James Lieber, a lawyer who writes for The Village Voice, investigated the reasons for the global financial collapse, and identified a man named Joseph Cassano, head of AIG Financial Products in London, as the key player in “the worst financial scandal in history.” That made me curious. For example, I wondered what had happened to Cassano (photo at right). I found that he resigned a year ago after AIG Financial Products posted $11 billion in losses, and now lives in an exclusive London enclave. AIG gave him a nice going-away present. Not only was he allowed to keep $34 million in bonuses, but the company hired him as a consultant at $1 million per month. That’s right – a million bucks a month, and from all accounts he doesn’t have to do any actual work. But I guess it’s no more than you would expect for a guy who made $280 million during his eight years at AIG.
Meanwhile, a bunch of anonymous global “counterparties” who bought “credit derivatives” from Cassano were bailed out with your money. You remember? AIG got that $84 billion government loan (and spent $440,000 on a spa vacation for top execs)? And then the government lent AIG another $38 billion? And then the government gave AIG another $40 billion, slashed the $85 billion loan to $60 billion, and “replaced” the $38 billion loan with a $52.5 billion aid package. That’s how generous you-the-taxpayer have been to AIG. The Bush crewe and AIG wouldn’t say where your billions went. But Lieber says it went to “counterparties who bought derivatives from Cassano’s shop in London.”
I know you don’t have time to read long blogs, but you might want to make an exception in this case. I think you would find these excerpts from Lieber’s explanation of the global meltdown interesting:
What did cause the crisis was the writing of credit derivatives. In theory, they were insurance policies for investors; in practice, they became a guarantee of global financial collapse. As insurance, they were poised to pay off fabulously when these weak bundled securities failed.
(Lieber compares the “credit derivatives” to taking out a large insurance policy on a third party who is terminally ill then cashing in when the person dies. He zeroes in on AIG Financial Products in London, which he calls “the heart of darkness.”)
AIG had placed this unit outside American borders, which meant that it would not have to abide by American insurance reserve requirements. In other words, the derivatives clerks in London could sell as many products as they could write – even if it would bankrupt the company. The president of AIGFP, a tyrannical super-salesman named Joseph Cassano, certainly had the experience. In the 1980s, he was an executive at Drexel Burnham Lambert, the now-defunct brokerage that became the pivot of the junk-bond scandal that led to the jailing of Michael Milken, David Levine, and Ivan Boesky.
During the peak years of derivatives trading, the 400 or so employees of the London unit reportedly averaged earnings in excess of a million dollars a year. They sold “protection” …. worth more than three times the value of parent company AIG…. This scheme that smacks of securities fraud facilitated the dreams of buyers called “counterparties” willing to ante up. Hedge fund offices sprouted in Kensington and Mayfair like mushrooms after a summer shower. Revenue from premiums for derivatives at AIGFP rose from $737 million in 1999 to $3.26 billion in 2005…
People still seem surprised to read that hedge principals have raked in billions of dollars in a single year. They shouldn’t be. These subprime-time players knew how to score. The scam bled AIG white….
Imagine if a ring of cashiers at a local bank made thousands of bad loans, aware that they could break the bank. They would be prosecuted for fraud and racketeering under the anti-gangster RICO Act. If their counterparties – the debtors – were in on the scam and understood that they didn’t have to pay off the loans, they could be charged, too. In fact, this scenario played out at subprime-pushing outlets of a host of banks, including Washington Mutual (acquired last year by JP Morgan Chase, which itself received a $25 billion bailout); IndyMac (which was seized by FDIC regulators); and Lehman Brothers (which went belly-up). About 150 prosecutions of this type of fraud are going forward….
So far, Cassano has not been prosecuted, although a news report today says prosecutors are taking a close look at the guy. What about the “counterparties” who bought the credit derivatives? Nobody is going after them. They’re probably enjoying your bailout money on the Riviera or someplace nice like that. Doesn’t that make you wonder just who this Cassano guy represented, and who his “counterparties” might include?
You might recall that much the same kind of scam occurred back in the late Eighties with the Savings and Loan failures in the U.S. Several books have since been published revealing how organized crime rigged the system to siphon off money in “bad loans.” And you might recall that the taxpayers ended up with a multi-billion-dollar bailout bill back then, too.