Cassano defends actions at AIG
Thursday, July 1, 2010
Joseph Cassano, who oversaw the American International Group unit that doomed the company and prompted a $182 billion federal bailout, defended his investment decisions Wednesday, adding that he could have saved taxpayers money if he had stayed with the firm.
"I would have negotiated a much better deal for the taxpayer," Cassano told the Financial Crisis Inquiry Commission (FCIC), a congressionally appointed panel.
Cassano, a mysterious figure who largely escaped public view even as his handiwork at AIG Financial Products required one of the largest government bailouts, was among several current and former Wall Street executives who testified about the role of complex investments known as derivatives in the financial crisis.
"When clarity mattered most, Wall Street and Washington were flying blind," said the commission's chairman, Phil Angelides. "In the case of derivatives, my fellow commissioners and I are seeing something we've seen many times in our investigation: enormous risk, reckless leverage, and early warning signs being ignored."
The AIG unit traded in a type of derivative known as a credit-default swap -- essentially an insurance policy for investments made by banks in mortgages. When the mortgages went bad, the investments lost value. Financial Products was on the hook to cover losses. It couldn't meet its liabilities, leading to the near-collapse of the company.
In rescuing the firm, the government, by way of the Federal Reserve Bank of New York, paid out the insurance claims fully, providing billions of dollars to firms such as Goldman Sachs. This episode has been the subject of intense debate, with critics arguing that the Fed engaged in a backdoor bailout of top domestic and foreign banks instead of demanding that they settle for partial payments.
In his written testimony, Cassano defended his initial decision to write the ill-fated insurance.
"Often repeated are my words during an earnings call in August 2007 that I did not expect any realized, economic losses (as opposed to unrealized accounting losses) on this portfolio," Cassano said. "I meant exactly what I said."
Federal prosecutors and Securities and Exchange Commission investigators conducted a lengthy probe of Cassano and other AIG executives to determine whether they misled investors about the state of the Financial Products unit's finances. Prosecutors and the SEC recently decided not to file charges.
Cassano said Financial Products maintained the highest standards and stopped writing new insurance on mortgage securities when it concluded the housing market would go south.
Cassano left AIG in February 2008 over disagreements with the company's auditors about how to value portions of his unit's investments. He earned nearly $300 million from the firm.
Others at AIG were more blunt about the company's judgments.
"We were wrong about how bad things could get," said Robert Lewis, the company's chief risk officer. "What ended up happening was so extreme that it was beyond anything we had planned for."
Goldman Sachs's president, Gary D. Cohn, denied that his firm got a backdoor bailout through AIG. Although the Fed payments benefited Goldman Sachs, Cohn said, his company did not need them to survive because it had taken precautions in case AIG could not make good on what it owed the bank.
"We spent a considerable sum of our shareholders' money to insure against the risk that AIG would not pay us in the event of a default," he said.
Cohn began his testimony with a conciliatory statement, in contrast to the combative approach Goldman Sachs took this spring in response to a series of federal challenges, including an SEC lawsuit. Those tensions included a subpoena recently issued by the congressional panel, which had accusing the bank of refusing to comply with requests for documents.
"You have stated that we have not been sufficiently responsive to the FCIC's requests for information," he told the panel. "We apologize for any failure on our part."