NU Online News Service, June 30, 3:45 p.m. EDT
The former chief executive officer of the American International Group Financial Products Division said that the collateralized debt obligations (CDO) that undermined the company's financial foundations should not have caused the losses they did.
In written testimony before the Financial Crisis Inquiry Commission, Joseph J. Cassano, former CEO of AIG Financial Products (AIG-FP), said that the CDOs that the company wrote credit-default swaps (CDS) on were thoroughly reviewed and analyzed.
"I did not expect actual, economic losses on the portfolio," he said. "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, Mr. Cassano said.
However, he added that things changed, 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 said all contracts went through "rigorous reviews to identify unanticipated risk" and were reviewed again on a monthly basis.
Trouble began when collateral calls began coming in as the financial crisis took hold in late 2007 and 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 a government lifeline of more than $180 billion to stay in business.
Around this time, Mr. Cassano left AIG at the behest of then AIG President and CEO Martin J. Sullivan.
During testimony today, broadcast over the web, Mr. Cassano said that he felt the amount of taxpayer bailout 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, after he left, AIG paid substantially more than it should have, aggravating the company's financial situation, according to Mr. Cassano.
"I would have negotiated a much better deal for the taxpayer," he told the committee.
Also testifying today were Mr. Sullivan and current AIG Chief Risk Officer Robert E. Lewis.
In his testimony, Mr. Sullivan said of the company's risk management practices that "when I look back at my tenure, I believe that AIG's risk management practices were well-designed, well-staffed and well-funded."
Mr. Lewis echoed Mr. Cassano's observations of the company's risk management practices, saying that it was believed the CDS would "perform satisfactorily," but he confessed, "As it turned out, we were wrong about how bad things could get."
At the conclusion of the hearing with the executives, Committee Chairman Phil Angelides told Mr. Sullivan that he believed there would be little debate among the committee members that the lack of recollection and leadership Mr. Sullivan exhibited was very disturbing.
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