Cassano comes out swinging

By Felix Salmon
June 30, 2010
testimony to the FCIC:

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AIG FP’s Joe Cassano is coming out swinging in his testimony to the FCIC:

Often repeated are my words during an earnings call in August 2007 that I did not expect any realized, economic losses (as opposed to unrealized accounting losses) on this portfolio. I meant exactly what I said in August 2007. The underlying loans in the CDOs were diversified, and we insured only the super-senior tranche, which always had a AAA layer of loans below it. I did not expect actual, economic losses on the portfolio…

As I look at the performance of some of these same CDOs in Maiden Lane III, I think there would have been few, if any, realized losses on the CDS contracts had they not been unwound in the bailout.

This is something which should be able to be cleared up empirically quite easily, no? How many of the super-senior CDO tranches that AIG FP insured have ended up defaulting by now?

More generally, of course, the question is moot because AIG simply didn’t have the liquidity to survive as a going concern after putting up all the collateral which its insurance contracts required it to post during the crisis. It’s not enough that your credit default swap ends up suffering no losses in the end; you also have to be able to survive until the end. And no one, least of all Cassano, seemed to worry about that.

Update: In his live testimony, Cassano is reiterating that “I think the portfolios are withstanding the test of time in extremely difficult circumstances.” Chairman Angelides is not convinced, saying that projections are for very big losses. But he does seem to be conceding that there aren’t any cash losses on the AIG credit default swaps yet.


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The government didn’t have to buy the swaps back from Goldman, et al, they could have just posted the collateral in an escrow account. Then, if Cassano proves right, the cost to taxpayers would have been nothing.

But Goldman needed cash at that point, didn’t they? Increasing the amount of collateral AIG had available wouldn’t have helped Goldman, they needed and wanted cash.

Posted by OnTheTimes | Report as abusive

There has been incessant comment about Goldman, Sachs having some special secret not so secret connect with the govt so she got special treatment (AIG bailout going $1:$1 to repay Goldman) being that many GS folks populate the Treasury Dept, such as the fin crisis era Sec’y Paulson. At any given time, some investment bank has a closer than safe relationship with our gov’t. that puts democracy at risk. This is the system we have, and as we know, this bailout consolidated the banking sector into even less hands.
It’s two years later. At this time, when we know what kinds of activities created “moral hazard” yet we still don’t appear to be close to setting up rules that might help obviate the need for the next bailout, why we, the people, are not screaming in the streets attests to a kind of inveterate “moral hazard” in the entire population.
Yeah, it’s complicated, the credit default swaps, the collateralized debt obligations, the latter square for chrissakes, but is it not obvious by now: those post war years after the huge regulation of finance were pretty godamn safe for la jentĂ©, then banking started to want a bigger share, the academy sainted the “self regulating market”, dereg happened and soon thereafter, boom: one big bubble bursting after the next.
The world is much more complex now than in the thirties, yes, but could we not have seen the writing on the wall with the wealth consolidating ever upwards, decent jobs being outsourced, welfare being replaced with credit, and obvious bad business models like depository bank profits based solely on bad check fees became the norm.
What the hell?
None of us are taking responsibility. Kinda makes me re-understand the ole “turn on, tune in, drop out” idea, albeit changed to plain ‘drop out’ since turn on brings you to super-max, and tuning in just continues to kill me.

Posted by CitizenReno | Report as abusive

oh. I forgot to mention. Cassano may be right that the triple A tranches won’t default by the expiration of the CDSs he sold, but the fact is – no company should be allowed to sell insurance without the money to pay it off should it default. Regular casualty insurance companies had to be bailed out by the govt. for some of the losses incurred from September 11th, but they paid most of them, because there are rules governing the ratio of underwriting to equity (I don’t know what it’s actually called, but I think you know what I mean.)
It may seem obvious, so let me come out as a non-participant (in any voluntary way) in the finance world. I am simply Polly Q Public, trying to make out what the *^&$! is happening.

Posted by CitizenReno | Report as abusive

Good grief Cassano simply pulled an Enron and instead of putting the risk inside the company, ie putting it on books off the balance sheet, they externalized the risk to the whole market. Smart in a very sad way, but we all pay the price and they make money. I will be in a different mood when the first Goldman Sach’s employee, or any major investment banker, goes to jail.

I mean if Jeff Skilling goes to jail why not LB?

As to Cassano and the belief that all the loans were backed in the other tranches, what world is he living in? Read what happened at Lehman Brothers in that Archstone was good on paper and would have been ok if the rental market had not tanked. The key issue there, of course, is that CDS would have been called in and the devil’s candy would have been revealed for what it was (an empty promise).

The whole logic was that at the end of all the promises something tangible has to exist. Not simply a promise to pay the actual ability to pay either by having cash in hand or converting something into cash. It really is that simply. What Casson is missing, and does not want to know about, is that beneath those layers the quality went down hill so that there was no there there. In other words, he was selling whipping cream on s***.

To put it directly, Cassano and his ilk were not worrying about what the companies beneath the top tiers did or where those bonds were, or where the money was supposed to come from as long as the top tiers looked good.

My god, it is so simple it is shocking. Forget the mathematical BS (wizard of oz suddenly arrives forget about that man behind the curtain) this boils down to a basic transaction, it is about selling a product. For someone to make a profit, someone has to make a loss. (In other words you cannot make something from nothing) What was being sold was some illusion (the devils candy) that I can make us both money or better yet “I can always return %15 year on year.” How long can an investment fund manager and his clients ignore that siren song? Once they are hooked, they have to keep the process working.

Give me the building society and the manufacturing sector any day of the week, or the agricultural sector (at least you can eat your mistakes).

Posted by sgreillylives | Report as abusive