Joseph Cassano, Formerly Of AIG, Hides In London as Storm Clouds Gather

Joseph Cassano, the former CEO of now-heavily-bailed AIG Insurance, who’s lying low in Knightsbridge around the corner from Harrods somewhere, refusing all interviews, has had his claim to being chief bogeyman of the crisis bolstered today. He’s under investigation by prosecution lawyers after telling investors that their money was all tucked up in a warm cosy place when he knew it was actually dropping into the freezing waters of toxic credit default swaps.

This time last year Cassano told investors not to worry their little heads over AIG’s “super-senior” credit default swaps, saying on December 6, 2007: “It is very difficult to see how there can be any losses in these portfolios”. What he swept under the carpet was the fact that they’d actually lost $5.96bn on those contracts for the month of November, that PriceWaterhouseCoopers were challenging their financial controls, and that Goldman Sachs, who bought the credit protection on the swaps, were asking for cash back from AIG after the value started dropping. So not very hard to see how there could be any losses in these portfolios, actually.

After the quarterly loss of $11.1bn was announced in February, Cassano resigned, taking with him $34m in bonuses (to add to the $280m he’d made in the previous eight years with the firm) and retaining a $1m-a-month consulting role. Already he’s not the most endearing creature, but this investigation is drawing out some lovely details that are sure to send your blood to a temperature you could make tea with.

There’s his “Shut up, sillyhead” tactic, displayed after Goldman came calling for cash: “We have, from time to time, gotten collateral calls from people. Then we say to them, ‘Well, we don’t agree with your numbers.’ And they go, ‘Oh.’ And they go away.” Except they didn’t go away – AIG lost $305m extra in the third quarter of 2007, after they paid collateral to Goldman.

And then there’s the old “La la la, can’t hear you” methodology – he told AIG auditor Joseph St. Denis, “I have deliberately excluded you from the valuation of the super seniors because I was concerned that you would pollute the process”, after Cassano decided to value the credit swaps using a seriously outdated and inaccurate model, that understated potential losses.

And there’s just offensively misplaced arrogance – on the credit default swaps he said in August 2007, “It is hard for us, without being flippant, to even see a scenario within any kind of realm or reason that would see us losing $1 in any of those transactions”.

It seems that Cassano helped breed, with statements like the one above, a feeling of invulnerability to the dangers of derivatives, coupled with their relative success in the preceding years and AIG’s vast capital base. He constantly assured the US Office of Thrift Supervision that the derivatives were low risk, as explained by this enlightening article on ProPublica. Admittedly, the OTS certainly should have done more in seeing the unpredictability of the derivatives, and checked the gap between AIG’s assets and liquidity, the latter compromised by the vast amount of collateral needed to protect the derivatives.

But Cassano’s reckless use of unpredictable financial instruments in chasing pure, dangerously uncertain profit ended up costing the world dear. Anyone know exactly where his house is so we can go and egg it?

Posted by Ben Beaumont-Thomas in Hot Money | November 26, 2008 11:29AM |