AIG former execs draw fire from lawmakers

WASHINGTON (Reuters) - Lawmakers criticized American International Group Inc (AIG.N) on Tuesday for lavish spending and ignoring financial warnings as former top executives blamed the insurer's woes on accounting rules and short sellers.

AIG, rescued September 16 by a two-year $85 billion loan from the Federal Reserve, was blasted at a congressional hearing for sending executives to a spa retreat less than a week later and for giving a $1 million-a-month consulting contract to an employee blamed by some lawmakers for AIG's risky activities.

House Oversight and Government Reform Committee Chairman Henry Waxman revealed a letter from the Office of Thrift Supervision (OTS) and a warning by AIG's accountants about material weaknesses at AIG as part of a series of hearings into the financial crisis.

"We need to understand what makes a private company like AIG too big to fail and what drew such a large and venerable enterprise to the brink of failure," said Waxman, a California Democrat.

The OTS sent a letter to AIG in March warning of its lack of transparency and ability to oversee its financial products.

"A material weakness exists within corporate management's oversight of (the company's financial products unit) super senior Credit Default Swap (CDS) valuation process and financial reporting," said the March 10 letter to AIG's board from the OTS, a division of the Treasury Department.

But former AIG chief executives blamed the company's downfall on several factors, including mark-to-market accounting rules, which require companies to price their assets at current values even when there is no market.

The CEOs were Hank Greenberg, who left in 2005 after an accounting scandal for which he has denied wrongdoing; Robert Willumstad, who was brought in after wide mortgage losses in June 2008 until the bailout; and Martin Sullivan, who was CEO between Greenberg and Willumstad.

Greenberg submitted testimony to the oversight committee but did not appear at the hearing due to illness.

Republican lawmakers, as they did on Monday at a hearing with Lehman Brothers (LEHMQ.PK) chief executive Richard Fuld, tried to focus attention on housing finance companies Fannie Mae (FNM.P) and Freddie Mac (FRE.P), that were seized by the government early in September.

Some Republicans are calling for a special counsel, or the Justice Department, to examine the companies' role in the financial chaos. Waxman said his committee will hold a hearing on Fannie and Freddie's role.

The Lehman and AIG hearings come just days after Congress passed and President George W. Bush signed a $700 billion financial bailout package, giving the government vast powers to buy up bad mortgage-related debt.

But global markets have continued to swoon this week prompting calls for a coordinated multinational cut in interest rates, aimed at encouraging the resumption of lending.

OUTRAGE OVER PERKS

Lawmakers expressed outrage at perks AIG executives enjoyed less than a week after the bailout, including a spa retreat where they racked up bills for $200,000 for hotel rooms and $23,000 for spa services.

"They were getting facials, manicures, and massages, while the American people were footing the bill," said Rep. Elijah Cummings, a Maryland Democrat on the oversight panel.

The oversight committee examined thousands of pages of internal documents produced by AIG and former executives.

Minutes from a compensation committee meeting in March said Sullivan urged exclusion of the money-losing AIG Financial Products unit when calculating bonuses.

The committee approved the change, according to Waxman.

Sullivan told lawmakers he did it to retain key executives. "I was focusing on them more than me."

The congressional panel also found that AIG auditor Joseph St. Denis was excluded from a valuation review of credit swaps because then financial products division executive Joseph Cassano worried he would "pollute" it. St. Denis, who later resigned in protest and lost his own bonus, expressed concern about AIG's valuation of financial product liabilities.

Cassano drew fire at the hearing for being kept on a $1 million-per-month consulting contract when he left AIG after several quarters of billion-dollar losses. "I wanted to retain the 20-year knowledge that Mr. Cassano had," said Sullivan.

But lawmakers were incredulous. "It appears to me that he single-handedly brought AIG to its knees and is the reason taxpayers had to step in," said Rep. John Sarbanes, a Maryland Democrat.

Lynn Turner, a former Securities and Exchange Commission chief accountant, said AIG had failed to be open about problems it was facing, even when it had hints of trouble. "I don't think the company was ever honest with the investors about the potential magnitude of these things," Turner testified.

BACKING FOR MORE REGULATION

AIG'S troubles stem from guarantees it wrote on mortgage-linked derivatives that resulted in $18 billion in losses over the last three quarters.

The guarantees, credit-default swaps (CDS), are designed to protect against the risk a borrower will default on a debt.

Eric Dinallo, the top New York State insurance regulator, and former AIG CEOs Sullivan and Willumstad, said they would back some type of regulation of the fast-growing $55 trillion CDS market.

"With benefit of hindsight, if there is good regulation that could be put in place... I would support that," said Sullivan.

Dinallo also said lawmakers should consider revising the Gramm-Leach-Bliley law, which broke down barriers between investment and commercial banks and let them to combine in new ways under one umbrella.

Some blame the landmark 1999 law for contributing to the financial mess.

"I would take a serious look at Gramm-Leach-Bliley... and whether the supermarket of financial services is worth it when things kind of smell in aisle six," Dinallo said.

(Reporting by Rachelle Younglai, Kim Dixon, Diane Bartz; Editing by Lisa Von Ahn and Tim Dobbyn)