this a good thing? Nah ah, “the threat level has been raised to ORANGE”

Later in November 2007 – AIG’s auditors Price Waterhouse report to AIG that it may have a “material weakness” because they did not know how to value their credit default swaps. A material weakness is a VERY BIG DEAL under the Sarbanes- Oxley Act and must be both reported and corrected. A material weakness is a fault in the internal accounting controls of a company that could lead it to make a “material misstatement” of AIG’s value and fraudulently inflate AIG’s stock price.

Digression #3 – A material misstatement is a big deal under Rule 10b-5 of the Securities Exchange act of 1934.

Rule 10b-5 states:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.  [emphasis added]

OK, we are now at RED ALERT. RED ALERT! Let the red light strobe and the claxon wail.

November 28, 2007 – Cassano resists the idea of explaining his credit default swap portfolio to investors saying he doesn’t want to “confuse them”.

December 5, 2007 – Public conference call with AIG investors. Cassano, Bob Lewis and AIG chief executive Martin Sullivan astoundingly say  that because the credit default swaps are so carefully underwritten they “believe the probability that it will sustain an economic loss is close to zero.”

Digression #4—Say what?  Your auditors just told you that you don’t know how to value your own insurance contracts, Goldman Sachs and other trading partners are asking you to post more collateral – indicating that they disagree with how you have valued these contracts, the guy in charge of these products cannot come up with a way to explain them in layman’s terms, yet you have the chutzpah to tell your investors that your products are “carefully underwritten”? And probability of loss is zero? WTF? Where did you get that from?

AIG is trying to spin this as a “statement of optimism about future events”.

I call, well erm, bovine fertilizer! That your trading partners are making collateral calls in the millions and billions of dollars, is not a question of future occurrences. That your auditor told you that you haven’t got a clue about how to value your own insurance contracts is not a statement about future events. That your trading partners have taken huge write downs on the value of securities that you have insured, is not a statement about a future event. These are all things that have already happened. Wishing that a fairy will come by and waive her wand and undo these events, is not “a statement of optimism”;  it’s fantasy or a lie and both are actionable under 10b-5.

February 11, 2008 – Price Waterhouse finally gets the AIG Board to admit to the material weaknesses in the valuations of the credit default swap portfolio.

February 28, 2008 – AIG’s 2007 year end SEC filing indicated that AIG had posted over $5 billion in collateral against over $11 billion in paper losses, yet inexplicably stated that that “management believes” it could raise the billions of dollars needed to meet “anticipated cash requirements”.

September 2008 – AIG, unable to raise the billions needed to meet its cash requirements, takes $180 billion in cash and loans from the government bailout.

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Cynthia Kouril

Cynthia Kouril

Cynthia Kouril is a former Special Assistant United States Attorney in the Southern District of New York under several different U.S. Attorneys, former counsel to the Inspector General for the N.Y.C. Department of Environmental Protection where she investigated threats to the New York City water supply and other environmental crimes, as well as public corruption and fraud against the government, former Examining Attorney at the N.Y.C. Department of Investigation and former Capital Construction Counsel at New York City Parks and Recreation.
She is now in private practice with a colleague whom she met while at the USA Attorney's Office. Ms. Kouril is a member of the Steering Committee, National Committeewoman and Regional Coordinator for the New York Democratic Lawyers Council, a member of the Program Committee of the Federal Bar Council and a member of the Election Law Committee at the Association of the Bar of the City of New York. She is active in several other Bar Associations.
Most important of all, she is a soccer mom.