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 Vanity Fair has been getting a lot of attention between its features on Sarah Palin, Heath Ledger and the villainy of American International Group Inc.'s (NYSE:AIG) Joseph Cassano. The last article is interesting because it places blame for the crisis on Wall Street in particular and the recession in general on one man, Joseph Cassano, the head of AIG Financial Products. Vanity Fair's Michael Lewis uncovers what most figured out anyway -- the fall of AIG wasn't due to big bonuses or the employees of AIG Financial Products. That's right. The employees were just as unaware that the company was going to implode as the government and taxpayers were due to one man: Cassano. The feature delves into Cassano's psyche and depicts him as a control freak with immense issues of insecurity. It's these issues that cause him to accidentally mastermind a fraud, in a way that likens Cassano's role in the economic crisis to that of Bernie Madoff's. "Unlike, say, Bernie Madoff's pyramid scheme, they don't seem to have been raw theft," writes Lewis, referring to Cassano's decisions. Lewis' feature revives old debates on Cassano's claimed innocence in the matter and is vaguely similar to the feature by The Times of London, written in May, that explains that Cassano's decisions concerning AIG's derivatives brought down the insurer and that he essentially committed fraud. Wrote : Yes, in the widest sense -- but it was fraud as wilfull ignorance, in which a whole industry is based on false assumptions, and each participant has little reason to question the system as long as it continues to make him rich. "To date, neither AIG nor AIGFP is aware of any fraud or malfeasance in connection with the underwriting and creation of the multi-sector CDS portfolio," says AIG, referring to the trades under scrutiny, "as opposed to what, with hindsight, turned out to be bad business decisions." If they were bad decisions, they had a context. Similarly Lewis' version outlines that no one at the company knew what was going on in the unit including Cassano, who blindly trusted the professionals on Wall Street: A.I.G. F.P. was already insuring these big, diversified, AAA-rated piles of consumer loans; to get it to insure subprime mortgages was only a matter of pouring more and more of the things into the amorphous, unexamined piles. They went from being 2 percent subprime mortgages to being 95 percent subprime mortgages. And yet no one at A.I.G. said anything about it--not C.E.O. Martin Sullivan, not Joe Cassano, not Al Frost, the guy in A.I.G. F.P.'s Connecticut office in charge of selling his firm's credit-default-swap services to the big Wall Street firms. The deals, by all accounts, were simply rubber-stamped by Cassano and then again by A.I.G. brass--and, on the theory that this was just more of the same, no one paid them special attention. It's hard to know what Joe Cassano thought and when he thought it, but the traders inside A.I.G. F.P. are certain that neither Cassano nor the four or five people overseen directly by him, who worked in the unit that made the trades, realized how completely these piles of consumer loans had become, almost exclusively, composed of subprime mortgages. That's when Park decided to examine more closely the loans that A.I.G. F.P. had insured. He suspected Joe Cassano didn't understand what he had done, but even so Park was shocked by the magnitude of the misunderstanding: these piles of consumer loans were now 95 percent U.S. subprime mortgages. Park then conducted a little survey, asking the people around A.I.G. F.P. most directly involved in insuring them how much subprime was in them. He asked Gary Gorton, a Yale professor who had helped build the model Cassano used to price the credit-default swaps. Gorton guessed that the piles were no more than 10 percent subprime. He asked a risk analyst in London, who guessed 20 percent. He asked Al Frost, who had no clue, but then, his job was to sell, not to trade. "None of them knew," says one trader. Which sounds, in retrospect, incredible. But an entire financial system was premised on their not knowing--and paying them for their talent! Lewis' version takes it a step further by essentially pinning all of Wall Street's troubles on AIG due to the decisions made by Cassano as well as the fact that he had guaranteed AIG's AAA credit rating as a trigger if there was a run on AIG: What no one realized is that Joe Cassano,in exchange for the privilege of selling credit-default swaps on subprime-mortgage bonds to Goldman Sachs and Merrill Lynch and all the rest, had agreed to change the traditional terms of trade between A.I.G. and Wall Street. In the beginning, A.I.G. F.P. had required its counter-parties simply to accept its AAA credit: it refused to post collateral. But in the case of the subprime-mortgage credit-default swaps, Cassano had agreed to several triggers, including A.I.G.'s losing its AAA credit rating, that would require the firm to post collateral. So how does this liken Cassano to Madoff in terms of fraud? Lewis basically concludes that Cassano didn't know what he was doing. couldn't undo what he had done and essentially didn't want to, so AIG's troubles remained hidden, even though it was his fiduciary duty to expose them. Joe Cassano was the perfect man for these times--as responsible for a series of disastrous trades as a person in a big company can be. He discouraged the dissent of subordinates who understood them better than he did. He acted with the approval of A.I.G., but he also must have known that A.I.G. wasn't able to evaluate his trades. Once he was persuaded to stop insuring subprime-mortgage bonds, the logical course of action was to reverse the deals he had already done. In 2006 he might have found a way to do this, if he had been willing to accept the costs involved, but he wasn't. Had he been, the machine he helped to create would have kept running--by then it had a life of its own--and the losses would have simply wound up more concentrated inside the big banks. But he'd have saved his company. So did Cassano, who resigned in March 2008 with a $34 million golden parachute, commit a crime, as Lewis suggests by hiding essential information, or is he just a fall guy that was caught up in the same hype everyone else was buying into at the time? Cassano isn't facing charges of fraud, but he is being investigated, and the idea that Cassano was ignorant to the details of these transactions and the ultimate effects they would have on the economy could be possible. Felix Salmon states: "You can blame the end of the world on Cassano, but there were a lot of people inside AIG but outside Cassano's little group who ended up buying into the markets he helped to create and inflate." But Tyler Durden over at Zero Hedge has some evidence disclosing details about AIG's CDO portfolio and collateral calls during a Dec. 5 conference call with investors that suggest Cassano and CEO Martin Sullivan, effectively committed 10(b) 5 fraud by misrepresenting material company conditions. The collateral disclosure, courtesy of CBS News, which comes from an email sent by Joseph Cassano to Bill Dooley on November 27, a week before the fateful "all is good" conference call, identifies $66.7 Billion in CDO Negative basis trades with 9 counterparties, most of which demand collateral to cover mark discrepancies amounting to a total of just over $4 billion. Did Cassano commit fraud by misleading investors, or is it just a matter of circumstances and ignorance? What do you think? - Maria Woehr
CategoriesComments
From: Mitchele X. Vigil,
Even in my lowest of the low positions as a mortgage originator a cursory analysis revealed that which did in fact come to pass, that mortgage product, which is to say Mortgage Tranches of extremely dubious underwriting was given the okay to fund so that the CDO bundle could then be sold off into the financial markets. Given the fact that these men were at the sharp-end, it would be ridiculous to portray what they knew as anything but whole. Though so it is that in attempting to convict a White-Collar criminal, the standard of required proof rises to the level of having to prove precognition.
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September 28, 2009 5:24 PM
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Ignorance is not an excuse, especially a guy that gets paid $34 million for destroying the company that he worked for.
The proper penalty would be a fine of $50 Million and many years in jail. It is time to get tough on these guys who have done more damage to US families than all of the drug dealers combined.