Bad Paper

The Securities and Exchange Commission and the Justice Department are reportedly investigating the manner in which American International Group accounted for subprime related derivatives. The agencies are reviewing the manner in which AIG valued credit default swaps. Losses on those swaps led to record losses at the insures.

According to an article from Bloomberg as reported in the Los Angeles Times, Chief Executive Martin Sullivan told investors at a Dec. 5 conference that write-downs from the U.S. housing market would be “manageable.” That same day, Joseph Cassano, head of the company’s unit selling credit-default swaps, said the contracts declined by $1.1 billion in the first two months of the fourth quarter. “The effectiveness of our risk-management efforts will show through in our results,” he said. Cassano later stepped down, and the write-downs have since triggered net losses of $5.29 billion for the fourth quarter and $7.81 billion for the first quarter.