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 FINANCIAL CRISIS INQUIRY COMMISSION REPORT

behalf of its insurance subsidiaries. From the end of  through September ,
its holdings rose from  billion to  billion. Meanwhile, Financial Products, act-
ing on its own analysis, had decided in  to begin pulling back on writing credit
default swaps on CDOs. In PwC’s view, in allowing one subsidiary to increase expo-
sure to subprime while another subsidiary worked to exit the market entirely, the
parent company’s risk management failed. PwC also said that the company’s second
quarter of  financial disclosures would have been changed if the exposure of the
securities-lending business had been known. The auditors concluded that “these
items together raised control concerns around risk management which could be a
material weakness.”  Kevin McGinn, AIG’s chief credit officer, shared these con-
cerns about the conflicting strategies. In a November , , email, McGinn wrote:
“All units were apprised regularly of our concerns about the housing market. Some
listened and responded; others simply chose not to listen and then, to add insult to
injury, not to spot the manifest signs.” He concluded that this was akin to “Nero play-
ing the fiddle while Rome burns.”  On the opposite side, Sullivan insisted to the
FCIC that the conflicting strategies in the securities-lending business and at AIG Fi-
nancial Products simply revealed that the two subsidiaries adopted different business
models, and did not constitute a risk management failure. 
On December , six days after receiving PwC’s warnings, Sullivan boasted on an-
other conference call about AIG’s risk management systems and the company’s over-
sight of the subprime exposure: “The risk we have taken in the U.S. residential
housing sector is supported by sound analysis and a risk management structure. . . .
we believe the probability that it will sustain an economic loss is close to zero. . . . We
are confident in our marks and the reasonableness of our valuation methods.” Charlie
Gates, an analyst at Credit Suisse, a Swiss bank, asked directly about valuation and
collateral disputes with counterparties to which AIG had alluded in its third-quarter
financial results. Cassano replied, “We have from time to time gotten collateral calls
from people and then we say to them, well we don’t agree with your numbers. And
they go, oh, and they go away. And you say well what was that? It’s like a drive-by in a
way. And the other times they sat down with us, and none of this is hostile or any-
thing, it’s all very cordial, and we sit down and we try and find the middle ground and
compare where we are.” 
Cassano did not reveal the  billion collateral posted to Goldman, the several
hundred million dollars posted to other counterparties, and the daily demands from
Goldman and the others for additional cash. The analysts and investors on the call
were not informed about the “negative basis adjustment” used to derive the an-
nounced . billion maximum potential exposure. Investors therefore did not know
that AIG’s earnings were overstated by . billion—and they would not learn that
information until February , .

“Material weakness”
By January , AIG still did not have a reliable way to determine the market price
of the securities on which it had written credit protection. Nevertheless, on January