It's fun, in an Edvard Munch kind of way, to juxtapose AIG exec Joseph Cassano's testimony today before congressional investigators with the N.Y. Times's exposÃ© of how federal officials rolled over for Wall Street banks seeking restitution on credit protection they'd bought from the company.
Cassano once ran AIG's notorious Financial Products division, which among other things sold credit default swaps to Goldman Sachs (GS) and other banks against their potential losses on mortgage-backed securities. After the housing bust, AIG got left holding the bag. Taxpayers had to pump $182 billion into the company to prevent it from tearing the American financial system a new one. Money that we're unlikely ever to get back.
In a familiar refrain during these hearings, Cassano told members of the Financial Crisis Inquiry Commission that AIG had managed its credit risks just fine. Ditto for its underwriting practices. The trouble was vanishing liquidity, he said, which happens to be the same culprit that Wall Street bankers like to finger for their problems. The great thing about blaming liquidity is that no one really knows what that means. It's like the captain of the Titanic blaming water for sinking his ship. Well, in a way.
Even when panelist Brooksley Born (who has a devastatingly understated way of inserting the dagger) pressed him on why, oh, why AIG hadn't hedged its billions of dollars in CDS sales, Cassano clutched his defense like a drowning man clings to driftwood. Remember Nathan Thurm, of SCTV and Saturday Night Live fame? Dead ringer.
Cassano did make one interesting, and not wholly implausible, claim. Commenting on the 2008 negotiations between officials at the U.S. Treasury, Federal Reserve Bank of New York and several Wall Street banks over how much AIG, by then in government hands, would pay the financial firms, Cassano said:
I think I would have negotiated a much better deal for the taxpayer than what the taxpayer got.Of course, that's not saying much. The government's own Special Inspector General for TARP and Congressional Oversight Panel have made it amply clear that then-New York Fed boss Tim Geithner, Federal Reserve Chairman Ben Bernanke and other government officials gave Wall Street firms a sweetheart deal in settling up with AIG.
How sweet? After the government intervened in the fall of 2008 to rescue AIG, it barred the company from suing Goldman, Deutsche Bank (DB) and other of its CDS customers over the garbage mortgage securities it had insured. You know, the kind Goldman was selling to investors as part of the Abacus CDO fund the SEC is now investigating.
As law prof David Skeel told the NYT:
Even if it turns out that it would be a hard suit to win, just the gesture of requiring AIG to scrap its ability to sue is outrageous. The defense may be that the banking system was in trouble, and we couldn't afford to destabilize it anymore, but that just strikes me as really going overboard.Drawing on the paper's analysis of thousands of documents, the story details how Geithner and other financial regulators involved in the AIG talks ignored advice from their own experts to draw a harder line in negotiating down the company's debts. Instead, they paid AIG's customers 100 cents on the dollar, costing taxpayers billions.
For his part, Cassano will likely walk away a free, and filthy rich, man. Earlier this year federal prosecutors dropped their investigation of Cassano. Between 2000 and 2008, the year he left the company to spend more time with his family, the man who nearly capsized AIG earned more than $300 million. After his departure he was able to supplement his income by working as an outside consultant for the company to the tune of $1 million -- a month.
Cassano evidently felt good enough about the deal, and his part in this sorry affair, to voluntarily forgo his 2007 bonus check. He told the Financial Crisis commissioners:
Instead, I proposed to AIG that we simply have a handshake agreement that AIG would compensate me in the future if AIG-FP's accounting losses reversed, as I was confident they would. I did not make this offer because anyone asked me to -- I did it because it was the right thing to do, even though AIG management ultimately rejected my proposal.Now you can scream.
Geithner photo from U.S. Treasury Department Related:
- Geithner Deal With Wall Street Over AIG Swaps Cost Taxpayers $13 Billion
- AIG is a Symptom, Not the Cause, of a More Serious Disease
- Financial Crisis Hearing, Like Pecora Commission, Offers Rare Opportunity
- Why the Financial Crisis Inquiry Commission is Better than Valium
- The SEC Takes on the Vampire Squid: How Goldman Sachs Hoodwinked Investors