The former head of the AIG unit that nearly crippled the insurer said the 2008 taxpayer bailout of up to $182 billion was too generous to customers like Goldman Sachs.
Goldman Sachs, in turn, insisted it simply followed its agreement with American International Group and underlying accounting rules in demanding collateral under the credit default insurance products it bought from AIG.
“I think I would have negotiated a much better deal for the taxpayer than what the taxpayer got,” a defiant yet calm Joseph Cassano told the Financial Crisis Inquiry Commission on Wednesday.
Cassano, the ex-chief of AIG’s Financial Products Division who was edged out roughly seven months before the September 2008 bailout, says he could have saved taxpayers money if he had been allowed to negotiate claims with firms like Goldman.
Instead, flush with cash after the bailout, AIG moved to settle claims at full value.
Goldman President Gary Cohn offered no apology for the collateral calls and said considerable shareholder money was spent ahead of the bailout to insure against the risk that AIG would never pay.
“If you look at our trading agreement with AIG, it very clearly states our marks were to be determined at fair (market) value,” Cohn said.
The commission is holding two days of hearings into the role of derivatives in the financial crisis. Thursday’s session will include further AIG and Goldman witnesses along with current and former regulators.
Wednesday’s hearing provided Cassano, against whom federal probes were recently dropped, with an opportunity to defend himself publicly. It also allowed Goldman a forum to again reject criticism that it bet against clients and received a backdoor bailout 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 Dec. 15 detailing the causes of financial crisis.
“I’m not looking for a whodunnit, but who built this bomb?,” Angelides asked during Wednesday’s hearing.
Cassano stepped down at AIG in February of 2008 but was put on a controversial $1 million-a-month consulting contract. His move came just after auditors disallowed a technique used by his unit to value pools of mortgages and other loans linked to the credit default swaps bought by firms like Goldman.
Cassano, appearing slimmer after being out of the public eye for over two years, began his testimony by asking the commission to direct criticism at him, not AIG employees.
He stood by a 2007 proclamation that the insurer would not lose even a dollar on its portfolio that included subprime mortgages. Many of the pools of loans would have performed over time, except that they were unwound in the bailout, he said.
Cassano touted a decision in early 2006 to stop writing credit insurance deals with subprime exposure. But commission members were skeptical of AIG’s efforts, saying it had already taken on a lot of mortgage risk at that point.
“You were a one man army in an invasion of huns” wanting collateral, panel member Douglas Holtz-Eakin, a former chief of the Congressional Budget Office, said sarcastically.
Angelides focused on Goldman’s aggressive calls for increased collateral from AIG.
“We were surprised by the magnitude of the call,” Cassano said. “It went from nothing to $1.8 billion… Obviously my job is not to trust Goldman Sachs, but to verify.”
Goldman’s Cohn insisted the investment bank used actual trades as reference points in determining its collateral demands.
AIG said in March 2009 that a total of $93 billion had been paid to banks, including $12.9 billion to Goldman Sachs, which was the most received by any bank.
Congress is expected to soon vote on a final version of a financial regulation reform bill that will, among other things, bring the $615 trillion over-the-counter derivatives market under the purview of federal regulators. Banks would be allowed to continue dealing in credit-default swaps, as long as they go through a clearinghouse.
The son of a Brooklyn policeman, Cassano has been the subject of criminal and civil investigations in the United States and abroad, but recently had the specter of prosecution lifted when the U.S. Department of Justice and Securities and Exchange Commission ended their investigations against him and other AIG executives.
AIG Chief Risk Officer Robert Lewis said he believed the collateralized debt obligations — the loan portfolios linked to the credit default swaps — were relatively conservative and could have recovered with time.
But Lewis said the deteriorating financial environment triggered collateral calls that depleted AIG’s liquidity and the federal government stepped in.
“What ended up happening was so extreme that it was beyond anything we had planned for,” he told the crisis panel. “As it turned out, we were wrong about how bad things could get.”
(Reporting by Steve Eder, Kim Dixon and Rachelle Younglai; Editing by Tim Dobbyn)