The enormous mortgage bets that led to the collapse of the US insurance giant American International Group (AIG) were in fact solid investments that would not have lost a penny in the long run, the former head of AIG's derivatives business told a sceptical commission investigating the credit crisis yesterday.
Joseph Cassano, who was sacked as head of AIG Financial Products in February 2008, broke his public silence to defend the actions of his London-based traders, and to describe a year-long battle to the death with Goldman Sachs and other trading partners who wanted more and more collateral that AIG ultimately could not afford.
Barely six months after Mr Cassano's departure, one of the world's most powerful insurers was on its knees, requiring a $180bn bailout by the US government.
AIG was insuring hundreds of billions of dollars of mortgage-related derivatives that its computer models said would never go bad. Its bankruptcy would have blown a huge hole in the centre of the financial system, making it the ultimate "too big to fail" institution.
Speaking carefully and quietly, in a manner at odds with his reputation as one of the chief villains of the credit crunch, Mr Cassano told the Financial Crisis Inquiry Commission (FCIC) that the real story of the decline of AIG "diverges in many ways from the popular wisdom".
Earlier this year, federal prosecutors decided not pursue fraud charges against him, following a long investigation. "Accounting losses", recorded as the market value of AIG's positions collapsed, were different from the real, economic losses that the company would have had to pay out over time if it had been able to hold on to the portfolio, Mr Cassano said.
In the end, the accounting losses triggered ever-increasing demands for extra collateral, beginning in July 2007. That was when Goldman Sachs demanded $1.8bn from AIG, though it eventually reduced its demands and settled on taking $450m.
The FCIC chairman, Phil Angelides, compared the repeated demands for collateral by Goldman to "a cheetah chasing down a weak member of the herd". Goldman's chief operating officer, Gary Cohn, said its demands were based on the market values of AIG's positions, but Mr Cassano said the market had dried up and was no longer generating proper prices.
After the US government took over AIG, collateral calls started being paid in full – something which led critics to describe the takeover as a back-door bailout of Goldman and others. Mr Cassano said yesterday he wished he had still been at the firm then to fight for better terms from trading partners. "I think I would have negotiated a better deal for taxpayers," he said.
AIG had in fact been prescient about the deterioration of the mortgage market and pulled back from taking risky bets when it saw, in 2005, that loans were being extended to borrowers who were much more likely to default, Mr Cassano said.
The portfolio AIG insured before then – much of which is now in a company controlled by the US central bank, the Federal Reserve – remained sound and has already been used to pay back some of the government's bailout loans. Mr Cassano added: "It is performing through this crisis and meeting the standards we set. The portfolio is standing the test of time."
The FCIC is looking into collateralised debt obligations (CDOs) which parcelled up US mortgage debts for sale across the world and at credit default swaps, the contracts sold by AIG and others which were used to insure against CDO losses. The AIG Financial Products group was no gang of rogue traders inside AIG, Mr Cassano insisted, saying that its decisions were fully vetted by risk managers at the insurer's parent company.
Martin Sullivan, the Briton who was chief executive of AIG until the middle of 2008, told the hearing that AIG's risk management practices were "well-designed, well-staffed and well-funded".