General Electric Inc.'s pension and investment funds lawsuit with American International Group Inc. is going to federal court in New York, resurrecting claims from a class action suit settled last year that AIG made misrepresentations to investors regarding the exposure of billions worth of mortgage-backed transactions, despite the housing market crashing.
Between 2006 and 2009, five GE trusts lost an enormous amount of money by buying AIG stock based on optimistic forecasts made by AIG's top executives that the company was performing well, even though it knew that billions worth of credit default swaps and residential mortgage-backed securities were jeopardizing its position.
The GE funds opted out of a $960 million settlement reached with investors last year to resolve claims pertaining to the credit default swap.
GE's complaint centers on American International Group Financial Products Corp. and its CEO Joseph Cassano, whom the complaint alleges was given nearly complete power over the CDS portfolio after AIG CEO Hank Greenberg resigned in 2005. Soon after Greenberg left, Cassano began drastically increasing AIGFP's CDS portfolio, writing more contracts for the swaps, which were backed by securities that included mortgages, in a nine-month period than in the previous seven years, according to the complaint.
By the end of 2005, as AIGFP began to slow down on signing new CDS contracts because it was becoming increasingly clear that the housing market was at the beginning of a downward spiral, GE alleges that another AIG unit, AIG Investments, began increasing its presence in the unstable RMBS market.
GE asserts that even before AIG received an $85 billion government bailout, while it was hard pressed for funds as the crisis grew, the company was alarmingly unconcerned. Further, the new CEO Martin Sullivan went as far to state at an investor meeting that losses from the CDS portfolio were "close to zero," even though they had recently been alerted that their valuation models were grossly inaccurate.
As news of the bailout was released, AIG's stock plummeted from a high of $72.54 per share in June 2007 to $2.05 per share in September 2008, pulling down investors' portfolios, like GE's, with it.