THE much-maligned former head of the American International Group (AIG) unit which drove the insurer to the brink of collapse, broke a long silence yesterday to defend his firm’s aggressive build-up of risky mortgage-linked securities.
Joseph Cassano, the former chief of AIG’s financial products division that precipitated a $182bn bail-out pledge from taxpayers, told a congressionally appointed panel that he stood by a 2007 proclamation that the insurer would not lose even a dollar on a portfolio that had included had subprime mortgages.
“I meant exactly what I said in August 2007,” Mr Cassano said in prepared testimony for a hearing by the Financial Crisis Inquiry Commission. “I did not expect actual, economic losses on the portfolio.
That said, I was truthful at all times about the unrealised accounting losses and did my very best to estimate them accurately.”
The commission is holding two days of hearings into the role of derivatives in the financial crisis, with witnesses that include AIG and Goldman Sachs executives.
The hearing provides Mr Cassano, against whom federal probes were recently dropped, with an opportunity to defend himself publicly. It also allows Goldman a forum to again reject criticism that it bet against clients and received a backdoor bail-out as part of the government’s rescue of AIG.
The 10-member commission, headed by former California state treasurer Phil Angelides, is due to issue a report by December 15 detailing the causes of the financial crisis, but is not expected to produce detailed reform recommendations.
Mr Angelides said the commission would explore the Goldman- AIG connection — “a multibillion- dollar strategic relationship”. “We’ll examine how the two financial giants struggled over derivatives in the fateful weeks and months leading up to the financial crisis and whether their fight fuelled this crisis.”
Goldman was among US and European banks that had purchased credit default protection from AIG and were quickly compensated after the US government bailed out AIG, beginning in September 2008.
AIG said in March last year that 93bn had been paid to banks, including $12,9bn to Goldman Sachs, which was the most received by any bank.
Congress is nearing a vote on a financial regulation reform bill aimed at avoiding a repeat of the recent financial crisis. Banks would be allowed to continue dealing in credit default swaps, as long as they go through a clearinghouse.
Crisis panel member Keith Hennessey, an economic adviser to former president George Bush, said the problem was about bad assumptions by market players rather than the financial instruments. “Derivatives and credit default swaps are things, and things can’t be culprits any more than a hammer used in a murder can be a culprit,” he said.
Mr Cassano has evaded public appearances since leaving the bailed-out insurer in February of 2008, albeit on a 1m-a-month consulting contract.
He said that during his tenure there were disagreements with counterparties relating to collateral calls that his unit fought using contractual defences and market analysis. But eventually the firm’s auditors disallowed a key part of the method his unit used to determine the fair value of its portfolio.
Mr Cassano also said he tried to convince AIG management to take a “handshake agreement” that would have only paid him if the financial product unit’s accounting losses reversed. He said he suggested the AIG bonus programme which paid out $165m to employees in its financial products unit last year, “keeping our employees together during this critical time” but sparking public outrage. Reuters