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E-mails inside AIG reveal executives struggling with growing crisis

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Washington Post Staff Writer
Wednesday, December 30, 2009

The probing e-mails came from every direction inside insurance giant American International Group during the summer and fall of 2007, all with the same underlying question:

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Could Joe Cassano back up his assurances -- to auditors, rating companies, colleagues and shareholders -- that his Financial Products unit wasn't in trouble?

Cassano grew weary at times of the seemingly endless inquiries, even as he set about answering them. He was particularly impatient with the repeated requests from Elias Habayeb, an AIG executive at the parent company's headquarters who appeared unsatisfied with Cassano's assertions that the sinking subprime mortgage market posed no long-term risk to the firm.

"More love notes from Elias," Cassano wrote to his subordinates as he forwarded another set of Habayeb questions. "Please go through the same drill of drafting answers . . ."

The Cassano-Habayeb correspondence, along with thousands of other e-mails obtained by The Washington Post, as well as supporting interviews, reveal a company wracked by more division, doubt and turmoil than anyone on the outside realized during those tense months in 2007, a full year before the federal government undertook one of the largest corporate bailouts in U.S. history to prevent AIG's collapse.

The Financial Products unit had made AIG billions of dollars in the largely unregulated world of financial derivatives, operating primarily from Wilton, Conn., and London. But as the subprime mortgage boom began to deflate in 2007, some e-mails from New York took on an unfamiliar tone of concern.

"While everyone is comfortable with the conclusions reached in the past," Habayeb told Cassano as the date neared for the company's third-quarter filing to the Securities and Exchange Commission, "the question is whether something different needs to be done come September 30, 2007, given the current dislocation and turmoil in the marketplace."

"This has become the hottest subject at 70 Pine," Habayeb wrote in a subsequent e-mail, employing company shorthand for AIG headquarters in Manhattan.

While the e-mails offer the most revealing look yet at AIG's inner struggles, they also underscore the main obstacle to federal prosecutors assessing individual culpability for the financial crisis. In a Wall Street culture defined by salesmanship and secrecy, divining the difference between optimism and deceit can be a legal morass -- especially when it comes to convincing a jury that the line has been crossed.

Last month, a New York jury made that point clear when it acquitted two former Bear Stearns hedge-fund managers in a criminal case that relied, in part, on e-mail. The jurors were unswayed by the prosecution's claim that a key exchange -- between private e-mail accounts, outside the Bear Stearns e-mail system -- was evidence of a deliberate effort to hide information from investors.

Attorneys for various AIG executives, including Cassano, had no comment for this article, citing the ongoing investigations. AIG also declined to comment. The company's written response to a lawsuit filed by shareholders in a New York federal court, however, offers a glimpse into a potential defense to civil or criminal charges.

The suit alleges that AIG executives ignored warnings and intentionally downplayed the extent of the company's troubles. In its response, AIG conceded that its executives were optimistic, but denied any intent to deceive. "Being wrong or even unwise, in hindsight, is not the same as violating the securities laws," the company wrote.

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