|American International Group Inc. (AIG), the U.S.-based insurance giant, has launched a defence against allegations by its shareholders that the beleaguered company engaged in fraud and wrongdoing that led to its spectacular collapse in September 2008. It was saved through a U.S. taxpayer-funded bailout of over $180 billion (USD), only to pay billions of that money to other troubled Wall Street firms and millions in retention bonuses to its executives.
In civil lawsuits filed in New York, AIG\'s shareholders are trying to recover damages for the money lost when AIG\'s stock price crashed. Citing risky securities lending practices in one unit and a failure to disclose massive paper losses in another unit that wrote billions in exotic derivatives contracts, the shareholders are trying to cleave back billions of dollars. Similar lawsuits in the U.S. have reaped handsome settlements and verdicts for groups of individuals, who can sue under so-called \"class action\" laws, allowing many people to bring a single lawsuit if they suffer from the same harmful act.
In a court filing this week, AIG denied allegations of wrongdoing, blaming its collapse on \"the perfect financial storm.\" Claiming that the market panic and the need for cash caused an unexpected \"run on the bank,\" the company defended itself -- as well as its auditors, underwriters and several former executives -- all accused of fraud in civil class action cases brought in the United States.
Gradually, questions about systemic weakness in several AIG businesses have emerged. Last week, media in the United States, including The New York Times, began raising questions about the weaknesses even in AIG\'s core insurance businesses. AIG\'s court papers make little mention of the insurance business, but, for the first time since its implosion, AIG confessed to being underfunded and unprepared when its was called upon to pay out billions of dollars to institutions who were returning borrowed securities in droves. Those firms, hungry for cash, had a right to reclaim money they posted for the stock borrowings, but AIG did not have cash to give back because it placed the money in other risky investments. At this same moment, large investment firms like Société Générale, Goldman Sachs, and Merrill Lynch were demanding that AIG post billions in collateral on credit default swaps, which were insurance-like contracts that AIG wrote to payout if the firms suffered losses on near-risk-free bonds.
In the search for greater clarity on the causes of the collapse, AIG\'s courtroom defence may raise more questions than it answers.. AIG has not explained why it had insufficient cash on hand to cover securities redemptions, nor its decision to post the last of its cash with SocGen and other firms for unrealised losses on bonds that, even now, have suffered no dollar losses. Earlier filings and statements by AIG show that the company had contested the need to post the cash under these insurance-style contracts. At an investor conference in late 2007, Joseph Cassano, the former head of the unit that wrote the derivative contracts, who is also being sued by shareholders, vowed to fight calls for collateral by some of Wall Street\'s most powerful firms, saying \"[i]t’s not a service to the shareholder or to the company for me to agree terms on these collateral calls unless I can make sure that I believe that they’re bona fide. And that’s what we do.\" Sources close to AIG’s London office say that Cassano was at loggerheads with its external auditors, who also served as Goldman Sachs’ auditors, over Goldman’s demand for cash. Shortly thereafter, Cassano was sacked, and AIG went on to pay billions in collateral for unrealized losses to SocGen, Goldman Sachs, and other firms.