Villainizing AIG's Edward Liddy May Have Cost Us Billions

Includes: AIG, BAC, C, WFC
by: Barbara Horne

As Edward Liddy left AIG (NYSE:AIG) the company’s stock was up 63%, though there is no clear indication as to why.

Mr. Liddy, an experienced CEO in the insurance industry left retirement to take the lead position at the request of the Treasury Department.

During his time at AIG he found himself the subject of intense public scrutiny and a reoccurring guest on Capitol Hill. His decision to focus on the directive of shutting down AIG as opposed to being distracted by the bonus situation became the defining moment of his time at the company.

The media led spotlight on the $158 million pulled the public’s attention away from the swaps that AIG has backing the $193 billion for European banks.

With our minds on AIG bonuses, Mark-to-Market accounting was experiencing a rule change that allowed more latitude to financial institutions in assigning value to complex products that did not have a market. The same banks that contributed heavily to the crisis were marking products that no one wanted to buy and recording those values on the books.

So, now, we are seeing banking profits.

But, according to Bloomberg, “Wells Fargo (NYSE:WFC) augmented net income by $334 million because of the effect of the rule on the value of debts held to maturity.”

Citigroup (NYSE:C) was able to record $2.7 Billion before taxes by leveraging an accounting rule that allows them to record income when the value of their debt falls.

A number of companies took advantage of the rule changes in accounting; leaving us with the questions, where did your revenue come from? How did you generate a profit?

Though the frustration of the public is understandable and Mr. Liddy knew the job would come with much criticism; we have to recognize this as a lesson to not be distracted by media hype.

In order to distinguish accounting magic from revenue generated from the sale of products or services we have to ask: What are AIG, Citigroup, Wells Fargo, Bank of America (NYSE:BAC) and other institutions actually selling to generate income? Then we have to ask what are the risks to society involved in their services and products?

We have to shift our focus to a financial system that demands business be responsible members of society; as opposed to manufactures of useless paper. As we overhaul regulation, create and adjust rules we have to constantly ask ourselves what are the implications of these changes for investors and the public? How can we avoid or mitigate the risk to society?

Disclosure: No positions