"THEY KNEW AND DID NOTHING"

That explains why the Big Shitpile got so big: People who warned about the looming risks were ignored because there was too much money being made. This is the real moral hazard issue.

Documents Show AIG Knew Of Problems With Valuations
By LIAM PLEVEN and AMIR EFRATI
OCTOBER 11, 2008
Wall Street Journal

Top officials at American International Group Inc. knew of potential problems in valuing derivative contracts long before these risky transactions caused the insurer's shareholders severe pain, according to documents released by congressional investigators.

At congressional hearings Tuesday, a former internal AIG auditor wrote that he had early on raised concerns about being excluded from conversations about the valuation of the derivatives. The auditor, Joseph St. Denis, wrote in a letter to the House Committee on Oversight and Government Reform that in early September 2007, he learned that AIG's financial-products unit had been asked for billions of dollars in collateral related to derivatives it had sold.

"I was gravely concerned about this," Mr. St. Denis wrote. The derivatives, known as credit-default swaps, protect buyers against the risk of default on other investments, and AIG believed the likelihood of making payouts was remote. Mr. St. Denis wrote that the valuation model of one of AIG's trading partners "apparently indicated" that, in fact, the unit "was in a potentially material liability position."

Mr. St. Denis wrote he wasn't personally involved in the valuation of the swaps at the unit. In the last week of September 2007, Mr. St. Denis wrote, the unit's head, Joseph Cassano, said he had "deliberately excluded" Mr. St. Denis "because I was concerned that you would pollute the process."

In the letter, Mr. St. Denis said he resigned on Oct. 1, 2007, and that later that month, AIG's chief auditor, Michael Roemer, asked him why and said he would report those reasons to AIG's audit committee. Mr. St. Denis wrote that he told Mr. Roemer about Mr. Cassano's comment. That would indicate that a key AIG executive last fall was aware of Mr. St. Denis's concerns.

The good news is that there is a chance that some of these lying bastards may go to jail:

Criminal prosecutors are looking at whether AIG executives misled PwC about market indications that showed the value of AIG's swaps should be lowered, that person said. If prosecutors were to find evidence that investors or PwC were misled, it could constitute criminal fraud.