Paulson rescued AIG to save Goldman
Don Tiberone
September 28, 2008
Behind Insurer’s Crisis, a Blind Eye to a Web of Risk
By GRETCHEN MORGENSON
“It is hard for us, without being flippant, to even see a scenario
within any kind of realm of reason that would see us losing one dollar
in any of those transactions.”
— Joseph J. Cassano, a former A.I.G. executive, August 2007
Two weeks ago, the nation’s most powerful regulators and bankers
huddled in the Lower Manhattan fortress that is the Federal Reserve
Bank of New York, desperately trying to stave off disaster.
As the group, led by Treasury Secretary Henry M. Paulson Jr., pondered
the collapse of one of America’s oldest investment banks, Lehman
Brothers, a more dangerous threat emerged: American International
Group, the world’s largest insurer, was teetering. A.I.G. needed
billions of dollars to right itself and had suddenly begged for help.
The only Wall Street chief executive participating in the meeting was
Lloyd C. Blankfein of Goldman Sachs, Mr. Paulson’s former firm. Mr.
Blankfein had particular reason for concern.
Although it was not widely known, Goldman, a Wall Street stalwart that
had seemed immune to its rivals’ woes, was A.I.G.’s largest trading
partner, according to six people close to the insurer who requested
anonymity because of confidentiality agreements. A collapse of the
insurer threatened to leave a hole of as much as $20 billion in
Goldman’s side, several of these people said.
Days later, federal officials, who had let Lehman die and initially
balked at tossing a lifeline to A.I.G., ended up bailing out the
insurer for $85 billion.
Their message was simple: Lehman was expendable. But if A.I.G.
unspooled, so could some of the mightiest enterprises in the world.
A Goldman spokesman said in an interview that the firm was never
imperiled by A.I.G.’s troubles and that Mr. Blankfein participated in
the Fed discussions to safeguard the entire financial system, not his
firm’s own interests.
Yet an exploration of A.I.G.’s demise and its relationships with firms
like Goldman offers important insights into the mystifying, virally
connected — and astonishingly fragile — financial world that began to
implode in recent weeks.
Although America’s housing collapse is often cited as having caused
the crisis, the system was vulnerable because of intricate financial
contracts known as credit derivatives, which insure debt holders
against default. They are fashioned privately and beyond the ken of
regulators — sometimes even beyond the understanding of executives
peddling them.
Originally intended to diminish risk and spread prosperity, these
inventions instead magnified the impact of bad mortgages like the ones
that felled Bear Stearns and Lehman and now threaten the entire
economy.
In the case of A.I.G., the virus exploded from a freewheeling little
377-person unit in London, and flourished in a climate of opulent pay,
lax oversight and blind faith in financial risk models. It nearly
decimated one of the world’s most admired companies, a seemingly
sturdy insurer with a trillion-dollar balance sheet, 116,000 employees
and operations in 130 countries.
“It is beyond shocking that this small operation could blow up the
holding company,” said Robert Arvanitis, chief executive of Risk
Finance Advisors in Westport, Conn. “They found a quick way to make a
fast buck on derivatives based on A.I.G.’s solid credit rating and
strong balance sheet. But it all got out of control.”
The London Office
The insurance giant’s London unit was known as A.I.G. Financial
Products, or A.I.G.F.P. It was run with almost complete autonomy, and
with an iron hand, by Joseph J. Cassano, according to current and
former A.I.G. employees.
A onetime executive with Drexel Burnham Lambert — the investment bank
made famous in the 1980s by the junk bond king Michael R. Milken, who
later pleaded guilty to six felony charges — Mr. Cassano helped start
the London unit in 1987.
The unit became profitable enough that analysts considered Mr. Cassano
a dark horse candidate to succeed Maurice R. Greenberg, the longtime
chief executive who shaped A.I.G. in his own image until he was ousted
amid an accounting scandal three years ago.
But last February, Mr. Cassano resigned after the London unit began
bleeding money and auditors raised questions about how the unit valued
its holdings. By Sept. 15, the unit’s troubles forced a major
downgrade in A.I.G.’s debt rating, requiring the company to post
roughly $15 billion in additional collateral — which then prompted the
federal rescue.
Mr. Cassano, 53, lives in a handsome, three-story town house in the
Knightsbridge neighborhood of London, just around the corner from
Harrods department store on a quiet square with a private garden.
He did not respond to interview requests left at his home and with his
lawyer. An A.I.G. spokesman also declined to comment.
At A.I.G., Mr. Cassano found himself ensconced in a behemoth that had
a long and storied history of deftly juggling risks. It insured people
and properties against natural disasters and death, offered
sophisticated asset management services and did so reliably and with
bravado on many continents. Even now, its insurance subsidiaries are
financially strong.
When Mr. Cassano first waded into the derivatives market, his biggest
business was selling so-called plain vanilla products like interest
rate swaps. Such swaps allow participants to bet on the direction of
interest rates and, in theory, insulate themselves from unforeseen
financial events.
Ten years ago, a “watershed” moment changed the profile of the
derivatives that Mr. Cassano traded, according to a transcript of
comments he made at an industry event last year. Derivatives
specialists from J. P. Morgan, a leading bank that had many dealings
with Mr. Cassano’s unit, came calling with a novel idea.
Morgan proposed the following: A.I.G. should try writing insurance on
packages of debt known as “collateralized debt obligations.” C.D.O.’s.
were pools of loans sliced into tranches and sold to investors based
on the credit quality of the underlying securities.
The proposal meant that the London unit was essentially agreeing to
provide insurance to financial institutions holding C.D.O.’s and other
debts in case they defaulted — in much the same way some homeowners
are required to buy mortgage insurance to protect lenders in case the
borrowers cannot pay back their loans.
Under the terms of the insurance derivatives that the London unit
underwrote, customers paid a premium to insure their debt for a period
of time, usually four or five years, according to the company. Many
European banks, for instance, paid A.I.G. to insure bonds that they
held in their portfolios.
Because the underlying debt securities — mostly corporate issues and a
smattering of mortgage securities — carried blue-chip ratings, A.I.G.
Financial Products was happy to book income in exchange for providing
insurance. After all, Mr. Cassano and his colleagues apparently
assumed, they would never have to pay any claims.
Since A.I.G. itself was a highly rated company, it did not have to
post collateral on the insurance it wrote, analysts said. That made
the contracts all the more profitable.
These insurance products were known as “credit default swaps,” or
C.D.S.’s in Wall Street argot, and the London unit used them to turn
itself into a cash register.
The unit’s revenue rose to $3.26 billion in 2005 from $737 million in
1999. Operating income at the unit also grew, rising to 17.5 percent
of A.I.G.’s overall operating income in 2005, compared with 4.2
percent in 1999.
Profit margins on the business were enormous. In 2002, operating
income was 44 percent of revenue; in 2005, it reached 83 percent.
Mr. Cassano and his colleagues minted tidy fortunes during these high-
cotton years. Since 2001, compensation at the small unit ranged from
$423 million to $616 million each year, according to corporate
filings. That meant that on average each person in the unit made more
than $1 million a year.
In fact, compensation expenses took a large percentage of the unit’s
revenue. In lean years it was 33 percent; in fatter ones 46 percent.
Over all, A.I.G. Financial Products paid its employees $3.56 billion
during the last seven years.
The London unit’s reach was also vast. While clients and
counterparties remain closely guarded secrets in the derivatives
trade, Mr. Cassano talked publicly about how proud he was of his
customer list.
At the 2007 conference he noted that his company worked with a “global
swath” of top-notch entities that included “banks and investment
banks, pension funds, endowments, foundations, insurance companies,
hedge funds, money managers, high-net-worth individuals,
municipalities and sovereigns and supranationals.”
Of course, as this intricate skein expanded over the years, it meant
that the participants were linked to one another by contracts that
existed for the most part inside the financial world’s version of a
black box.
Goldman Sachs was a member of A.I.G.’s derivatives club, according to
people familiar with the operation. It was a customer of A.I.G.’s
credit insurance and also acted as an intermediary for trades between
A.I.G. and its other clients.
Few knew of Goldman’s exposure to A.I.G. When the insurer’s flameout
became public, David A. Viniar, Goldman’s chief financial officer,
assured analysts on Sept. 16 that his firm’s exposure was
“immaterial,” a view that the company reiterated in an interview.
Later that same day, the government announced its two-year, $85
billion loan to A.I.G., offering it a chance to sell its assets in an
orderly fashion and theoretically repay taxpayers for their trouble.
The plan saved the insurer’s trading partners but decimated its
shareholders.
Lucas van Praag, a Goldman spokesman, declined to detail how badly
hurt his firm might have been had A.I.G. collapsed two weeks ago. He
disputed the calculation that Goldman had $20 billion worth of risk
tied to A.I.G., saying the figure failed to account for collateral and
hedges that Goldman deployed to reduce its risk.
Regarding Mr. Blankfein’s presence at the Fed during talks about an
A.I.G. bailout, he said: “I think it would be a mistake to read into
it that he was there because of our own interests. We were engaged
because of the implications to the entire system.”
Mr. van Praag declined to comment on what communications, if any, took
place between Mr. Blankfein and the Treasury secretary, Mr. Paulson,
during the bailout discussions.
A Treasury spokeswoman declined to comment about the A.I.G. rescue and
Goldman’s role. The government recently allowed Goldman to change its
regulatory status to help bolster its finances amid the market
turmoil.
An Executive’s Optimism
Regardless of Goldman’s exposure, by last year, A.I.G. Financial
Products’ portfolio of credit default swaps stood at roughly $500
billion. It was generating as much as $250 million a year in income on
insurance premiums, Mr. Cassano told investors.
Because it was not an insurance company, A.I.G. Financial Products did
not have to report to state insurance regulators. But for the last
four years, the London-based unit’s operations, whose trades were
routed through Banque A.I.G., a French institution, were reviewed
routinely by an American regulator, the Office of Thrift Supervision.
A handful of the agency’s officials were always on the scene at an
A.I.G. Financial Products branch office in Connecticut, but it is
unclear whether they raised any red flags. Their reports are not made
public and a spokeswoman would not provide details.
For his part, Mr. Cassano apparently was not worried that his unit had
taken on more than it could handle. In an August 2007 conference call
with analysts, he described the credit default swaps as almost a sure
thing.
“It is hard to get this message across, but these are very much
handpicked,” he assured those on the phone.
Just a few months later, however, the credit crisis deepened. A.I.G.
Financial Products began to choke on losses — though they were only on
paper.
In the quarter that ended Sept. 30, 2007, A.I.G. recognized a $352
million unrealized loss on the credit default swap portfolio.
Because the London unit was set up as a bank and not an insurer, and
because of the way its derivatives contracts were written, it had to
put up collateral to its trading partners when the value of the
underlying securities they had insured declined. Any obligations that
the unit could not pay had to be met by its corporate parent.
So began A.I.G.’s downward spiral as it, its clients, its trading
partners and other companies were swept into the drowning pool set in
motion by the housing downturn.
Mortgage foreclosures set off questions about the quality of debts
across the entire credit spectrum. When the value of other debts
sagged, calls for collateral on the securities issued by the credit
default swaps sideswiped A.I.G. Financial Products and its legendary,
sprawling parent.
Yet throughout much of 2007, the unit maintained that its risk
assessments were reliable and its portfolios conservative. Last fall,
however, the methods that A.I.G. used to value its derivatives
portfolio began to come under fire from trading partners.
In February, A.I.G.’s auditors identified problems in the firm’s swaps
accounting. Then, three months ago, regulators and federal prosecutors
said they were investigating the insurer’s accounting.
This was not the first time A.I.G. Financial Products had run afoul of
authorities. In 2004, without admitting or denying accusations that it
helped clients improperly burnish their financial statements, A.I.G.
paid $126 million and entered into a deferred prosecution agreement to
settle federal civil and criminal investigations.
The settlement was a black mark on A.I.G.’s reputation and, according
to analysts, distressed Mr. Greenberg, who still ran the company at
the time. Still, as Mr. Cassano later told investors, the case caused
A.I.G. to improve its risk management and establish a committee to
maintain quality control.
“That’s a committee that I sit on, along with many of the senior
managers at A.I.G., and we look at a whole variety of transactions
that come in to make sure that they are maintaining the quality that
we need to,” Mr. Cassano told them. “And so I think the things that
have been put in at our level and the things that have been put in at
the parent level will ensure that there won’t be any of those kinds of
mistakes again.”
At the end of A.I.G.’s most recent quarter, the London unit’s losses
reached $25 billion.
As those losses mounted, and A.I.G.’s once formidable stock price
plunged, it became harder for the insurer to survive — imperiling
other companies that did business with it and leading it to stun the
Federal Reserve gathering two weeks ago with a plea for help.
Mr. Greenberg, who has seen the value of his personal A.I.G. holdings
decline by more than $5 billion this year, dumped five million shares
late last week. A lawyer for Mr. Greenberg did not return a phone call
seeking comment.
For his part, Mr. Cassano has departed from a company that is a far
cry from what it was a year ago when he spoke confidently at the
analyst conference.
“We’re sitting on a great balance sheet, a strong investment portfolio
and a global trading platform where we can take advantage of the
market in any variety of places,” he said then. “The question for us
is, where in the capital markets can we gain the best opportunity, the
best execution for the business acumen that sits in our shop?”
Lubow
to entities that wanted their CDOs insured by AIG-FS. GS in fact was shorting
the CDO market although it may have been marketing "insured (by AIG-FS)" CDOs to
the unsuspecting.
What I see is that GS may have gotten some egg on its otherwise polished Tiffany
face and some lost revenue marketing AIG-FS's services, but that's all the
exposure I could glean from the article. Was there something I had missed?
"Don Tiberone" <s_kn...@my-deja.com> wrote in message
news:3340d6b7-8eba-4e5a...@f63g2000hsf.googlegroups.com...
d.
Goldman's ass. Most of the people here seem to think he is a god.
I think he has been a member of Citii's board for several years.
Don Tiberone <s_kn...@my-deja.com> wrote:
>http://www.nytimes.com/2008/09/28/business/28melt.html?_r=3D1&ref=3Dbusines=
>s&oref=3Dslogin
>
>September 28, 2008
>Behind Insurer=92s Crisis, a Blind Eye to a Web of Risk
>By GRETCHEN MORGENSON
>
>=93It is hard for us, without being flippant, to even see a scenario
>within any kind of realm of reason that would see us losing one dollar
>in any of those transactions.=94
>
>=97 Joseph J. Cassano, a former A.I.G. executive, August 2007
>
>Two weeks ago, the nation=92s most powerful regulators and bankers
>huddled in the Lower Manhattan fortress that is the Federal Reserve
>Bank of New York, desperately trying to stave off disaster.
>
>As the group, led by Treasury Secretary Henry M. Paulson Jr., pondered
>the collapse of one of America=92s oldest investment banks, Lehman
>Brothers, a more dangerous threat emerged: American International
>Group, the world=92s largest insurer, was teetering. A.I.G. needed
>billions of dollars to right itself and had suddenly begged for help.
>
>The only Wall Street chief executive participating in the meeting was
>Lloyd C. Blankfein of Goldman Sachs, Mr. Paulson=92s former firm. Mr.
>Blankfein had particular reason for concern.
>
>Although it was not widely known, Goldman, a Wall Street stalwart that
>had seemed immune to its rivals=92 woes, was A.I.G.=92s largest trading
>partner, according to six people close to the insurer who requested
>anonymity because of confidentiality agreements. A collapse of the
>insurer threatened to leave a hole of as much as $20 billion in
>Goldman=92s side, several of these people said.
>
>Days later, federal officials, who had let Lehman die and initially
>balked at tossing a lifeline to A.I.G., ended up bailing out the
>insurer for $85 billion.
>
>Their message was simple: Lehman was expendable. But if A.I.G.
>unspooled, so could some of the mightiest enterprises in the world.
>
>A Goldman spokesman said in an interview that the firm was never
>imperiled by A.I.G.=92s troubles and that Mr. Blankfein participated in
>the Fed discussions to safeguard the entire financial system, not his
>firm=92s own interests.
>
>Yet an exploration of A.I.G.=92s demise and its relationships with firms
>like Goldman offers important insights into the mystifying, virally
>connected =97 and astonishingly fragile =97 financial world that began to
>implode in recent weeks.
>
>Although America=92s housing collapse is often cited as having caused
>the crisis, the system was vulnerable because of intricate financial
>contracts known as credit derivatives, which insure debt holders
>against default. They are fashioned privately and beyond the ken of
>regulators =97 sometimes even beyond the understanding of executives
>peddling them.
>
>Originally intended to diminish risk and spread prosperity, these
>inventions instead magnified the impact of bad mortgages like the ones
>that felled Bear Stearns and Lehman and now threaten the entire
>economy.
>
>In the case of A.I.G., the virus exploded from a freewheeling little
>377-person unit in London, and flourished in a climate of opulent pay,
>lax oversight and blind faith in financial risk models. It nearly
>decimated one of the world=92s most admired companies, a seemingly
>sturdy insurer with a trillion-dollar balance sheet, 116,000 employees
>and operations in 130 countries.
>
>=93It is beyond shocking that this small operation could blow up the
>holding company,=94 said Robert Arvanitis, chief executive of Risk
>Finance Advisors in Westport, Conn. =93They found a quick way to make a
>fast buck on derivatives based on A.I.G.=92s solid credit rating and
>strong balance sheet. But it all got out of control.=94
>
>The London Office
>
>The insurance giant=92s London unit was known as A.I.G. Financial
>Products, or A.I.G.F.P. It was run with almost complete autonomy, and
>with an iron hand, by Joseph J. Cassano, according to current and
>former A.I.G. employees.
>
>A onetime executive with Drexel Burnham Lambert =97 the investment bank
>made famous in the 1980s by the junk bond king Michael R. Milken, who
>later pleaded guilty to six felony charges =97 Mr. Cassano helped start
>the London unit in 1987.
>
>The unit became profitable enough that analysts considered Mr. Cassano
>a dark horse candidate to succeed Maurice R. Greenberg, the longtime
>chief executive who shaped A.I.G. in his own image until he was ousted
>amid an accounting scandal three years ago.
>
>But last February, Mr. Cassano resigned after the London unit began
>bleeding money and auditors raised questions about how the unit valued
>its holdings. By Sept. 15, the unit=92s troubles forced a major
>downgrade in A.I.G.=92s debt rating, requiring the company to post
>roughly $15 billion in additional collateral =97 which then prompted the
>federal rescue.
>
>Mr. Cassano, 53, lives in a handsome, three-story town house in the
>Knightsbridge neighborhood of London, just around the corner from
>Harrods department store on a quiet square with a private garden.
>
>He did not respond to interview requests left at his home and with his
>lawyer. An A.I.G. spokesman also declined to comment.
>
>At A.I.G., Mr. Cassano found himself ensconced in a behemoth that had
>a long and storied history of deftly juggling risks. It insured people
>and properties against natural disasters and death, offered
>sophisticated asset management services and did so reliably and with
>bravado on many continents. Even now, its insurance subsidiaries are
>financially strong.
>
>When Mr. Cassano first waded into the derivatives market, his biggest
>business was selling so-called plain vanilla products like interest
>rate swaps. Such swaps allow participants to bet on the direction of
>interest rates and, in theory, insulate themselves from unforeseen
>financial events.
>
>Ten years ago, a =93watershed=94 moment changed the profile of the
>derivatives that Mr. Cassano traded, according to a transcript of
>comments he made at an industry event last year. Derivatives
>specialists from J. P. Morgan, a leading bank that had many dealings
>with Mr. Cassano=92s unit, came calling with a novel idea.
>
>Morgan proposed the following: A.I.G. should try writing insurance on
>packages of debt known as =93collateralized debt obligations.=94 C.D.O.=92s=
>.
>were pools of loans sliced into tranches and sold to investors based
>on the credit quality of the underlying securities.
>
>The proposal meant that the London unit was essentially agreeing to
>provide insurance to financial institutions holding C.D.O.=92s and other
>debts in case they defaulted =97 in much the same way some homeowners
>are required to buy mortgage insurance to protect lenders in case the
>borrowers cannot pay back their loans.
>
>Under the terms of the insurance derivatives that the London unit
>underwrote, customers paid a premium to insure their debt for a period
>of time, usually four or five years, according to the company. Many
>European banks, for instance, paid A.I.G. to insure bonds that they
>held in their portfolios.
>
>Because the underlying debt securities =97 mostly corporate issues and a
>smattering of mortgage securities =97 carried blue-chip ratings, A.I.G.
>Financial Products was happy to book income in exchange for providing
>insurance. After all, Mr. Cassano and his colleagues apparently
>assumed, they would never have to pay any claims.
>
>Since A.I.G. itself was a highly rated company, it did not have to
>post collateral on the insurance it wrote, analysts said. That made
>the contracts all the more profitable.
>
>These insurance products were known as =93credit default swaps,=94 or
>C.D.S.=92s in Wall Street argot, and the London unit used them to turn
>itself into a cash register.
>
>The unit=92s revenue rose to $3.26 billion in 2005 from $737 million in
>1999. Operating income at the unit also grew, rising to 17.5 percent
>of A.I.G.=92s overall operating income in 2005, compared with 4.2
>percent in 1999.
>
>Profit margins on the business were enormous. In 2002, operating
>income was 44 percent of revenue; in 2005, it reached 83 percent.
>
>Mr. Cassano and his colleagues minted tidy fortunes during these high-
>cotton years. Since 2001, compensation at the small unit ranged from
>$423 million to $616 million each year, according to corporate
>filings. That meant that on average each person in the unit made more
>than $1 million a year.
>
>In fact, compensation expenses took a large percentage of the unit=92s
>revenue. In lean years it was 33 percent; in fatter ones 46 percent.
>Over all, A.I.G. Financial Products paid its employees $3.56 billion
>during the last seven years.
>
>The London unit=92s reach was also vast. While clients and
>counterparties remain closely guarded secrets in the derivatives
>trade, Mr. Cassano talked publicly about how proud he was of his
>customer list.
>
>At the 2007 conference he noted that his company worked with a =93global
>swath=94 of top-notch entities that included =93banks and investment
>banks, pension funds, endowments, foundations, insurance companies,
>hedge funds, money managers, high-net-worth individuals,
>municipalities and sovereigns and supranationals.=94
>
>Of course, as this intricate skein expanded over the years, it meant
>that the participants were linked to one another by contracts that
>existed for the most part inside the financial world=92s version of a
>black box.
>
>Goldman Sachs was a member of A.I.G.=92s derivatives club, according to
>people familiar with the operation. It was a customer of A.I.G.=92s
>credit insurance and also acted as an intermediary for trades between
>A.I.G. and its other clients.
>
>Few knew of Goldman=92s exposure to A.I.G. When the insurer=92s flameout
>became public, David A. Viniar, Goldman=92s chief financial officer,
>assured analysts on Sept. 16 that his firm=92s exposure was
>=93immaterial,=94 a view that the company reiterated in an interview.
>
>Later that same day, the government announced its two-year, $85
>billion loan to A.I.G., offering it a chance to sell its assets in an
>orderly fashion and theoretically repay taxpayers for their trouble.
>The plan saved the insurer=92s trading partners but decimated its
>shareholders.
>
>Lucas van Praag, a Goldman spokesman, declined to detail how badly
>hurt his firm might have been had A.I.G. collapsed two weeks ago. He
>disputed the calculation that Goldman had $20 billion worth of risk
>tied to A.I.G., saying the figure failed to account for collateral and
>hedges that Goldman deployed to reduce its risk.
>
>Regarding Mr. Blankfein=92s presence at the Fed during talks about an
>A.I.G. bailout, he said: =93I think it would be a mistake to read into
>it that he was there because of our own interests. We were engaged
>because of the implications to the entire system.=94
>
>Mr. van Praag declined to comment on what communications, if any, took
>place between Mr. Blankfein and the Treasury secretary, Mr. Paulson,
>during the bailout discussions.
>
>A Treasury spokeswoman declined to comment about the A.I.G. rescue and
>Goldman=92s role. The government recently allowed Goldman to change its
>regulatory status to help bolster its finances amid the market
>turmoil.
>
>An Executive=92s Optimism
>
>Regardless of Goldman=92s exposure, by last year, A.I.G. Financial
>Products=92 portfolio of credit default swaps stood at roughly $500
>billion. It was generating as much as $250 million a year in income on
>insurance premiums, Mr. Cassano told investors.
>
>Because it was not an insurance company, A.I.G. Financial Products did
>not have to report to state insurance regulators. But for the last
>four years, the London-based unit=92s operations, whose trades were
>routed through Banque A.I.G., a French institution, were reviewed
>routinely by an American regulator, the Office of Thrift Supervision.
>
>A handful of the agency=92s officials were always on the scene at an
>A.I.G. Financial Products branch office in Connecticut, but it is
>unclear whether they raised any red flags. Their reports are not made
>public and a spokeswoman would not provide details.
>
>For his part, Mr. Cassano apparently was not worried that his unit had
>taken on more than it could handle. In an August 2007 conference call
>with analysts, he described the credit default swaps as almost a sure
>thing.
>
>=93It is hard to get this message across, but these are very much
>handpicked,=94 he assured those on the phone.
>
>Just a few months later, however, the credit crisis deepened. A.I.G.
>Financial Products began to choke on losses =97 though they were only on
>paper.
>
>In the quarter that ended Sept. 30, 2007, A.I.G. recognized a $352
>million unrealized loss on the credit default swap portfolio.
>
>Because the London unit was set up as a bank and not an insurer, and
>because of the way its derivatives contracts were written, it had to
>put up collateral to its trading partners when the value of the
>underlying securities they had insured declined. Any obligations that
>the unit could not pay had to be met by its corporate parent.
>
>So began A.I.G.=92s downward spiral as it, its clients, its trading
>partners and other companies were swept into the drowning pool set in
>motion by the housing downturn.
>
>Mortgage foreclosures set off questions about the quality of debts
>across the entire credit spectrum. When the value of other debts
>sagged, calls for collateral on the securities issued by the credit
>default swaps sideswiped A.I.G. Financial Products and its legendary,
>sprawling parent.
>
>Yet throughout much of 2007, the unit maintained that its risk
>assessments were reliable and its portfolios conservative. Last fall,
>however, the methods that A.I.G. used to value its derivatives
>portfolio began to come under fire from trading partners.
>
>In February, A.I.G.=92s auditors identified problems in the firm=92s swaps
>accounting. Then, three months ago, regulators and federal prosecutors
>said they were investigating the insurer=92s accounting.
>
>This was not the first time A.I.G. Financial Products had run afoul of
>authorities. In 2004, without admitting or denying accusations that it
>helped clients improperly burnish their financial statements, A.I.G.
>paid $126 million and entered into a deferred prosecution agreement to
>settle federal civil and criminal investigations.
>
>The settlement was a black mark on A.I.G.=92s reputation and, according
>to analysts, distressed Mr. Greenberg, who still ran the company at
>the time. Still, as Mr. Cassano later told investors, the case caused
>A.I.G. to improve its risk management and establish a committee to
>maintain quality control.
>
>=93That=92s a committee that I sit on, along with many of the senior
>managers at A.I.G., and we look at a whole variety of transactions
>that come in to make sure that they are maintaining the quality that
>we need to,=94 Mr. Cassano told them. =93And so I think the things that
>have been put in at our level and the things that have been put in at
>the parent level will ensure that there won=92t be any of those kinds of
>mistakes again.=94
>
>At the end of A.I.G.=92s most recent quarter, the London unit=92s losses
>reached $25 billion.
>
>As those losses mounted, and A.I.G.=92s once formidable stock price
>plunged, it became harder for the insurer to survive =97 imperiling
>other companies that did business with it and leading it to stun the
>Federal Reserve gathering two weeks ago with a plea for help.
>
>Mr. Greenberg, who has seen the value of his personal A.I.G. holdings
>decline by more than $5 billion this year, dumped five million shares
>late last week. A lawyer for Mr. Greenberg did not return a phone call
>seeking comment.
>
>For his part, Mr. Cassano has departed from a company that is a far
>cry from what it was a year ago when he spoke confidently at the
>analyst conference.
>
>=93We=92re sitting on a great balance sheet, a strong investment portfolio
>and a global trading platform where we can take advantage of the
>market in any variety of places,=94 he said then. =93The question for us
>is, where in the capital markets can we gain the best opportunity, the
>best execution for the business acumen that sits in our shop?=94