Things Fall Apart
- But that same month, with the housing market collapsing and sub-prime assets plummeting in value, Goldman Sachs demanded $1.5 billion in collateral from AIG, to cover the mortgage-backed securities that AIG’s credit default swaps had insured. Under the terms of its contract, AIGFP was required to post more collateral than it would have had its credit rating remained at AAA. By October, it had posted almost $2 billion, and other counter-parties were beginning to make their own collateral demands.
-Between early October and mid November, AIG’s stock price fell 25 percent. That month, AIGFP reported that its swaps portfolio had lost $352 million. A month later, Cassano put the figure at $1.1 billion
- Late that month, Pricewaterhouse Coopers, AIG’s auditing firm, told AIG CEO Martin Sullivan that no one knew whether AIGFP’s valuation of its derivatives portfolio was accurate. That process had been led by Casssano, who, it appears, had shut out the firm’s internal accountant, Joseph St. Denis. (St. Denis would describe Cassano’s high-handed behavior and unwillingness to allow AIGFP’s transactions to be properly audited, in a letter (pdf) to congressional investigators sent the following year.)
- And yet, Cassano and Sullivan were continuing to paint a rosy picture for investors. At a December 5 presentation, Cassano declared: “It is very difficult to see how there can be any losses in these portfolios.” Sullivan added: “”AIG has accurately identified all areas of exposure to the US residential-housing market … we are confident in out markets and the reasonableness of our valuation methods.” This presentation is currently being scrutinized by the Feds as evidence of possible fraud.
- In February 2008, AIG announced estimated losses of $11.5 billion, and that it had posted $5.3 billion in collateral.
- The following day, Sullivan announced that Cassano would step down, effective March 31. Only later, during a congressional investigation, did it come out that Cassano would get a $1 million a month consulting contract (the contract was cancelled in September 2008). It was also revealed that Cassano had made $43.6 million in salary and bonuses in 2006, and $24.2 million in 2007.
- That summer, it was reported that the Justice Department was investigating AIGFP for possible criminal fraud. The UK’s Serious Fraud Office would later announced its own probe.
- In September 2008, AIG executives learned that the ratings agencies planned to downgrade the company’s rating again. That would trigger more collateral calls, which AIG knew it couldn’t begin to cover. Desperate negotiations to keep the company afloat — including a possible $75 billion bridge loan from Goldman and JP Morgan, both major counter-parties on the credit default swaps — ensued. Tim Geithner, then the head of the New York fed, called in. But in the following days, it became clear that AIG’s level of exposure to its credit default swap losses was higher than anyone had yet understood. On Sept 16, the Federal Reserve Board, announced that it would take a nearly 80 percent equity stake in AIG — effectively taking over the firm — and would provide an $85 billion “loan”.
- In October 2008, Gerry Pasciucco, a vice chair at Morgan Stanley, was brought in to wind down AIGFP. The unit, Pasciucco found, had $2.7 trillion worth of swap contracts and positions, and 50,000 outstanding trades with 2000 different firms, and 450 employees in six offices around the world.
- In March 2009, amid outrage over multi-million dollar bonuses for those employees, AIGFP would post armed guards outside Wilton headquarters.
* This sentence has been corrected from an earlier version.