Earlier today, we picked out some fascinating-in-hindsight excerpts from a May 2007 presentation given by Joe Cassano, then the head of AIG’s financial products unit.
Since then, we’ve been looking at a similar presentation (via Nexis) for investors given by Cassano and other AIG execs in December of that year. By that time, the collapse of the subprime housing market could no longer be downplayed, and Cassano’s appears more anxious than ever to reassure clearly nervous investors about AIG’s exposure to losses on its credit default swaps.
One excerpt in particular is pretty remarkable. Cassano deputy Andy Forster, who ran AIGFP’s global credit division, which conducted many of the credit default swaps, directly confronts (rhetorical) questions about the unit’s exposure to the sub-prime market.
Forster: And then for the truly morbid amongst you, they say well what about you’ve got CDOs in your transaction, so what about the CDO exposures? So we don’t like CDOs from A downwards so let’s take all of the CDOs that you have that are A rated and below and we give no cares for vintage and we give no cares for what the underlying collateral, which again, as you’ll see in the appendix, is a very harsh assumption given that the CDOs in our deals are of an earlier vintage and the collateral is not always subprime collateral. But let’s say we write all of those off, so A and below, regardless of vintage, no recovery. We add that to the second half of 2005 subprime, all BBB and below, and we add that to all of ‘06 and all of ‘07 regardless of rating and regardless of recovery. What happens then to your book?
And as you can see, the high-grade transactions now have a cumulative loss of $412 million spread across six deals now and the average subordination still stands north of 10% on the remaining transactions. The Mezzanine transactions show a cumulative loss of $169 million, four deals, the remaining deals have an average subordination of north of 20% still. So we could go on if time would permit, but I think these are what we think are representative of the questions you’ve asked and they’re representative and demonstrate the quality book that we have, how well structured transactions that we have and the superior collateral that we have within all of our transactions. And with that I’m going to hand back to Joe to talk about the valuation processes.
In other words, even assuming a worst-case scenario, the unit’s losses would be more than manageable.
Still, Cassano felt the need to immediately reassure the audience that this wasn’t even remotely likely to happen, anyway.
Cassano: Great thank you, Andy. And as you can tell by Andy’s presentation of the slide five, this is not anywhere near anything we think is going to happen. This is just, as Andy put it, there are some morbid questions we get about what happens if the world rolls off its axis and the world goes to hell in a hand basket. But with the data that you now have in front of you, you can play this power game. You can go through and you can figure out what you think our losses might be or what you see from information in the market and you can go through this. But it does come back to us as saying that we believe this is a money good book and money good assets.
Got that? “There are some morbid questions we get about what happens if the world rolls off its axis and the world goes to hell in a hand basket.” And who expects that to happen?
Less than three months later, AIG would put its estimate of paper losses at $11.5 billion, thanks almost entirely to losses on those “money good assets.”
And federal investigators are reportedly zeroing in on this speech, as possible evidence that Cassano made knowingly misleading statements about AIG’s potential losses.