FBI Began Investigating AIG in March

By Carrie Johnson and Carol D. Leonnig
Washington Post Staff Writers
Thursday, September 25, 2008

Federal investigators have been scrutinizing American International Group since March, focusing on whether the insurance giant knowingly concealed mammoth losses that helped lead to the company's $85 billion federal bailout this month.

Investigators are interviewing witnesses and examining previous statements and disclosures made by AIG and its former officials, according to two people familiar with the probe. No determination has been made about whether to seek criminal or civil charges, said the sources, who spoke on the condition of anonymity because the investigation is at a delicate stage.

As with the 25 other ongoing FBI inquiries involving the mortgage debacle, the main focus of interest is whether companies and their executives misled investors and auditors when they put a value on their mortgage-related investments.

On Feb. 28, AIG posted its largest quarterly loss ever, blaming complex financial instruments known as derivatives for write-downs of more than $11 billion. Martin J. Sullivan, the insurer's chief executive at the time, resigned in June after AIG suffered another multibillion-dollar quarterly loss on its derivatives connected to defaulting home mortgages.

The company's near-death is largely being blamed on its heavy involvement in a kind of unregulated derivative called credit default swaps, whereby AIG earned hefty premiums in exchange for guaranteeing another company's mortgage investments if the mortgages defaulted. AIG bet that many of the mortgages would never fail, but an unusually high percentage did.

Joseph Norton, a spokesman for AIG, said yesterday: "We don't have details about the FBI investigation. Of course we will cooperate."

Mark Lane, an equity research analyst for William Blair & Co., said it is natural for authorities to scrutinize a company after its investors have lost enormous amounts of money without warning. But many powerful Wall Street firms misjudged their investments, he said.

"In terms of criminal intent, it seems to me it will be difficult to prove," he said. "It's more likely they're guilty of complacency and denial."

Hundreds of financial services executives misjudged the risks of subprime mortgage-backed securities. "Just look at the environment," Lane said. "It doesn't matter if it's an investment bank, a bond insurer or an insurance company. There's been a lot of people who didn't see how bad things would get."

In an investor conference call earlier this year, Sullivan called on regulators to overhaul an accounting standard that requires businesses to value such investments at the market price if they were to be sold rather than held in a company's own portfolio for months or years. The provision has forced corporate managers to disclose steep losses on mortgage-related investments this year.

AIG has been under investigation in the past for misleading accounting -- and each time emerged largely unscathed.

Sullivan got his job after the 2005 ouster of legendary chairman Maurice R. "Hank" Greenberg, who ran the company for four decades and built an empire in 130 countries. Greenberg was forced to step aside after then-New York Attorney General Eliot L. Spitzer and the Securities and Exchange Commission accused him and his company of fraudulent financial reports. An investigation found evidence that the company was playing down losses and risk, using sham transactions to companies that were not independent of AIG. The company settled the case by paying a record $1.6 billion in fines.

In 2004, AIG agreed to pay $126 million to settle another multi-layer probe, in which the SEC and Justice Department alleged that the insurer had engaged in accounting fraud by concealing the nature of its transactions with a bank subsidiary and cellphone company.

Staff researcher Julie Tate contributed to this report.

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