Ex-AIG executive testifies he didn’t ease standards to allow risky trades
WASHINGTON — A former top executive of American International Group acknowledged yesterday that his division more than tripled the amount of risky investments it insured in the three years leading up to the 2008 financial meltdown.
But Joseph Cassano, former chief executive for AIG’s Financial Products division, rebuffed assertions from a panel investigating the crisis that he relaxed standards to issue more credit default swaps. AIG received a $182 billion taxpayer bailout after it nearly collapsed and helped trigger the financial crisis.
“We never diluted our underwriting standards,’’ Cassano told the Financial Crisis Inquiry Commission, a panel created by Congress, in his first public comments since the crisis.
AIG sold billions of dollars of credit default swaps, guarantees on mortgage securities that forced AIG to pay billions after the housing market went bust. That pushed AIG to the brink of failure in September 2008.
The panel chairman, Phil Angelides, questioned how the world’s largest insurer could raise the amount of swaps it issued, from $17 billion in 2005 to $78 billion in 2007, without compromising its standards.
Martin Sullivan, a former chief executive of the company, said he wasn’t told until several months afterwards in 2007 that the amount had tripled.
AIG and Goldman Sachs executives appeared at the hearing focused on derivatives, the complex instruments at the heart of the meltdown. The panel is also examining the relationship between AIG and Goldman, two companies that made some of the riskiest derivative trades.
Cassano, who was forced to retire in March 2008, said the government paid too much to settle AIG’s debt. He said he could have negotiated better deals with AIG’s Wall Street trading partners, if he had stayed. He also said he thought the housing market would turn around and that the company could have recouped some of its investments if it had been more patient.
A beneficiary of the AIG money was Goldman Sachs Group.
Goldman Sachs profited from its bets against the housing market before the crisis. It continued to ring up huge profits after accepting bailout money. Its dealings in another type of derivative, known as collateralized debt obligations, have brought it scrutiny by a Senate panel and in one case, civil fraud charges from the Securities and Exchange Commission. Goldman has denied any wrongdoing.
“We did not bet against our clients,’’ Gary Cohn, Goldman’s president, told the panel. “During the two years of the financial crisis, Goldman Sachs lost $1.2 billion in its residential mortgage-related business.’’