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LATE  TO EARLY : BILLIONS IN SUBPRIME LOSSES 

, Cassano sent an email to Michael Sherwood and CFO David Viniar at Goldman
demanding that they return . billion of the  billion posted.  He attached a
spreadsheet showing that AIG valued many securities at par, as if there had been no
decline in their value. That was simply not credible, Goldman executives told the
FCIC.  Meanwhile, Goldman had by then built up . billion in protection by
purchasing credit default swaps on AIG to cover the difference between the amount
of collateral they had demanded and the amount that AIG had paid. 
On February , , PwC auditors met with Robert Willumstad, the chairman of
AIG’s board of directors. They informed him that the “negative basis adjustment”
used to reach the . billion estimate disclosed on the December  investor call had
been improper and unsupported, and was a sign that “controls over the AIG Finan-
cial Products super senior credit default swap portfolio valuation process and over-
sight thereof were not effective.” PwC concluded that “this deficiency was a material
weakness as of December , .”  In other words, PwC would have to announce
that the numbers AIG had already publicly reported were wrong. Why the auditors
waited so long to make this pronouncement is unclear, particularly given that PwC
had known about the adjustment in November.
In the meeting with Willumstad, the auditors were broadly critical of Sullivan;
Bensinger, whom they deemed unable to compensate for Sullivan’s weaknesses; and
Lewis, who might not have “the skill sets” to run an enterprise-wide risk manage-
ment department. The auditors concluded that “a lack of leadership, unwillingness to
make difficult decisions regarding [Financial Products] in the past and inexperience
in dealing with these complex matters” had contributed to the problems.  Despite
PwC’s findings, Sullivan received  million over four years in compensation from
AIG, including a severance package of  million. When asked about these figures
at a FCIC hearing, he said, “I have no knowledge or recollection of those numbers
whatsoever, sir. . . . I certainly don’t recall earning that amount of money, sir.” 
The following day, PwC met with the entire AIG Audit Committee and repeated
the analysis presented to Willumstad. The auditors said they could complete AIG’s
audit, but only if Cassano “did not interfere in the process.” Retaining Cassano was a
“management judgment, but the culture needed to change at FP.”  On February ,
AIG disclosed in an SEC filing that its auditor had identified the material weakness,
acknowledging that it had reduced its December valuation loss estimates by . bil-
lion—that is, the difference between the estimates of . billion and . billion—
because of the unsupportable negative basis adjustment.
The rating agencies responded immediately. Moody’s and S&P announced down-
grades, and Fitch placed AIG on “Ratings Watch Negative,” suggesting that a future
downgrade was possible. AIG’s stock declined  for the day, closing at ..
At the end of February, Goldman held  billion in cash collateral, was demand-
ing an additional . billion, and had upped to . billion its CDS protection
against an AIG failure. On February , AIG disappointed Wall Street again—this
time with dismal fourth-quarter and fiscal year  earnings. The company re-
ported a net loss of . billion, largely due to . billion in valuation losses re-
lated to the super-senior CDO credit default swap exposure and more than .