AIG's Sullivan May Find Job at Stake After Writedown

American International Group Inc. Chief Executive Officer Martin Sullivan may find his job at stake after an accounting lapse led to a bigger-than-forecast drop in the value of the company's holdings.

AIG rebounded in New York trading today after saying losses from so called credit-default swaps will not be material. The company fell the most in two decades yesterday after disclosing the contracts, sold to protect fixed-income investors, declined four times more than a previous estimate. Sullivan, 53, had assured investors in December that writedowns tied to the U.S. housing market were manageable.

You have to question Sullivan's leadership ability, said Rose Grant, who helps manage $2 billion in assets including AIG shares for Boston-based Eastern Investment Advisors. People are frustrated with the performance of the stock, basically throwing in the towel. His job definitely could be in jeopardy.

Citigroup Inc. and Merrill Lynch & Co. removed their CEOs last year after they underestimated losses tied to subprime mortgages. AIG, which appointed Sullivan three years ago after accounting and sales probes led to the ouster of Maurice Hank Greenberg, said it still doesn't know what the contracts were worth at the end of 2007. The company's market value has fallen about 30 percent during Sullivan's tenure.

AIG gained $1.71, or 3.8 percent, to $46.45 at 11:33 a.m. in New York Stock Exchange composite trading. Yesterday the New York-based insurer tumbled 12 percent, the biggest daily decline since the market crash of Oct. 19, 1987.

Possible Loss

Auditor PricewaterhouseCoopers LLP found material weakness in AIG's accounting for the contracts, called credit- default swaps, the company said in a regulatory filing yesterday.

The $4.88 billion decline in value of the credit-default swaps may have wiped out AIG's fourth-quarter profit, Citigroup analyst Joshua Shanker said yesterday in a research note. Fitch Ratings said in a statement that it may lower the insurer's AA credit rating.

The insurer believes that any losses from meeting obligations on its credit-default swap portfolio will not be material to the company, AIG said in a statement today.

The company said in the filing yesterday that it has procedures to appropriately determine the fair value of its holdings. Sullivan declined to be interviewed, AIG spokesman Chris Winans said.

AIG's financial products unit issues contracts that promise to reimburse investors for losses tied to $505.5 billion of securities as of Nov. 25, including corporate debt, European mortgages and collateralized debt obligations, which bundle loans.

New Chief

Greenberg ran AIG for 38 years until he was forced to retire in March 2005, two months before then-New York State Attorney General Eliot Spitzer sued and accused Greenberg of ordering improper transactions to hide losses and inflate reserves. Greenberg has maintained he did nothing wrong.

Sullivan steered the insurer through a $1.64 billion settlement of probes started by Spitzer and federal regulators, and restatements of 2000 to 2005 results that cut profit by $3.4 billion. He also led an overhaul of AIG's accounting and regulatory systems. The company blamed those restatements on weaknesses in internal controls that it said were found after Greenberg left. PricewaterhouseCoopers, AIG's auditor for more than two decades, was rehired in October.

It is incomprehensible that yet once again, this company, its board, its CEO and CFO, and its independent auditors are saying the company doesn't have adequate controls, said Lynn Turner, former chief accountant at the U.S. Securities and Exchange Commission and now on the board of Guidance Software Inc. and the Colorado Public Employees' Retirement Association. These people should all be held accountable.

Legal Consequences

Shareholder lawsuits and an SEC investigation may follow, said Tamar Frankel, a law professor at Boston University specializing in financial regulation. A material weakness is a really red flag for the SEC, she said.

SEC spokesman John Nester declined to comment. David Nestor, a PricewaterhouseCoopers spokesman, and Ken Frydman, a spokesman for Greenberg, declined to comment.

Sullivan's accounting overhaul didn't catch the latest accounting weakness because either these are new problems or more likely, these are problems that existed before and the regulators didn't go far enough, said Edward Ketz, a Pennsylvania State University accounting professor.

Net Income

AIG's net income, which set a record under Sullivan in 2006, fell 27 percent in 2007's third quarter on losses linked to the U.S. housing slump, including a $352 million reduction in the value of the derivatives. The company, which has units that originate, insure and invest in subprime mortgages or securities, is scheduled to announce fourth-quarter results later this month.

Investors eventually will look back at yesterday's announcement and conclude they overreacted, said David Katz, chief investment officer for New York-based Matrix Asset Advisors, who supports Sullivan.

The things that he can control, we're comfortable he's done a good job managing them, said Katz, whose firm manages $1.6 billion, including 845,000 AIG shares. The subprime fallout was part of the hand he was dealt.