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The Downfall of AIG's 'Beautiful Machine'

POSTED: 04:03 PM ET, 12/31/2008 by Derek Kravitz

In a three-part series this week examining the downfall of insurance giant American International Group Inc., The Post examined the influence of the company's complex and lucrative financial products division, which dealt in risky credit-default swaps.

The division and its longtime chief, Joseph Cassano, were behind AIG's magnificient downfall, which resulted in a $152 billion government-backed bailout, The Post's Robert O'Harrow Jr. and Brady Dennis found.

Their series shows how two brainy Wall Street whiz-kids sold one of the country's few Triple-A-rated institutions on risky short-term deals known as interest-rate swaps. The pair, Howard Sosin and Randy Rackson, met AIG founder Maurice "Hank" Greenberg, through a former U.S. senator in 1987. By that July, they had scored their first $1 billion deal with the Italian government.

O'Harrow and Dennis also report that Greenberg and Sosin nearly parted ways in 1990, until Greenberg got cold feet and reasoned that there was too much money to be made. With the relationship fractured, Greenberg employed a covert-like "shadow group" to figure out how the difficult-to-understand credit-default swaps worked. In 1993, Sosin left for good. The "beautiful machine" still grew, taking on more risky and novel investments and insuring more volatile forms of debt.

The problems of AIG -- and especially Cassano's influence -- have been under scrutiny from Congress and federal investigators in the months since the breakdown in the financial system.

During congressional testimony in September, Rep. Jackie Speier (D-Calif.) called Cassano "the golden boy of the casino in London." The New York Times has noted that his "freewheeling little 377-person unit ...flourished in a climate of opulent pay, lax oversight and blind faith in financial risk models."

As the mortgage derivative market started to unravel, Cassano's division racked up losses -- $11 billion by last February.

During his eight years at AIG, Cassano earned $280 million and, after leaving the company in March, was slated to receive $1 million a month (document) as a consultant through the end of 2008, disclosed Rep. Henry A. Waxman (D-Calif.), the chairman of the House Oversight and Government Reform Committee.

Federal investigators are now looking into whether Cassano "misled auditors and investors on subprime mortgage-related losses," Bloomberg reported.

The FBI has opened fraud investigations into AIG. Greenberg's personal influence in Washington has been scrutinized.

And a few days after the federal government unveiled its $85 billion bailout package for AIG, executives from one of the firm's subsidiaries set off new controversy when they went on a week-long retreat to the St. Regis Resort in Monarch Beach, Calif. The tab: $443,000.

"I was totally unaware that there was any plan for any conference," AIG's ex-CEO, Robert B. Willumstad, said during his testimony before the House Oversight and Government Reform Committee. "Had I been aware of it I would have prevented it from happening." (AIG later canceled its Ritz-Carlton business meeting in Half Moon Bay, Calif., and most of its other get-togethers, company officials said.)

By late October, the firm had stopped all of its lobbying efforts on Capitol Hill after The Wall Street Journal reported that AIG was "still engaged in a state-by-state effort to soften new federal regulations requiring mortgage originators to get licenses and provide extensive background information." (The nonpartisan Center for Responsive Politics reported that AIG spent nearly $11.4 million last year on lobbying.)

In November, the federal government invested $40 billion directly into AIG as part of an expanded bailout plan after the insurance giant disclosed massive losses over the last three months. U.S. regulators responsible for supervising AIG acknowledged that they failed to grasp the impact of provisions in the complex derivative contracts that pushed the insurance company to the brink of collapse.

By Derek Kravitz |  December 31, 2008; 4:03 PM ET Economy Watch
Previous: Blagojevich Has History With Senate Choice | Next: Richardson Probe, Md. Police Spying, Madoff Investigators Chased in Vain

Comments

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All I can say is that anyone that purchases any of it's businesses mine as well have bought a ticket on the SS Titanic. Cassano it's downfall, what a freaking surprise, he probably has mob ties which is about the only thing that we haven't heard about the company doing. If Willumstad had no idea about the conference than I also have some ocean front property to sell you in southern KY.

Posted by: srhodge | December 31, 2008 7:25 PM

This story makes for good reading, but as we all know, nothing will come of any of this and the unfathomable salaries and bonuses will continue. It's the NEW American way, get used to it. What little money I had in my 401k was taken away so that these bonuses could continue to be paid and investors could be reimbursed for making the wrong choice of stocks. They really need their millions and I am GLAD that I am able to help them maintain their lofty positions and bank accounts.

Posted by: Drayknight | January 4, 2009 10:56 AM

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