Why AIG Stumbled, And Taxpayers Now Own It

Of all the corporate bailouts that have taken place over the past year, none has proved more costly or contentious than the rescue of American International Group (AIG). Its reckless bets on subprime mortgages threatened to bring down Wall Street and the world economy last fall until the U.S Treasury and the Federal Reserve stepped in to save it.

So far, the huge insurance and financial services conglomerate has been given or promised $180 billion in loans, investments, financial injections and guarantees - a sum greater than the annual cost of the wars in Iraq and Afghanistan.

In return the U.S. taxpayers have been given a 79 percent equity stake in the company. We are now AIG's largest shareholder. We have 116,000 loyal employees who had nothing to do with this mess, some valuable insurance assets, and a new CEO, Edward Liddy, who says his only mission is to get our money back.

For the past eight months, Liddy's job has been to prevent AIG from collapsing: trying to extricate the company from its disastrous trades, and selling off the crown jewels of what was once one of the world's great businesses, all to satisfy its massive debt to Uncle Sam.

"Are there people from the government on this floor?" Kroft asked Liddy.

"There aren't people from the government on this floor. But I would guess today, there's probably 20, or 30, or 40, or 50 people either in our building or over at the Federal Reserve, which is a couple of blocks away, worrying and thinking about things related to AIG. They come to our board meetings. They come to our committee meetings. We have them in any strategic meetings, any decisions to buy assets, to sell assets. They're involved in those," he explained.

It's a thankless job that Liddy neither sought nor particularly wanted. He had retired from the chairmanship of the Allstate insurance company and was serving on the board of Goldman Sachs when Treasury Secretary Hank Paulson, Goldman's former chairman, asked him to take over AIG.

Liddy agreed to do it for a salary of one dollar a year

Asked what ever possessed him to take the job for a dollar a year, Liddy told Kroft, "First, I think, like much of your audience, if somebody calls and says, 'Could you please help your country?' people say, 'Yes.' With respect to a dollar a year, I knew I'd have to make some tough decisions. I didn't want in any way, shape, or form people to question my integrity, my honesty as to why I was doing it."

"Did you have any idea what you were getting into?" Kroft asked.

"In some regards, I did, and in some regards, I didn't. So certainly understanding how to restructure a company, I've done that before. The political issues, how you relate to the Federal Reserve or Treasury, or the Congress, that's new and sometimes terrifying to me," Liddy said.

"Especially the Congress," Kroft remarked.

"Especially the Congress, yes," Liddy replied.

Congress raked him over the coals for paying out $165 million in bonuses to some of the very people who helped wreck AIG. The bonus deals had been signed before Liddy got there.

"It's difficult to sit there and have 30 or 35 people throwing barbs at you, and really not appreciating that you're on their side and you're trying to help," Liddy said.

Asked if he knew how bad things were at the company when he took the job, Liddy told Kroft, "No, no, not at all."

Not long after he arrived, AIG reported the largest quarterly loss in U.S. history - more than $60 billion during the final three months of last year.

The sprawling holding company, that controlled some of the biggest insurance companies in the world, owned and leased more jet aircraft than most of the major airlines, and provided investment income for pensions, municipalities and other institutions around the world, had its tentacles everywhere. And the threat of collapse walked the global financial system to the edge on an abyss.

"I know you're not to blame for any of this, but you are the current proprietor, so to speak. Big picture, what happened?" Kroft asked.

"We strayed from our core skills. … in the late '80s, we put in something called AIG FP. It wasn't an insurance company. It's a company that dealt in very sophisticated financial products," Liddy explained.

With offices in London and Connecticut, AIG Financial Products had fewer than 500 employees, but it made enough bad deals to destroy the rest of the company.

The division was created by longtime AIG Chairman Maurice "Hank" Greenberg, who was forced to resign after an accounting scandal in 2005, and was succeeded by Martin Sullivan.

Like most of Wall Street, AIG FP became enamored with the amount of money to be made in the subprime mortgage market.

Not only did AIG buy billions of the now toxic mortgage-backed securities, the financial products division looked at their computer models and decided that the securities were so safe it could make tons of money insuring them for other investors who bought them.

These private, unregulated insurance contracts were called credit default swaps, and would ultimately expose the giant conglomerate to $64 billion in potential subprime mortgage losses; when the housing bubble burst, AIG didn't have enough money to meet its obligations.

Liddy estimated that just 20 or 30 people were involved in bringing down the company.

"How can 20 or 30 people bring down a company the size of AIG? I mean, that requires a lot of failures, doesn't it?" Kroft asked. "On the part of a lot of different people, on the people in risk management?"

"You know Steve, I don't necessarily see it that way. I think it requires a belief that models are always right and human intervention won't offset them. It assumes that the kinds of risks that were viewed to be so remote could not occur. But in fact, they did occur," Liddy replied.

"This was a pretty colossal screw up. You would agree?" Kroft asked.

"Yeah, I'd say in hindsight, if the people that made that decision had to do it over again, my guess would be that they would not do it," Liddy said.

"What they did was that they underwrote the credit bubble in the U.S. They held up a sign. And they said, 'We're ready to buy the stuff.' It was a cash cow for them. They liked it. They loved the business. And they backstopped the credit bubble and the whole economy," Rich Ferlauto, director of pension investments for the American Federation of State, County and Municipal Employees [AFSCME], told Kroft.

AFSCME's members' pension plans lost $4.3 billion on investments in AIG stock. Ferlauto blames company executives, the board of directors, and a compensation system that rewarded short-term profits while ignoring long-term risk.

Asked why he thinks the people at AIG FP took these risks, Ferlauto told Kroft, "For the most part, I don't think they saw the risk. They knew the risk was out there But they were driven because they thought they could make a buck. They were sort of blindsided by the ability to make short-term money."

"And it was more than a buck," Kroft pointed out.

"This is the kind of money that most average people only dream of and then some. It's like hitting the jackpot every year," Ferlauto replied.

At AIG Financial Products, more than 30 percent of the profits were paid out in compensation. And no one benefited more than Joseph Cassano, who oversaw the London operation that brought AIG down.

Cassano, who is holed up in his London apartment, has declined all requests for interviews.

Liddy told Kroft he has never met Joe Cassano.

"But he's clearly one of the 20 people who helped wreck this company," Kroft said.

"Joe Cassano ran FP for a number of years," Liddy replied.

"According to these figures I have, he made $43 million in 2006, $24 million in 2007 - a total of $280 million over the course of the eight years. Do you believe that he was more concerned with the values and the survival of AIG than he was about his own compensation?" Kroft asked.

"Based upon those numbers, it doesn't sound like it. But that's pure speculation on my part," Liddy said.

Cassano continued to defend his investment strategy even after the subprime mortgage crisis reared it ugly head in the summer of 2007. On a conference call with Wall Street analysts he said there was nothing to worry about: "We see no dollar of loss associated with any of that business."

He was off by more than $40 billion.

"Do you think that Mr. Cassano knew that everything was all right in August, 2007, when he made that statement?" Kroft asked.

"I don't know what he was thinking," Liddy said.

"You mean, like I don't know what he was thinking?" Kroft asked.

"I mean, like I don't know what he was thinking," Liddy replied.

"Either he didn't know what was going on, which is a kind of frightening prospect, or he did, which would suggest that he and maybe others at AIG FP engaged in a massive fraud over a period of years. It's one of those two choices," Frank Partnoy told Kroft.

Partnoy is a law professor at the University of San Diego and an expert on the kind of complicated financial derivatives that ruined AIG.

"The fraud would be not telling AIG's shareholders, its investors, about the massive risks that AIG was taking," Partnoy explained. "The fraud would be not disclosing the fact. And it turned out to be a fact, that AIG had significant exposure to subprime mortgages."

Partnoy says AIG didn't tell its shareholders about its risky positions until June 2007, and even then the disclosure was limited to a single sentence buried in a 96-page report.

The conduct of AIG's Financial Products division and its CEO, Joseph Cassano, is now the subject of wide ranging investigations by the Securities and Exchange Commission and the FBI And that has made Ed Liddy's job even more difficult.

"The first thing that I did was walk in the door and say, 'AIG FP, we're going to shut it down.' We are not going to be in that business," he told Kroft.

But there are still employees working at AIG FP, winding the business down, getting paid and getting bonuses.

"You may have said, 'Let's shut it down,' but you're not out of that business yet,'" Kroft pointed out.

"No, we are not out of the business. And it'll take a while for us to be out of it. But we will substantially de-risk and shrink that business by the end of this year. People will be surprised by how much progress we make," Liddy said.

Since Liddy took over, he says the troubled, volatile entity has disposed of half of its complex derivative investments, but another 27,000 deals valued at $1.5 trillion are still on the books.

"We spoke to someone who's intimately familiar with AIG Financial Products. And he told us that out of the 10 or 20 people who were really involved in the decision-making process, only two have left the company. That everybody else is still there. Is that true?" Kroft asked Liddy.

"Steve, we've had some resignations," Liddy replied. "We've had some people who have said 'I'm going to resign, I'm not going to give you my resignation now, because I want to do this professionally and I want to help you.'"

Asked if it is true that only two people have left, Liddy said, "To the extent there are people who traded credit default swaps, some of them may still be there, because we're asking them to un-trade them But the people who designed it, who built those models, who signed us up for that business, they are gone."

"Retired, comfortably retired," Kroft remarked.

"Retired, left, went and did other things," Liddy said.

60 Minutes asked to speak with some of the employees of AIG FP and visit their offices in Wilton, Conn.

Liddy declined, but provided us with a video of the operation. He said people there were still traumatized from the threats and harassment leveled against them during the recent bonus controversy, and no one wanted to talk to us.

"Busloads of people wound up on their lawns, taking pictures, picketing in front of their houses. Just not a good idea for us to get back into that," Liddy explained.

Liddy believes the public anger directed against the company and its employees is misguided and counterproductive, making it more difficult to hold onto the people it needs to keep the company going, and undermining the value of its most successful and profitable assets which he is trying to sell.

Just this week, the company unloaded its Tokyo office building for $1.2 billon. The AIG brand - once a huge asset - is quickly vanishing. Even the iconic Manhattan headquarters is up for sale.

"So you are, in effect, the liquidator?" Kroft asked.

"Well, I don't think it will be called AIG, but there will be pieces of this institution left. But that's the only choice we have. That's the only way we can pay back the government," Liddy said.

Asked if all of the government money will be paid back, Liddy said, "That's what we're committed to doing."

"He's got a very tough job ahead of him," Richard Ferlauto told Kroft. "I don't envy him at all."

"You seem to be saying that AIG is still not out of the woods," Kroft remarked.

"If the economy deteriorates anymore, I think there are more problems out there," Ferlauto said.

"We're not an island," Liddy told Kroft. "We're very much dependent upon what happens in the overall economy and the overall financial marketplace. But we have a plan that we'll execute over the next couple of years that we think has an excellent chance of repaying the federal government."

Produced by Andy Court and Keith Sharman