Execs, regulators testify on derivatives' role

[July 01, 2010]  WASHINGTON (AP) -- A former executive of bailed-out insurance company American International Group Inc. says if he had been allowed to keep his job, he could have saved taxpayers a bundle.

"I think I would have negotiated a much better deal for the taxpayer than what the taxpayer got," Joseph Cassano, the former chief executive of AIG's Financial Products Division, told a special panel investigating the economic crisis.

Taxpayers rescued AIG to the tune of $182 billion -- the biggest of the federal rescues -- after the New York company nearly collapsed and helped spark the financial crisis.

Cassano, who was forced to retire in March 2008, testified Wednesday before the Financial Crisis Inquiry Commission, the bipartisan panel that is investigating the origins of the financial meltdown. He said the federal government paid too much to settle AIG's debt.

He said he could have negotiated better deals with the company's Wall Street trading partners if he had stayed on at AIG. He added that he thought the housing market would turn around and that AIG could have recouped some of the value in its investments if it had been more patient.

The crisis inquiry commission's hearings continue Thursday, with the panel examining further the role of derivatives in the crisis, getting reckonings of events from former executives of AIG and Goldman Sachs Group Inc., as well as state and federal regulators.

On the hot seat for Thursday's session: former AIG executives Stephen Bensinger, Andrew Forster and Elias Habayeb; and from Goldman Sachs, managing director David Lehman and Chief Financial Officer David Viniar. Also testifying are Gary Gensler, chairman of the Commodity Futures Trading Commission; Eric Dinallo, the former top insurance regulator in New York state; and Clarence Lee, a former official of the federal Office of Thrift Supervision.

AIG was regulated by the OTS, but its exploding business of credit default swaps was run out of London and elsewhere, and fell through the regulatory cracks. The result was the gargantuan taxpayer bailout.

Forster worked for Cassano, whose division at AIG sold billions of dollars of credit default swaps, guarantees on mortgage securities that ended up forcing AIG to pay out billions after the subprime mortgage bubble burst in 2007.

At Wednesday's hearing by the commission, Cassano acknowledged that his division more than tripled the amount of risky investments it insured in the three years preceding the 2008 meltdown. But he rebuffed accusations that his operation relaxed standards to issue more insurance on mortgage securities.

"We never diluted our underwriting standards at any point in time," he said.

Traded in an opaque global market valued at around $600 trillion, derivatives have caught a big part of the blame for the financial crisis. The value of derivatives hinges on an underlying investment or commodity -- such as currency rates, oil futures or interest rates. The derivative is designed to reduce the risk of loss from the underlying asset.

Goldman Sachs profited from its bets against the housing market before the crisis, and continued to ring up huge profits after accepting federal bailout money and other government subsidies. The firm's dealings in another type of derivative, known as collateralized debt obligations, have brought it harsh scrutiny by a Senate panel and in the case of one $2 billion CDO, civil fraud charges from the Securities and Exchange Commission. Goldman has denied any wrongdoing.

A previously disclosed 2007 e-mail has Viniar, the Goldman CFO, indicating that the firm made more than $50 million in one day on bets that the housing market would founder.

A CDO is a pool of securities, tied to mortgages or other types of debt, that Wall Street firms packaged and sold to investors at the height of the housing boom. Buyers of CDOs, mostly banks, pension funds and other big investors, made money off the investments if the underlying debt was paid off. But as U.S. homeowners started falling behind on their mortgages and defaulted in droves in 2007, CDO buyers lost billions.

[Associated Press; By MARCY GORDON]

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