All the Devils Are Here [127]
Park had wanted AIG not only to stop writing new business, but to begin hedging its exposure—and even to begin shorting securitized subprime mortgages. But that never happened. Most people at FP still couldn’t envision the possibility that their deals might ever go sour. At one point, Park spent about a month trying to work out a deal where FP would buy credit default swaps from one of its clients for some of its super-senior exposure. But the cost—20 basis points, or two-tenths of a percent—was considered too high for so unlikely an event. So Cassano and Forster vetoed the deal, according to several FP executives. (Cassano, through his lawyers, denies that he vetoed a hedging deal. Rather, he says, FP executives concluded that hedges were generally ineffective.)
In February 2006, Frost and Park went to the big annual asset-backed securities convention in Las Vegas. There were thousands of people in attendance; everyone who was anyone in the securitization business was there. They had meetings with all the firms they did business with. Frost introduced them to Park, and explained that AIG-FP “would be taking another look at the business.” Everyone knew what that meant. “During that period, he was not happy,” recalls someone who worked with Frost. “He thought Park was trying to undermine his business to make him look bad. He thought he was turning over the crown jewels. He personally took offense.”7
After the crisis, it would be revealed that FP did not completely turn off the spigot at the end of 2005, even though that is what the company later told the world. By the time 2005 had come to a close, the firm had a number of deals still in the pipeline. Not wanting to anger its clients, AIG-FP decided to close those deals, which meant it was continuing to insure multisector CDOs well into 2006. What’s more, under the terms of the swap contracts it wrote, CDO managers had the right to switch collateral to help maintain the yield—without having to inform AIG. As borrowers prepaid mortgages, for instance, the CDO managers would replace those earlier mortgages with mortgages that had been written in 2006 and 2007. Those latter mortgages, written as the housing bubble was reaching its peak, were far worse than even the mortgages written in 2005. And with Greenberg now gone, there was literally not a single executive at AIG’s headquarters who knew that a decline in the market value of the tranches AIG wrapped could trigger a collateral call.
But that would only emerge much later. Over the course of the next year, as the subprime bubble peaked and then began to crack, Cassano, Forster, and Park all truly believed they had dodged a bullet.
14
Mr. Ambassador
From the early days of subprime lending, there was a small, lonely group who sided with the consumer advocates fighting the subprime companies: the attorneys general in a handful of states like Iowa, Minnesota, Washington, and Illinois. They, too, had heard borrowers’ complaints firsthand, and saw the havoc that subprime lending was wreaking on communities. Some of them also understood that this wasn’t just about the borrowers. “It’s not in anyone’s long-term interest for consumers to get loans they can’t pay back,” says Prentiss Cox, the former attorney with the Minnesota attorney general’s office. “It’s only in the short-term interest of those who are raking in fees.” On a conference call with several other AGs in 2005, he said bluntly, “This whole thing is going to collapse.”
This alliance of attorneys general had investigated First Alliance (aka FAMCO) and then struck a landmark $484 million settlement with Household Finance in 2002. “I first heard about FAMCO when someone walked into my office with a complaint from a consumer that he had paid 20 percent of the loan amount in fees,” says Cox. “I said, ‘That’s a typo.