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James Cole Overlooked Monster Debt at AIG

Bea Edwards, June 07, 2010

On June 2, 2010, Ryan Reilly, writing for Main Justice about James Cole's nomination to be Deputy Attorney General (DAG) at the US Department of Justice (DOJ), addressed the issue of Cole's role as the Independent Consultant at AIG from 2005 until 2009. For five years, Cole was assigned by the DOJ and the Securities Exchange Commission (SEC) to monitor accounting-driven investment practices at AIG.

Reilly quoted Cole's defenders’ claim that “his work did not specifically include the major issue that nearly led to the company’s demise – namely credit default swaps.”

This explanation for Cole’s myopia and his astonishing ability to miss the unmanageable risk that brought on the meltdown at AIG is superficial and disingenuous. The key word is “specifically.” According to our sources, the problem was not simply credit default swaps (CDSs), but rather the way in which AIG-Financial Products (AIG-FP), the division that primarily generated and traded them, was exempted from compliance obligations and oversight. On May 26, 2010, Elizabeth Warren, Chairwoman of the Congressional Oversight Panel on TARP, said in her opening statement chairing the hearing:

“The company [AIG] was a corporate Frankenstein, a conglomeration of banking and insurance and investment interests that defied regulatory oversight."

In contrast to Warren’s opinion, Cole did not seem to perceive structural problems with regulatory oversight and legal compliance at AIG. On the contrary, when writing about AIG compliance in August 2008, he reported to DOJ and the SEC,

“Each compliance plan will be submitted to the OC (Office of Compliance) for review and approval to ensure that the plan has adequately provided controls for addressing all identified compliance risks.”

This, according to Cole, was a reasonable and achievable goal. Next to this text in his table of goals, Cole placed a green dot, meaning progress toward the goal was advancing without problems.

Cole’s evaluation of AIG compliance progress was categorized in terms of red dots – meaning poor; yellow dots – meaning not-so-bad; and green dots – meaning no worries. For this level of analysis, produced quarterly, his firm, Bryan Cave, LLP, was paid $20 million by AIG over five years.

Bear in mind that Cole was not sitting at AIG by coincidence during this time. He was there because the corporate management was guilty of criminal conduct. Nevertheless, while at AIG, Cole simply towed the corporate line, set by General Counsel Anastasia Kelly, among others. Kelly famously told Fortune in a February 2010 interview:

“I wanted to put in a worldwide compliance and regulatory organization, but I kept hearing, "Why do we need this?" I just kept pushing, and eventually we got that organization in place. When things blew up in 2008, it was very important in keeping things under control overseas.”

Of course, as we now know, things were not under control overseas. AIG-FP in London ran spectacularly aground, and sprung a leak in the corporate balance sheet that gushed enough debt to pollute the entire international financial system.

And Cole, who was supposedly looking over Kelly’s shoulder on behalf of the DOJ & SEC, believed her delusions. In the same August 2008 report , written less than one month before AIG imploded, the gerrymandering that allowed him to neglect the underlying risk associated with credit default swaps at AIG-FP is evident. Cole’s assessment (p. 47; D.05.1 and 06.1) concerned itself only with the correct application of the accounting standards that govern the reporting of changes in derivatives’ value (Federal Accounting Standards 133 and 159).

Congressional Research Service (CRS) report noted that Cole’s September 2007 recommendations also showed only a preoccupation with the accounting treatment of derivatives without concern about the risk associated with them. CRS also detected the peculiar “Franksteinian” character of AIG that Elizabeth Warren later lamented:

It should be noted that the recommendation addresses the accounting treatment of derivatives, rather than the financial risks to the company that they might pose, but it does suggest that AIG-FP enjoyed an unusual degree of autonomy within AIG's overall corporate structure (p. 8).

The surgical precision with which Cole managed to ignore the largest accumulation, ever, of unmanageable risk in the banking/investment/insurance industry is curious. Didn't he hear anything? Didn’t he go to the men's room? Stand in line at the cafeteria? Hang around the copier and chat? The fact is that AIG-FP stopped taking on credit default swaps as early as 2006 because by that time even the dopes in FP knew those deals were duds.

So here we are: game over. Let’s recap how the major players made out:

  • The CEO of AIG-FP, Joseph Cassano, quietly retired in 2008 with what can only be considered a platinum parachute rumored to be worth a lump sum of over $30 million, plus consulting fees of $1 million a month.
  • AIG General Counsel Anastasia Kelly left the company in 2009 with a multimillion-dollar severance package worth at least $2.5 million.
  • The multi-labeled Suzanne Folsom (Kelly’s sidekick, AIG Chief Compliance Officer, former Paul Wolfowitz crony at the World Bank) left in the corporation in 2009 with – by AIG standards – a measly million.
  • Andrew Forester, Chief CDS trader at FP remains in place collecting an annual pant-load of money in salary and bonuses
  • James Cole, AIG ‘Independent’ Consultant, may ascend to the #2 position at DOJ, where he’ll help decide who is prosecuted and for what.

Thanks to this crew, the US taxpayer is saddled with a bill for the AIG bailout of $182 billion. And on top of it all, we’re about to be saddled with James Cole at the Justice Department too.

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Beatrice Edwards is International Program Director of the Government Accountability Project, the nation's leading whistleblower advocacy organization.