First Posted: 06-30-10 11:19 AM | Updated: 07- 1-10 11:40 AM
The former head of the AIG derivatives unit accused of exacerbating the global financial crisis blamed the firm's auditors -- rather than his unit -- on Wednesday for the billions in losses the firm sustained, leading to its $182 billion taxpayer-financed government rescue.
Joseph J. Cassano, who led AIG's Financial Products division from 2002 to 2008, was unapologetic in the written testimony he submitted to the Financial Crisis Inquiry Commission, the panel created by Congress to investigate the roots of the worst financial crisis since the Great Depression.
Cassano's unit underwrote insurance on bonds, securities based on bonds (known as collateralized debt obligations), and securities based on securities that were based on bonds (known as synthetic collateralized debt obligations). That insurance, a type of derivative, is called a "credit default swap." As the housing market soured, leading to a worsening economy, financial firms that bought that insurance to either hedge their risk or to speculate demanded more and more collateral from AIG. This run on AIG, and its burgeoning accounting losses based on how they valued these securities, led to the government takeover and eventual bailout.
"I was truthful at all times about the unrealized accounting losses and did my very best to estimate them accurately," Cassano said in prepared remarks.
But Cassano didn't think his firm would actually experience any losses on those securities. Rather, the firm was forced to take accounting losses by its auditors -- a move Cassano disagreed with, according to his testimony.
"I did not expect actual, economic losses on the portfolio," Cassano said in his written remarks. "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."
CDOs are shorthand for collateralized debt obligations; Maiden Lane III is one of the financial vehicles created by the Federal Reserve Bank of New York to purchase the various instruments AIG insured. AIG's counterparties were paid 100 cents on the dollar. Unlike Wall Street firms like Goldman Sachs, it's unclear whether taxpayers will ever be made whole on the transactions.
Joseph J. Cassano, who led AIG's Financial Products division from 2002 to 2008, was unapologetic in the written testimony he submitted to the Financial Crisis Inquiry Commission, the panel created by Congress to investigate the roots of the worst financial crisis since the Great Depression.
Cassano's unit underwrote insurance on bonds, securities based on bonds (known as collateralized debt obligations), and securities based on securities that were based on bonds (known as synthetic collateralized debt obligations). That insurance, a type of derivative, is called a "credit default swap." As the housing market soured, leading to a worsening economy, financial firms that bought that insurance to either hedge their risk or to speculate demanded more and more collateral from AIG. This run on AIG, and its burgeoning accounting losses based on how they valued these securities, led to the government takeover and eventual bailout.
"I was truthful at all times about the unrealized accounting losses and did my very best to estimate them accurately," Cassano said in prepared remarks.
But Cassano didn't think his firm would actually experience any losses on those securities. Rather, the firm was forced to take accounting losses by its auditors -- a move Cassano disagreed with, according to his testimony.
"I did not expect actual, economic losses on the portfolio," Cassano said in his written remarks. "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."
CDOs are shorthand for collateralized debt obligations; Maiden Lane III is one of the financial vehicles created by the Federal Reserve Bank of New York to purchase the various instruments AIG insured. AIG's counterparties were paid 100 cents on the dollar. Unlike Wall Street firms like Goldman Sachs, it's unclear whether taxpayers will ever be made whole on the transactions.
