The New York Department of Financial Services (DFS) has reopened a probe into the risk management practices that led to American International Group’s (AIG) emergency takeover by the Federal Reserve Board in 2008.
In the DFS probe, disclosed in a June letter written by DFS superintendent Benjamin Lawsky, DFS examiners allege that AIG may have failed to properly measure and manage risk, misled supervisors and investors and lacked appropriate checks to limit outsized risk-taking.
The fact that the New York DFS is taking a fresh look at AIG’s troubled and controversial financial products (FP) subsidiary is ironically coming to light as the Obama administration observes the fifth anniversary of the financial crisis.
It is also “off-script.” That is, federal legislators and state regulatory authorities have consistently alleged that the AIGFP was overseen by the now-defunct Office of Thrift Supervision (OTS). However, states that always had full authority to regulate AIGFP and OTS merely regulated AIG’s small thrift, based in Wilmington, Del. and Wilton, Conn. It has since been downgraded. In fact, as attorney general of New York, Eliot Spitzer cited mispricing of CDS as part of his probe of AIG in 2006. That led to AIG paying a major fine to the SEC and shareholders through action by the Securities and Exchange Commission in 2008.
Obama’s comments followed Sunday’s release of a National Economic Council report that catalogs Obama administration and Federal Reserve actions that the council’s director, Obama Economic Advisor Gene Sperling, said “have performed better than virtually anyone at the time predicted.”
“They range from the unpopular Troubled Asset Relief Program, or TARP, that shored up the financial industry and bailed out auto giants, General Motors and Chrysler, to an $800 billion stimulus bill to sweeping new bank regulations,” the report said.
As for AIG, a title of the report notes that, “After intervening to stabilize AIG during the financial crisis to prevent a greater shock through the global economy, the administration took immediate steps to restructure AIG and accelerate the timeline for AIG’s repayment of the government’s support.”
While focusing on Lehman’s collapse on the 15th, the government’s involvement in AIG’s resurrection was more intense.
It was the evening of Sept. 16, 2008 that Federal Reserve general counsel Scott Alvarez announced that AIG’s board had agreed to sell 79.9 percent of the company to the Fed in exchange for $85 billion in cash.