The former chief executive officer of American International Group’s Financial Products Division said the collateralized debt obligations that undermined the company’s financial foundation and prompted a massive government bailout should not have caused the losses they did.
In written testimony before the federally-appointed Financial Crisis Inquiry Commission, Joseph J. Cassano, former CEO of AIG’s Financial Products unit, said CDOs–securities backed by mortgages, many of them of the subprime variety–that were covered with AIG credit-default swaps were thoroughly reviewed and analyzed.
“I did not expect actual, economic losses on the portfolio,” he told the commission last week. “That said, I was truthful at all times about the unrealized accounting losses, and did my very best to estimate them accurately.”
Up until 2005, the CDS contracts met the appropriate underwriting standards that minimized the risk to AIG and made them an appropriate investment, according to Mr. Cassano.
However, he added that things changed as the housing market began to overheat and the appropriate underwriting standards were not being observed. At this point, AIG-FP stopped writing the contracts and began leaving the market, but remained confident about the CDS contracts it wrote prior to 2005, he said.
He asserted that all contracts went through “rigorous reviews to identify unanticipated risk” and were reassessed on a monthly basis.
Trouble began when collateral calls started coming in as the financial crisis took hold in late 2007. The situation worsened after the company’s auditor, PricewaterhouseCoopers, said in mid- February 2008 that the company suffered a material weakness from its CDS exposure, which subsequently affected the company’s financial health.
That eventually led to Washington granting a government lifeline of more than $180 billion for AIG to stay in business and pay its CDS obligations.
Around this time, Mr. Cassano left AIG at the behest of its president and CEO at the time, Martin J. Sullivan.
During testimony last week broadcast over the web (http://www.fcic.gov/watch/), Mr. Cassano said he felt the amount of taxpayer bailout funds to AIG would have been severely reduced if he had remained with the company.
He said he aggressively negotiated deep discounts on the collateral calls and would have continued that practice.
However, he noted, after he left, AIG paid substantially more than it should have to CDS holders, aggravating the company’s financial situation. “I would have negotiated a much better deal for the taxpayer,” Mr. Cassano told the committee.
Also testifying were Mr. Sullivan and AIG’s current chief risk officer, Robert E. Lewis. “When I look back at my tenure, I believe that AIG’s risk management practices were well-designed, well-staffed and well-funded,” Mr. Sullivan testified.
Mr. Lewis echoed Mr. Cassano’s observations about the company’s risk management practices, stating that it was believed the CDS securities would “perform satisfactorily.” However, he conceded, “as it turned out, we were wrong about how bad things could get.”
At the conclusion of the hearing, Commission Chair Phil Angelides told Mr. Sullivan he believed there would be little debate among committee members that the lack of recollection and leadership Mr. Sullivan exhibited was very disturbing.
The commission was created last May as part of the Fraud Enforcement and Recovery Act of 2009. Its mission is to “examine the causes, domestic and global, of the current financial and economic crisis in the United States,” according to its website (http://www.fcic.gov/).
The 10 members of the bi-partisan commission include “prominent private citizens with significant experience in banking, market regulation, taxation, finance, economics, housing and consumer protection,” appointed by Congress.