The former head of the AIG unit that drove the insurer to the brink of collapse said he could have saved taxpayers money if allowed to settle claims with firms like Goldman Sachs, instead of being sidelined before a 2008 bailout.
Joseph Cassano, the ex-chief of AIG's Financial Products Division that precipitated a $182 billion government rescue pledge, told a congressionally appointed panel he could have better enforced contracts with counterparties.
Instead the government rapidly moved to settle claims at full value, quickly paying out more than $40 billion.
I think I would have negotiated a much better deal for the taxpayer than what the taxpayer got, a defiant yet calm Cassano told the Financial Crisis Inquiry Commission.
Cassano was invited to resign from American International Group in February of 2008, shortly after auditors disallowed a key part of a model used by his unit to value pools of mortgages and other loans linked to the credit insurance products bought by firms like Goldman.
As home prices declined and credit tightened, AIG faced increasing calls from customers for collateral, leading the government to come to the rescue of AIG in September of 2008.
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. He told 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.
He touted a decision in early 2006 to stop writing deals with subprime exposure. But commission members were skeptical, saying AIG had already taken on a lot of mortgage risk at that point.
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.
TWO DAYS OF HEARINGS
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 AIG and Goldman.
The 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 December 15 detailing the causes of financial crisis, but is not expected to produce detailed reform recommendations.
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 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 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.
Cassano's emergence was a rare event, having evaded public appearances since leaving AIG, 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.
(Reporting by Steve Eder, Kim Dixon and Rachelle Younglai; Editing by Tim Dobbyn)