Michael Lewis’s AIG piece entitled ‘The Man Who Crashed the World‘ at Vanity Fair is getting linked all over today. And it is not difficult to see why. The level of irresponsibility from AIG’s former head of Financial Products unit, Joe Cassano, and its CDS desk described in the Lewis’ article, is just mind-boggling. One of most striking things about the AIG crash story is the fact that the guys running the giant insurer didn’t have any idea how much sub-prime insurance they were selling. They only discovered it by accident, but by then it was too late.
Lewis explains how Joe Cassano the head of AIG’s Financial Products group, and famous for singlehandedly attempting to destroy capitalism and forcing most financial companies to be subsidized by US taxpayers, toward the end of 2005 wanted to hire Gene Park as the ambassador to Wall Street’s subprime-mortgage-bond desks. Park was a smart quant who understood abstruse securities and before taking on the job decided to examine more closely the loans that AIG FP had insured. He was stunned at what he found.
[Park] suspected Joe Cassano didn’t understand what he had done, but even so [he] was shocked by the magnitude of the misunderstanding: these piles of consumer loans were now 95 percent U.S. subprime mortgages. Park then conducted a little survey, asking the people around A.I.G. F.P. most directly involved in insuring them how much subprime was in them. He asked Gary Gorton, a Yale professor who had helped build the model Cassano used to price the credit-default swaps. Gorton guessed that the piles were no more than 10 percent subprime. He asked a risk analyst in London, who guessed 20 percent. He asked Al Frost [the guy in A.I.G. F.P.’s Connecticut office in charge of selling his firm’s credit-default-swap services to the big Wall Street firms], who had no clue, but then, his job was to sell, not to trade. “None of them knew,” says one trader. Which sounds, in retrospect, incredible. But an entire financial system was premised on their not knowing—and paying them for their talent!
By the time Joe Cassano invited Gene Park to London for the meeting in which he would be “promoted” to the job of creating even more of these ticking time bombs, Park knew he wanted no part of it. [Vanityfair]
Lewis points out that “nearly a year after perhaps the most sensational corporate collapse in the history of finance, a collapse that, without the intervention of the government, would have led to the bankruptcy of every major American financial institution, plus a lot of foreign ones, too, A.I.G.’s losses and the trades that led to them still haven’t been properly explained.”