All the Devils Are Here [205]
By the time that late November meeting took place, AIG’s top executives were well aware of the collateral calls. Prying the information out of Cassano, however, hadn’t been easy.21 In early August, about a week after the first one, AIG’s auditors had scheduled a meeting with Cassano and several other FP executives on another topic. One of the auditors mentioned, more or less in passing, that he had heard a rumor that FP had been hit with collateral calls. Cassano acknowledged that FP had received a collateral call from Goldman but pooh-poohed its significance, arguing that the market would come back once traders returned from vacation. The auditors accepted the rationale and moved on to their main topic.
Toward the end of August, AIG CFO Steve Bensinger also began picking up rumors that FP was getting collateral calls. He asked one of his deputies, Elias Habayeb, CFO for the AIG’s financial services division, to call Cassano and find out. Again, Cassano acknowledged the calls but dismissed their significance. Habayeb, having crossed swords with Cassano in the past, was not so quick to accept his say-so. Over the ensuing weeks—especially as the end of the quarter approached—Habayeb lobbed e-mail after e-mail into Cassano and his top deputies, trying to find out how the securities were being valued and to what extent the problems were. Cassano, annoyed by the e-mails, would assign one of his minions to respond.
At four thirty on October 8, for instance, Habayeb sent a lengthy e-mail to Cassano with a series of “follow-up questions” about valuing the super-senior portfolio, which FP needed to do quickly since the quarter had ended eight days earlier. “When should I expect to receive the valuation of the SS CDS (portfolios D & E) using the BET as of September 30, 2007?” was one question. (BET stood for binomial expansion technique, a methodology also used by the rating agencies, which FP was trying to quickly adopt.) “With respect to the valuations using BET, how are the effects of hedges reflected or not reflected in these estimates?” was another question. Habayeb concluded gently, “I understand that everyone is working hard . . . I further appreciate that this is not an easy exercise. However, as you can imagine, this has become the hottest subject at 70 Pine” (70 Pine was the Wall Street location of AIG’s headquarters).
Three hours later, Cassano forwarded Habayeb’s e-mail to his lieutenants. “More love notes from Elias,” he wrote. “Please go through the same drill of drafting answers. . . .”
Meanwhile, AIG’s auditors at PricewaterhouseCoopers had begun viewing the collateral calls as far more serious business than they had a few weeks earlier. Goldman Sachs, which was also a client of PWC, helped push it in this direction. At Goldman the collateral dispute was important enough that it was being discussed at the board level; its auditors sat in on those discussions. “It was a constant focus inside Goldman Sachs,” says a former partner. As the ongoing dispute with AIG worsened, several Goldman Sachs executives began asking their auditors how it could be that “you have one set of numbers for one firm and a totally different set of valuations for another firm?” The lead partner on the Goldman account—who had nothing to do with AIG—told the executives he would take it up with HQ. Which he did. It wasn’t long before PWC was bearing down on FP and AIG as well.
The essential problem FP faced as it grappled with how to value the super-seniors was that it had never really thought about liquidity risk. Its models had always measured one thing: credit risk. That is, what was the likelihood of a triple-A tranche defaulting, which would cause FP to have to pay off the bonds in their entirety? Cassano had always been fixated on that question because that is where he saw the risk. And since AIG’s risk models consistently showed there was virtually no credit risk, it always valued the securities at par.
But now, with the market in “a state of panic,” as Cassano described it, the only question that mattered was what they were worth