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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