The former head of the AIG unit which drove the insurer to the brink of collapse, broke a long silence on Wednesday and defended his role in an aggressive buildup of risky mortgage-linked securities.
Joseph Cassano, the ex-chief of AIG's Financial Products division that precipitated a $182 billion bailout pledge from taxpayers, told a congressionally appointed panel he stood by a 2007 proclamation that the insurer would not lose even a dollar on its portfolio that included subprime mortgages.
Cassano refused to acknowledge that his division made excessively risky bets, telling the panel that many of the pools of loans would have performed over time, except that they were unwound in the bailout.
We never diluted our underwriting standards at any point in time, said Cassano, the most anticipated witness before the Financial Crisis Inquiry Commission. His arrival during an earlier panel of witnesses was accompanied by a phalanx of television cameras.
Cassano touted a decision to stop writing deals with subprime exposure that was announced in February of 2006. But commission members were skeptical, saying AIG had already taken on a lot of subprime mortgage risk.
You were in this business fairly fast and furious prior to your recognition that you had dug a hole that you couldn't climb out of, said Bill Thomas, the panel's vice chairman.
The commission is holding two days of hearings into the role of derivatives in the financial crisis, with witnesses that include current and former executives from American International Group and Goldman Sachs.
The hearing provides Cassano, against whom federal probes were recently dropped, with an opportunity to defend himself publicly. It also allows 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 December 15 detailing the causes of financial crisis, but is not expected to produce detailed reform recommendations.
AIG BAILOUT HELPED GOLDMAN, OTHERS
Angelides said the commission will explore the Goldman-AIG connection -- a multibillion-dollar strategic relationship.
Goldman was among U.S. and European banks that had purchased credit default protection from AIG and were quickly made whole after the U.S. government bailed out AIG, beginning in September of 2008.
AIG said in March 2009 that $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 vote in the coming weeks 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.
Crisis panel member Keith Hennessey, a former economic adviser to President George W. Bush, said the problem was about bad assumptions by market players rather than the financial instruments themselves.
Derivatives and credit default swaps are things, and things can't be culprits any more than a hammer used in a murder can be a culprit, said Hennessey.
Cassano's emergence was a rare event, having evaded public appearances since leaving the bailed-out insurer in February of 2008, albeit on a $1 million-a-month consulting contract.
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.
Cassano and AIG Chief Risk Officer Robert Lewis said they believed the collateralized debt obligations (CDOs) -- the loan portfolios linked to the credit default swaps -- were relatively conservative and could have recovered with time.
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 said.
Goldman President Gary Cohn offered no apology for his firm making those collateral calls and said considerable shareholder money was spent to insure against the risk that AIG would not pay Goldman in the event of a default
While every market participant benefited from the government's actions, we took our own steps, from the very beginning, to protect our shareholders, Cohn said in written testimony.
GOLDMAN UNDER FIRE
Goldman has found itself under fire stemming from its own marketing and packaging of derivative products.
On April 16, the SEC charged Goldman with civil fraud relating to investor disclosures for the Abacus CDO, an investment product linked to the performance of a group of mortgages.
Critics have also charged that Goldman bet against some of its clients' views of the mortgage market.
Cohn told the crisis panel that Goldman has combed through its underwriting of mortgage-backed securities and CDOs from December 2006 on, and found it had only sought protection against a tiny slice of those securities by the end of June 2007.
Cassano said during his tenure there were disagreements with counterparties relating to collateral calls, calls his unit fought using contractual defenses and market analysis. But eventually the firm's auditors disallowed a key part of the method his unit used to determine the fair value of its portfolio.
That decision led to his being asked to part ways from the company.
(Reporting by Steve Eder, Kim Dixon and Rachelle Younglai; Editing by Tim Dobbyn)