Former AIG exec tells panel feds are clueless

Image by Getty Images North America via @daylife

What’s it like to be in a roomful of people who are too dim to understand that you are the only person who understands how the world works?

Ask Joe Cassano, the former AIG Financial Products executive who masterminded the derivative strategy that eventually led to a $132 billion bailout of the giant insurance company.

I wish I could have been there. Without a soupcon of irony, Cassano told the Financial Crisis Inquiry Commission that the derivative contracts known as credit default swaps are still money-good. The WSJ live blog reports that one FCIC commissioner asked: “Were you too optimistic about the housing market and how it could impact the cash flows of the CDS instruments you created?”

Readers, be warned: Cassano is no Warren Buffett; he did not aw-shucks his interrogators with “who could have known?” type of assertions. Cassano is a man quite sure of himself and his analytics. The WSJ blog reports, quite incredulously: “Cassano won’t even go as far to say he was wrong about the housing market. Most everybody was wrong about how far the housing market would fall.”

The guy has serious cajones. First he sells insurance contracts on $78 billion of mortgages. No hedges. Just one caveat: The buyer can issue margin calls at will.

And Cassano, who is no longer under threat of civil prosecution, forgets to mention to the bosses that AIG is at risk for mega-margin calls. (The FCIC members seem pretty stunned that Cassano was able to keep this under his hat until 2007 when the phone started ringing — and it wasn’t Jerry Lewis at the other end of the line asking for money.)

So, is it small wonder then that Cassano is the only guy in the universe who can out-negotiate Goldman Sachs? (He was obviously good at negotiating something: He earned $300 million during his 6-year tenure at AIGFP, including consulting fees after his departure.) Cassano clearly has no patience for the way the feds handled the counterparty payouts on the CDS. The Reuters blog quotes Cassano as saying that he would have “negotiated a much better deal for the taxpayer than what the taxpayer got.”

Especially when it came to Goldman, which accounted for about 25% of the CDS book and was the most aggressive in its collateral calls. In one example, Cassano says Goldman requested $1.8 billion in collateral. He negotiated that down to $480 million. Again, from the Reuters blog, Cassano says: “”My job is not to trust Goldman Sachs’s numbers, but to verify.”

In other words, Treasury Secretary Timothy Geithner should have realized it was sunrise in America and told Goldman and friends to bugger off when they demanded 100 cents on the dollar for their contracts. True, Lehman Brothers had just bitten the dust, so it was hard in that moment to be full of optimism for the future. But a touch of the Old Gipper would have been beneficial: trust but verify.

So, it seems Cassano does have one regret: He was forced out in 2008 when the auditors decided the AIG FP accounting methods were a bit unorthodox. If he had been at AIG during the worst of the storm, he says he could have saved taxpayers billions. Who knows, maybe he could have convinced everyone to stop with all that crazy mark-to-market accounting and pretend that all was well in the land of Financial Oz. It worked for former Fed Chairman Paul Volcker during the Latin American debt crisis of the early 1980s and even has a name: extend and pretend.

We’ll never know now if it would have worked. But we know one man who has no doubts about it. In fact, for Cassano, there would have been no pretend because really, according to Joe, the investments are working out exactly as he expected.

Why, by the way, c-span didn’t air these hearings is beyond me. Also testifying today was Gary Cohn, No. 2 at Goldman, aka, CEO Lloyd Blankfein’s best friend. Twitter had great live-blogging on the hearings today from @cate_long. Check out her stream.